Fiscal State Aid in the EU: The Limits of Tax Autonomy

Abstract

This article reviews the application of the European Community’s State aid rules to tax measures. It updates and extends a previous review published in this Journal in 2001 and evaluates critically recent policy trends. Although there is no doubt that State aid rules apply to national tax measures even where there are no specific Community fiscal provisions, during the past couple of years the Commission has widened the scope of application of State aid rules. The Commission has recently found a number of national measures to be incompatible with State aid rules on the grounds that they indirectly favour certain enterprises by assessing their tax liability using special methods of calculating their relevant costs. This article examines how tax measures can be caught in this way by State aid rules. The article also evaluates a case where regional tax measures were found to be a form of State aid because they deviated from national measures. This is the most worrisome policy development because it appears to restrict the fiscal autonomy of local and regional authorities and to contradict the principle of subsidiarity. Using economic analysis, the article finds that when regions have fiscal autonomy there is no a priori reason to expect that their tax rates will remain uniform. It concludes that in this respect the Commission has stretched the meaning of State aid too far.

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