The metaphysical ability of the Commission to turn soft-law into hard-law
At the end of its press release of 19 September 2016, the Commission informed that the kind of economic advantage granted by Luxembourg to GDF Suez differs from the advantages granted to Amazon/Luxembourg, Starbucks/Netherlands, Fiat/Luxembourg and Apple/Ireland. The facts of the cases are surely different, but how are the issues dissimilar in substance?
Profit allocation and transfer pricing are two sides of the same coin and the discussion appears to gravitate around the economic reality of the transaction and the disposition of national tax authorities to accept such transactions i.e. to recognise them for tax purposes.
In contrast, in McDonalds and GDF Suez the main issue is the double non-taxation and and the fiscal treatment of hybrid instruments (credit instruments can be convertible into equity). This issue does not refer to an objective assessment of the economic reality of a transaction, but to the point of contention of two divergent (non-coordinated) policy choices. The disagreement may give rise to either double non-taxation or double taxation.
The claim made by the Commission in McDonalds case is that the Luxembourgian authorities knew that the transactions in question have not been subject to taxation in the USA and despite this fact, they chose not to impose taxation, hence they endorsed the double non-taxation result. This claim presupposes that Member States have an obligation to cooperate with the tax authorities of other states in order to eliminate tax advantages that may result from the differences of treatment stipulated by the tax law of distinct states.
It is not only a tax advantage that reflects a preferential treatment granted by one Member State according to its domestic tax policies, but also an advantage resulting from the parallel existence of different tax jurisdictions that may be treated as State aid by the Commission. In this context, it must be emphasised that under EU law, Member States have no obligation to amend their tax laws in order to eliminate the differences that give rise to non-taxation. The claim of the Commission relies on the international tax conventions signed between Member States or a Member State and a third state and the OECD recommendations.
However, the OECD recommendations are legally non-binding.
OECD members can chose whether or not they want to turn them into binding agreements. But as there is no single authority to set the rules in international law, many technically non-binding OECD standards or norms are adhered to as if they were binding. This is what many refer to as “the power of soft law”.
At least theoretically, it is very interesting to observe that the authority of the Commission in the field of State aid law transforms soft law into to hard law. Non-compliance with the OECD-standards is deemed as an abnormality, so it implies a deviation from the normal application of tax law, which in its turn reflects the mark of a selective measure that is prone to constitute State aid.