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€700 million in tax must be repaid to Belgian authorities, says European Commission

The European Commission has concluded that selective tax advantages granted by Belgium under an 'excess profit' tax scheme are illegal under EU state aid rules. 11 Jan 2016

The scheme, which has been running since 2005, allowed some multinational companies to reduce their corporate tax base by between 50% and 90% to allow for 'excess profits' that were considered to result from being part of a multinational group.

Under the tax rulings the actual recorded profit of a multinational was compared to the hypothetical profit of a standalone company in a similar position. The difference was then deemed to be 'excess profit' and the tax base reduced accordingly, the Commission said.

The Commission's investigation found that this does not follow normal practice under Belgian rules nor the EU state aid 'arm's-length principle', and is illegal under EU rules, it said in a statement.

The arm's length principle says that any excess profits should be shared between group companies "in a way that reflects economic reality, and then taxed where they arise", the Commission said.

Competition commissioner Margrethe Vestager said: "Belgium has given a select number of multinationals substantial tax advantages that break EU state aid rules. It distorts competition on the merits by putting smaller competitors who are not multinational on an unequal footing."

"There are many legal ways for EU countries to subsidise investment and many good reasons to invest in the EU. However, if a country gives certain multinationals illegal tax benefits that allow them to avoid paying taxes on the majority of their actual profits, it seriously harms fair competition in the EU, ultimately at the expense of EU citizens," she said.

The multinational companies benefitting from the scheme are mainly European companies, the Commission said, who also avoided the majority of the taxes under the scheme. The Commission estimates the total amount to be recovered from the companies to be around €700 million. It cannot name the companies involved at this stage because the investigation was into the scheme itself and not individual companies. It is for the Belgian authorities to confirm which companies benefited and implement recovery, it said.

Belgian Finance Minister Johan Van Overtveldt said in a statement that the decision was expected. "That is why I took action on the issue from the start," he said.

"Following the first warning signs from the European Commission, we put the system on hold and did not issue any more Excess Profit Rulings from February 2015. We are also the first country to have started the spontaneous exchange of rulings to other countries. This transparency is important to me," Van Overtveldt said.

Belgium will await the outcome of further negotiations with Europe on reimbursement of the tax, and does not rule out any option including a possible appeal against the decision, Van Overtveldt said.

Tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com said: "It is clear that the Commission remains determined to pursue potential state aid cases, rather than leaving matters to the relevant national tax authorities. The decision on the Belgian rulings is a further expansion of the Commission’s approach, and has the consequence that over 30 companies will now be required to repay up to €700m of tax benefits."

The scheme cannot be justified by the need to prevent double taxation, because the discounted profits are not taxed elsewhere, Self said

“The Commission specifically noted that the Belgian scheme resulted in profits escaping tax altogether. The decision therefore appears to be consistent with the aims of the wider OECD Base Erosion and Profit-Shifting project, one of the aims of which is to target such 'double non-taxation'," she said.

State aid expert Caroline Ramsay, also of Pinsent Masons, said: "Although the European Commission has not yet named the individual companies involved, it is believed that the majority are European headquartered companies. This news will likely be welcomed across the Atlantic as, until now, the scrutiny of the tax investigations were perceived by many to be directed largely towards US multinationals."

"The main difference between this case and the other tax investigations is that the European Commission has found that an entire tax ruling scheme is unlawful, as opposed to individual rulings. This means that any company which has utilised this scheme is now deemed to be a recipient of unlawful state aid," Ramsay said.