Identifying Illegal Subsidies

88 Pages Posted: 20 Jun 2019 Last revised: 21 Oct 2019

See all articles by Ruth Mason

Ruth Mason

University of Virginia School of Law

Date Written: June 5, 2018


Abstract: This Article argues that current methods for identifying illegal tax subsidies trigger the well-known conceptual difficulties of tax-expenditure analysis. To avoid these problems—particularly the irresolvable conflict over the correct baseline for measuring tax expenditures and tax subsidies—this Article advocates the “internal consistency test” as a superior method for identifying illegal subsidies. Developed by the U.S. Supreme Court to evaluate the compatibility of state taxes with the dormant Commerce Clause, the internal consistency test easily can be adapted to the subsidy context.

Introduction 103
I. Balancing Regulatory and Market Competition in State Aid 109
A. State-Aid Goals and Limits 110
B. Subsidy Control: Practice and Procedure 117
1. Elements of State Aid 117
2. State-Aid Procedure 118
II. Identifying Subsidies Using Tax-Expenditure Analysis 119
A. The Ineluctable Baseline Problem 120
B. Easy Cases Under Reference-Law Benchmarking 123
1. Unjustified Facially Selective Rules 125
2. Nonselective Advantageous Rules 126
III. Hard Cases Under Reference-Law Benchmarking 127
A. Facially Neutral Rules 128
1. Vodafone 129
2. Gibraltar 130
B. Facially Selective Rules 134
1. Transfer Pricing 134
2. Apple and Other Transfer-Pricing Cases 139
3. Belgian Excess Profits 144
C. Hard-to-Classify Rules 144
1. McDonald’s 145
2. Irish Tax-Residence Rules 147
D. Analysis of Recent Cases 147
1. Traditional Tax-Expenditure Analysis 151
2. External Benmchmarking 152
3. Impact Analysis 156
4. Justification 156
IV. Using Internal Consistency to Identify State Aid 158
A. Internal Consistency Identifies Mismatches 158
B. Internal Consistency Identifies Discrimination 163
C. Analyzing the Recent Cases under Internal Consistency 168
1. Vodafone 169
2. Gibraltar 170
3. Apple and the Other Transfer Pricing Cases 172
4. Belgian Excess Profits 174
5. McDonald’s 176
6 . Irish Tax-Residence Rule 176
D. Superiority of Internal Consistency Over Tax-Expenditure Analysis 177
V. Beyond State-Aid Enforcement 180
A. Acceptance 181
B. Legislative and Tax Treaty Limitations 183
C. An “Undue Benefit” Safety Valve, or, How to Solve a Problem Like Gibraltar 184
Conclusion 186

Keywords: state aid, apple, fundamental freedoms, tax, corporate tax avoidance, tax expenditures, subsidies, gibraltar

Suggested Citation

Mason, Ruth, Identifying Illegal Subsidies (June 5, 2018). American University Law Review, Vol. 69, No. 1, 2019. Available at SSRN: or

Ruth Mason (Contact Author)

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

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