When Policy Worlds Collide: Tax Competition, State Aid, and Regional Economic Development in the EU

Abstract

This paper explores the relationship between tax competition, regional development and state aid control. In the 1990s, partly against the backdrop of the impact of globalisation on tax revenues, ‘unfair’ tax competition rose up the policy agenda. EU and OECD initiatives led to the amendment of various tax measures sometimes, paradoxically, enhancing their attractiveness. In parallel, the European Commission pursued an increasingly rigorous approach to disciplining regional aid — even in the most disadvantaged regions. Meanwhile, the European courts addressed the longstanding question of whether corporate tax rates set by regional authorities involve state aid. The consequence of these policy outcomes is that national governments and ‘genuinely’ autonomous regional authorities may operate more generous tax measures than those authorised under the state aid rules in the most severely disadvantaged regions. This raises important issues for EU cohesion policy, small island economies, and the relationship between EU competition policy and taxation.

Keywords:

• State aid
• tax competition
• regional development
• outermost regions

Acknowledgements

Some sections of this paper are based on research undertaken for the Madeira Economic Development Agency (SDM) on the international competitiveness of the ZFM. This work has not been published (but is summarised in Wishlade 2011) and the financial support of SDM to undertake the work is gratefully acknowledged.

Notes

1. Case 70/72 Commission v Germany [1973] ECR 813.

2. C-88/03 Portugal v European Commission [2006] ECR I-7715.

3. Joined Cases C-428/06 to C-434/06: UGT-La Rioja [2008] ECR I-6747.

4. T-211/04 Gibraltar v Commission [2008] ECR II-3745.

5. There is also provision for transport-related support to the OMR and to sparsely-populated regions in the northernmost parts of the Nordic countries.

6. Portuguese legislation also provides for the Azores to operate a regime like the Madeiran measure, but this has never been implemented.

7. Decision in N708/98 — Islas Canarias España — Régimen de ayudas fiscales al funcionamiento: Zona Económica Especial (ZEC) — texts of all decisions are available on DG Competition case database at: http://ec.europa.eu/competition/elojade/isef/index.cfm?clear=1andpolicy_area_id=3 (accessed September 2011).

8. Decision in N376/2006 — Prorroga del Régimen de ayudas de la Zona Especial Canaria (ZEC).

9. See N421/2006 — Zona Franca da Madeira for the latest Commission decision.

10. Sociedad de Desenvolvimento da Madeira: http://www.ibc-madeira.com/about_ibc.aspx?ID=51.

11. Unpublished information kindly supplied by the Sociedade de Desenvolvimento da Madeira.

12. International Business Centre of Madeira: http://www.ibc-madeira.com/about_ibc.aspx?ID=51 (accessed September 2011).

13. Note that the earlier figure refers to EU15 and the later one to EU27, but this does not affect the comparison between the regions.

14. Guyane, one of the French DOMs, is not an island.

15. Neven, Papandropoulos, and Seabright (1998) use this to characterise competition policy treatment of agreements between firms.