State aid is not a tax specific concept, but rather a more general principle designed to stop EU member states from interfering in competition by giving selective advantages to particular taxpayers, in order to influence investment decisions or distort trading between member states. In the context of tax, a provision could be State aid if it included an unjustified exemption or derogation from the reference tax system that could lead to a difference in treatment between undertakings that are in a comparable legal and factual situation.
So why might a digital services tax be State aid?
A feature of all the DSTs described in Deeksha Rathi’s recent post is that they apply only to digital businesses that generate global and domestic revenues above certain (generally very high) thresholds. These are taxes focused solely on very large multinational businesses, and so the structure of DSTs does seem to favour smaller and/or wholly domestic businesses.
But does this mean that smaller businesses, who are exempt from DST, are being awarded a preferential treatment - even though they carry on businesses with a comparable legal and factual situation?
A recent decision of the EU General Court would suggest that DSTs may not be susceptible to a State aid challenge. The Court considered a new Polish retail sector tax under which small shops with low monthly turnover paid no tax, whereas large supermarkets (mainly owned by foreign companies) paid a top rate of as much as 1.4% of their turnover. It concluded that the EU Commission was not entitled to infer solely from the progressive nature of the tax that it provided selective advantages. The Court held that a progressive taxation, even from a high threshold, reflecting the intention to tax the activity of an undertaking only when the activity reaches a certain level does not, in itself, imply the existence of a selective advantage.
It would, of course, have been somewhat ironic if DSTs did constitute State aid, given that the EU had itself previously proposed an EU-wide DST with similarly high global and EU revenue thresholds.