PUBLIC. Brussels, 28 October 2002 COUNCIL OF THE EUROPEAN UNION 13545/02 LIMITE FISC 271

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1 Conseil UE COUNCIL OF THE EUROPEAN UNION Brussels, 28 October /02 PUBLIC LIMITE FISC 271 COVER NOTE from : the Secretary-General of the European Commission signed by Mr Sylvain BISARRE, Director date of receipt : 28 October 2002 to : Mr Javier SOLANA, Secretary-General/High Representative Subject : Energy Taxation - State-aid aspects in the proposal for a Council directive on energy taxation Delegations will find attached Commission document SEC(2002) Encl.: SEC(2002) /02 MG/ovl 1 DG G I EN

2 COMMISSION OF THE EUROPEAN COMMUNITIES Brussels, SEC(2002) 1142 COMMISSION STAFF WORKING PAPER State-aid aspects in the proposal for a Council directive on energy taxation

3 COMMISSION STAFF WORKING PAPER State-aid aspects in the proposal for a Council directive on energy taxation During the High Level Group meeting of 30 September 2002, the question of the link between tax reductions / exemptions and State aid legislation was raised. In particular, several delegations asked for further clarification on the nature of the examination, which would be conducted by the Commission s services in connection with the measures contemplated in Articles 14, 15 and 17 of the Presidency proposal 1 (Doc 10979/02 - FISC 205 of ). In-depth discussions on State aid issues have already taken place within the Fiscal Questions Group of the Council for the purpose of analysing the energy tax proposal. The German and Finnish Presidencies organised debates on this issue. The Belgian Presidency convened an expert of DG COMP to explain the applicable rules and a paper was issued on that very topic ARTICLE 87(1) OF THE EC TREATY The tax reductions / exemptions, which certain enterprises may enjoy in the context of the energy tax directive, are liable to constitute State aid within the meaning of Article 87 of the EC Treaty 3 if: i) enterprises benefit from a transfer of resources from the State 4. A loss of tax revenues is equivalent to consumption of State resources in the form of fiscal expenditure. ii) the measure confers on recipients an advantage which relieves them of charges that are normally borne from their budgets. The advantage may be provided through a reduction in the firm's tax burden, for instance by means of a total or partial reduction in the amount of the standard energy tax. In this matter, the situation in each individual Member State has to be analysed, to define the general excise duty system applicable at national level. The fact that competing enterprises established in another Member State are not subject to the same level of taxation is not relevant to determining whether the measure is an aid (the Commission may, however, take account of that aspect in examining the conditions for authorising the aid see below) These three articles deal principally with facultative tax exemptions/reductions in favour of certain sectors, processes, and uses of energy products. In the most recent consolidated (draft) version of the directive (Fisc 249 of ), the title of Article 14 is no longer Compulsory exemptions but Exemptions for certains products and uses. Doc 14640/01 - FISC 255 of Article 87 (1) EC Treaty : Save as otherwise provided in this Treaty, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, insofar as it affects trade between Member States, be incompatible with the common market. This criterion also applies to aid granted by regional or local bodies in the Member States. 2

4 iii) iv) the measure is specific or selective in that it favours "certain undertakings or the production of certain goods. The selective advantage involved here may derive from an exception to the tax provisions of a legislative, regulatory or administrative nature or from a discretionary practice on the part of the tax authorities. the measure affects trade between Member States. That criterion is satisfied when the aided enterprise engages, even partially, in an activity involving substantial trade between Member States 5. However, the condition of affecting trade may be fulfilled even where the aid recipient does not export its production to the other Member States, since the aid could enable it to decrease its costs, increase production for the national market, thereby curtailing the potential market for goods imported from the other Member States. The four above-mentioned conditions are cumulative. They must be satisfied altogether or the measure does not constitute aid in the meaning of Article 87(1). For instance, the decision of the Commission on the State aid case ( ) «Climate change Levy (CCL) UK» (N 123/2000) states that, under the conditions of that case, the tax exemption in favour of combined heat and power (CHP) is not a State aid, because the selectivity criterion (see iii) above) has not been satisfied. 2. GENERAL MEASURES Tax measures, which are open to all economic agents operating within a Member State, are in principle general measures 6. Thus, they are not State aids. These measures must be effectively open to all firms on an equal access basis, and they may not de facto be reduced in scope through, for example, the discretionary power of the State to grant them, or through other factors that restrict their practical effect. The differential nature of some tax measures does not necessarily mean that they must be considered to be State aid. This is the case with measures whose economic rationale makes them necessary to the functioning and effectiveness of the tax system. For instance, a reduction or an exemption in a CO2 tax, granted in favour of companies, which would be subject to the Community emissions trading scheme, might not constitute a State aid because imposing both a CO2 tax and an emissions cap through the Community scheme could lead to a form of double taxation which needs to be avoided. 3. HARMONISED MEASURES The compulsory or facultative nature of the tax exemptions / reductions is taken into account. According to the jurisprudence of the Court of Justice, for a measure to be capable of being classified as State aid within the meaning of Article 87(1) EC, it must be imputable to the State The Commission Regulation of 12 January 2001 on de minimis aid stipulates that aid not exceeding EUR over any period of three years is not covered by Article 87. Commission notice on the application of the State aid rules to measures relating to direct business taxation (OJ C 384 of ). For instance, judgement of the Court, case C 482/99, France/Commission,

5 If a tax exemption stems from a Directive and must be applied by all Member States without leaving any room for discretionary application, the measure concerned is not imputable to the State. As such, it is not a State aid and does not have to be notified to the Commission pursuant to Article 88(3). For instance, the Council directive 92/81/EEC provides that mineral oils injected into blast furnaces for the purposes of chemical reduction as an addition to the coke used as the principal fuel is subject to a Community-wide mandatory exemption. This is also the case for mineral oils supplied for use as fuels for the purpose of air navigation, other than private pleasure flying. As harmonisation measures at Community level, these exemptions are not regarded as State aids. 4. COMPATIBILITY WITH THE COMMON MARKET OF STATE AID IN THE FORM OF TAX MEASURES The fact that an exemption, or a reduction in the tax rates, constitutes a State aid does not mean that the Commission will prohibit it. A tax measure can, like aid granted in other forms, qualify for one of the derogations from the principle of incompatibility with the common market, provided for in Article 87(2) and (3). In particular, an aid can be authorised when it facilitates the development of certain economic activities, without adversely affecting trading conditions to an extent contrary to the common interest 8. The most relevant basis for establishing the compatibility of an energy tax exemption / reduction is the Community guidelines on State aid for environmental protection 9. They were formally accepted by all Member States in respect of existing aid schemes. These guidelines take into account the specific case of the energy sector and tax reductions 10 The guidelines confirm that certain exemptions or reductions in the tax level may prove necessary, notably because of the absence of harmonisation at European level 11, or because of the temporary risks of a loss of international competitiveness 12. In the framework of the energy tax directive, the following rules are applicable to operating aid in the form of reductions or exemptions 13 from a new tax introduced for environmental reasons: i) tax reductions above Community minimum rates can be authorised if they are limited in time (10 years) and if, i) voluntary agreements, or measures having an equivalent See Article 87(3)(c) EC Treaty. OJ C 37 of See paragraphs 23 and 24 of the guidelines. Appropriate rules apply depending on whether harmonisation measures have been adopted at Community level or not (see for instance paragraphs 47,48 and 51). See for instance paragraphs 47 and 51(2) of the guidelines. See chapter E.3.2. of the guidelines: Rules applicable to all operating aid in the form of tax reductions or exemptions. The same rules may be applied to existing taxes if the tax in question has an appreciable positive impact in terms of environmental protection and if the relevant derogations have been decided when the tax was adopted or have become necessary as a result of a significant change in economic conditions. 4

6 effect, are implemented by the industry or if, ii) the effective tax burden remains high enough to incentivise companies to act to enhance environmental protection. The Commission services think that the latter criterion is achieved for energy-intensive companies as defined in the Directive. ii) iii) tax reduction below Community minimum rates can be accepted if they are limited in time (5 years maximum) and i) degressive or ii) capped at 50% of the extra-costs. full tax exemptions may be authorised for a period of five years without degressivity in favour of processes for producing electric power from conventional energy sources that have an energy efficiency very much higher than the energy efficiency obtained with conventional production processes (provided that the primary energy used reduces significantly the negative effects in terms of environmental protection). For such processes, tax reduction above Community minimum rates may also be granted for 10 years in accordance with the conditions set out in above-mentioned point i). Other rules can be applied to tax reduction in favour of renewable energy sources 14. Such aid qualifies for special treatment because of the difficulties these sources of energy have sometimes encountered in competing effectively with conventional sources. Aid may be necessary, in particular, where the technical processes available do not allow energy to be produced at unit costs comparable to those of conventional sources. Operating aid may be justified here, in order to cover the difference between the cost of producing energy from renewable energy sources and the market price of that energy. This approach has been used, for instance, to authorise State aid for the promotion of biofuels (notably in France, Italy, United Kingdom). The same flexible rules applicable to renewables can be used to authorise fiscal aids to the production of environmental-friendly combined heat and power 15. In addition to the tax reductions/exemptions, investment aids can be also granted to projects leading to enhanced environmental protection. Finally, Member States remain free to re-notify their aid regimes after the expiry of an initial authorisation, if they consider that economic conditions are such that the exemptions should continue. 5. THE CASE OF DIESEL TAXATION The recent proposal of the Commission relating to the taxation of motor fuels 16 gives full legal certainty to the Member States. The explanatory memorandum clearly states that a positive approach to the tax measures in question can be adopted in the light of competition rules, particularly those on State aid. Of course, the medium-term convergence of the duty rates applicable to commercial diesel fuel, along the lines set by the proposal, and the level of excise duty on commercial diesel fuel, are key elements of the analysis See chapter E.3.3. of the guidelines: Rules applicable to operating aid for renewable energy sources. See chapter E.3.4. of the guidelines: Rules applicable to operating aid for the combined production of electric power and heat. Com(2002) 410 of

7 Reductions in excise duties in relation to, and to compensate for, the introduction of infrastructure charging, as well as arrangements during the transitional period, may be considered as satisfying the exemption provided by Article 73 regarding the coordination of transport. Conclusion Greater harmonisation of structures and rates of excise duty facilitates the application of State-aid rules. General and mandatory exemptions in Community legislation, leaving no room for discretionary application by the Member States, are not State aids. The draft directive on energy taxation contains numerous options, making it impossible to determine in advance whether or not the way they will be implemented by Member States will give rise to State aid within the meaning of Article 87 and whether such aid will always be compatible with the common market. Furthermore, the new situation created by the directive, once adopted, will be taken into account in the examination of compatibility. The Community guidelines on State aid for environmental protection provides the framework applied to assess most national energy tax reductions / exemptions. The transparent rules of these guidelines, in relation with a clear wording of the energy tax directive, give a high level of legal certainty to Member States and operators. Finally, to avoid the need to treat individual cases, Member States may notify for approval comprehensive State aid schemes, laying down the general rules and conditions Member States authorities will apply when granting aid in relation to the new energy tax directive. After their authorisation, these regimes do not require further notification of the individual cases of application to specific sectors or companies. 6