USING TAX AS AN INVESTMENT PROMOTION TOOL. Allison Christians and Marco Garofalo


USING TAX AS AN INVESTMENT PROMOTION TOOL. Allison Christians and Marco Garofalo

When governments use their tax systems to lure investment, it is not always clear whether their behaviour is fundamentally competitive or anti-competitive in nature. A nation that reduces its overall tax base might be exercising appropriate fiscal restraint and setting an example for other nations. That kind of tax competition has mostly been viewed as appropriate by bodies such as the OECD, whose mantra was perhaps best summed up by former tax policy chief Jeffrey Owen’s call for “fair but fierce” tax competition among free-market economies.87

On the other hand, governments might use their tax systems to capture global market share in ways that undermine, rather than foster, free market competition. This kind of tax competition is sometimes referred to  as “harmful” tax competition by OECD countries. 88

It has been a battleground in international tax policy for many decades, with the current iteration unfolding as the base erosion and profit shifting project. But what does it actually mean to draw a line between tax competition and what amounts to anti-competitive practices? Within the EU, governments are increasingly seeing their investment-luring tax incentives challenged by the European Commission as a form of anti-competitive state aid. While state aid arises from a multilateral treaty among European member states, it is not a strictly EU issue. Instead, recent cases involving large, highly visible U.S. multinationals—Apple, Amazon, and Starbucks among them—suggest that the European Commission is willing to use state aid rules to limit the ways in which European countries may lure investment from outside the EU.

For multinationals hoping to do business in Europe, the state aid rules create a new form of regulatory risk. The story of state aid does not end with the EU, however. Instead, it raises the spectre of other bilateral and multilateral agreements meant to foster free trade. If luring with tax violates within-EU anti-competition principles, it is not obvious why those same measures should pass muster under other regimes. The WTO agreements seem to be a primary target for inquiry, but scholars have generally concluded over the years that tax deals and free trade deals are rightfully separate regimes that cannot and should not be reconciled. Yet the rise of the state aid cases suggests that the interplay between free trade and tax should enjoy a resurgence of attention. Ultimately, the state aid regime may curtail tax competition where the WTO regime cannot. The state aid rules are part of a larger push to perfect a harmonized internal European market in which competition is robust. By contrast, the objective of the WTO is to avoid harmful obstacles to trade.

The difference is important because the SCM commitments extend only to goods – and even then only to subsidies affecting the importation and exportation of goods. By contrast, the EU State aid rules seek to prevent distortion of competition more broadly – goods, services, or capital; intra-market but also internationally in some respects. These distinctions may help explain why the WTO has not to date been an effective forum for dealing with tax practices that appear to be anti-competitive in nature. The WTO will likely continue to be an ineffective forum for contestation over the line between tax competition and strategic use of the tax system to gain unwarranted advantages in the global market for foreign investment capital. Ultimately this is a political rather than a legal problem. The legal constructs surrounding the policing of state practices under EU and WTO law have been forged incrementally over decades of international negotiation and compromise, alongside a lasting preference for autonomy in affairs having to do with the funding of the state. Yet in its cautious approach to preserving national autonomy and adhering to traditional notions of commercial law fundamentals, the international tax system has created incongruities that have important impacts on the global flow of capital, with disparate impacts on differently-situated countries.

These include inexplicably low tax rates paid by high profile multinational companies despite much higher statutory rates apparently imposed by law and the persistence of anticompetitive tax practices despite an apparently coordinated international effort to stamp them out. Those who are interested in a globally level playing field for international investment ought to be concerned about the deployment of national tax systems to gain non-economic advantages, even if –perhaps especially if—current legal structures are not adequate to test the boundaries.


87 Jeffrey Owens, Dir. of the OECD Ctr. for Tax Policy & Admin., Presentation at the INEKO International Conference on Economic Reforms for Europe, Fair Tax Competition: A Pillar of Positive Economic Reform (March, 18 2004). See also Jeffrey Owens, Fair Tax Competition: A Pillar of Positive Economic Reform (PowerPoint),,3425,en_2649_33745_34002090_1_1_1_1 ,00.html.

88 For a discussion, see Allison Christians, Sovereignty, Taxation and Social Contract, 81 MINN. J. INT’L L. (2009). 28] Christians & Garofalo [2016 ]