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This chapter focuses on three interrelated issues linked to the arm’s length principle. First, it considers the Commission’s legal basis for adopting an autonomous ALP different from that of the OECD (hereafter ‘the Commission ALP’) and making it an inherent part of Article 107 TFEU. Second, it questions the Commission’s methodology for applying the ALP, namely de facto using the Commission ALP as the appropriate reference framework in its analysis of a selective advantage rather than the national tax legislation. This analysis will include the Commission’s assertion that a breach of the Commission ALP confers a selective advantage within the meaning of Article 107(1) TFEU. Third, it challenges the Commission’s view that integrated and non-integrated companies are in the same factual and legal situation for tax purposes.

This chapter focuses on two issues. First, according to the Commission, the Commission ALP forms part of its assessment of tax measures granted to integrated companies under Article 107(1) TFEU 'independently of whether a Member State has incorporated this principal into its national legal system and in what form'. If the Commission can convince the Courts that its version of the ALP is indeed embedded in Article 107 TFEU, the consequence is a harmonisation of national tax systems whereby Member States are required to implement the Commission ALP in domestic tax law even where the ALP does not have competence within the area of direct taxation. Second the Commission uses competition law to promote 'integration through law', by allowing the Commission not merely to tackle barriers to trade, but to dictate detailed prescriptions in policy areas falling outside the remit of EU competences.

A significant upshot of the recent Commission decisions in the field of State aid is the exposure of the division between the EU and the US in relation to gov¬ernment subsidies and, more broadly, corporate taxation. Hence, this chapter will look at how the two legal orders address the issue of government subsidies and explore the reasons for their different approaches. This chapter will also compare and contrast the EU State aid regime with international practices, more specifically the WTO regime. In addition, the approach adopted by the Commission in the recent tax cases will also be assessed in the broader context of the international consensus on transfer pricing and the ALP.

This chapter argues that the Commission’s order of recovery in the recent tax cases is highly questionable due to the Commission’s novel legal analysis of State aid law. Recovery in cases where the Commission relied on a legal interpretation of the law unknown to the parties at the time of enforcement is inconsistent with the rule of law. If the Commission decides to adopt a new interpretation of Article 107 TFEU, it should allow companies and Member States a reasonable transitional period to adjust their tax affairs or not order recovery of aid

This chapter provides a summary of the Commission’s State aid decisions and open formal investigations concerning tax rulings by certain Member States. In all of these cases, the Commission decided, or was of the preliminary view, that the Member State in question had breached Article 107(1) TFEU, with the main issue being the granting of a selective advantage.