EU Commission spells out Corporation Tax position
15 May 2007
Statement by Jim Allister MEP
“Following all the hype and misinformed comment about Stormont securing a reduction in Corporation Tax rates, I tabled a Priority Written Question to the EU Commission as to what was permissible within EU regulations. Both the question and the detailed answer from Commissioner Kroes are set out in full below.
Certain pertinent realities are very clear from the Commission’s reply, which is based on what the European Court of Justice determined in the test case when Portugal tried, and failed, to reduce corporation tax in the Azores – which, unlike Northern Ireland, has fiscal powers.
It is clear that without fiercely independent fiscal powers – such as to exclusively control and shape the economic environment in which business operates, there is no question of a separate corporate regime in any part of the UK being compatible with EU law. Even in the Azores, where there are devolved fiscal powers, that was not enough as it was deemed to constitute state aid. The 3 tests set out in the 2nd paragraph of Commissioner Kroes’ answer are stiff and are additional to having autonomous fiscal powers.
1. The devolved government must be of such a nature, from a constitutional point of view, as to have a political and administrative status separate from that of the central government.
2. The subject fiscal law must have been adopted without the central government being able to intervene directly as regards its content.
3. The financial consequences of reducing corporation tax must not be offset by aid or subsidies from the central government – in other words there must be no subvention to make up for the loss in revenue.
The exceptional circumstance for “outermost regions”, outlined in paragraph 3 of the Answer, does not assist Northern Ireland as we do not so qualify.
Thus, it is clear that since Stormont does not possess any fiscal powers, never mind the autonomous kind necessary, there is no likelihood of a cut in corporation tax being possible within EU jurisprudence. Nice as a cut in corporation tax would be, it seems that a more prudent expenditure of energy might be in seeking to boost the inward investment incentive package for Northern Ireland.”
WRITTEN QUESTION P-1504/07
by Jim Allister (NI) to the Commission
Subject: Corporate tax rates
Can a region of a Member State enjoy corporation tax rates different from those prevailing generally in that Member State, without offending EU stipulations and expectations? Are there regions within Member States where such prevails?
P-1504/07EN
Answer given by Ms Kroes on behalf of the Commission
(11.5.2007)
The first question raised by the Honourable Member was recently answered by the European Court of Justice in its judgement in the case Portugal v Commission (C-88/03, not yet reported). The Portuguese Government was seeking the annulment of a Commission decision which established that a reduction of the Portuguese corporate tax rate in the Azores islands, in the context of devolved fiscal powers, constituted state aid in the sense of Article 87, paragraph 1, of the EC Treaty.
The European Court of Justice, while upholding the Commission decision, declared that it is possible that an infra-state body enjoys a legal and factual status which makes it sufficiently autonomous in relation to the central government of a Member State, with the result that, by the measures it adopts, it is that body and not the central government which plays a fundamental role in the definition of the political and economic environment in which undertakings operate.
In such a case, it is the area in which the infra-state body responsible for the measure exercises its powers, and not the country as a whole, that constitutes the relevant context for the assessment of whether a measure adopted by such a body favours certain undertakings in comparison with others in a comparable legal and factual situation, having regard to the objective pursued by the measure or the legal system concerned.
In order that a decision taken in such circumstances can be regarded as having been adopted in the exercise of sufficiently autonomous powers, that decision must, first of all, have been taken by a regional or local authority which has, from a constitutional point of view, a political and administrative status separate from that of the central government. Next, it must has been adopted without the central government being able to directly intervene as regards its content. Finally, the financial consequences of a reduction of the national tax rate for undertakings in the region must not be offset by aid or subsidies from other regions or central government. In such circumstances the reduction of the national corporate tax by a region does not constitute state aid.
In the event these criteria are not met, state aid in the form of reduction of national corporate tax, like other forms of operating aid, can be approved only in the outermost regions, low population density regions and those regions of the EU with less than 75% of average EU-25 gross domestic product (GDP) per capita, and only in so far as it is strictly necessary to offset the handicaps of the regions concerned.
As far as the second question is concerned, the Commission wishes to underline that two cases concerning the fiscal autonomous powers of the Basque country provinces (C-428/06 to C-434/06) and of Gibraltar (T-211/04 and T-215/04) are pending before the European Courts.
