🛢️ Exxon Sues Europe’s Windfall Tax
But also — A Swedish Council, US & Foreign Subsidies
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The Briefing
Oil major ExxonMobil is taking the EU to court to overturn the landmark windfall tax that was voted amid soaring energy prices and Russia’s war in Ukraine, the FT revealed on 28 December. ExxonMobil is challenging the EU's competence to adopt a regulation on the basis of Article 122(1) TFEU.
WINDFALL TAX • Regulation 2022/1854 of 6 October 2022 establishes a "temporary solidarity contribution" on the taxable profits of companies active in crude oil, natural gas, coal and refining established in the EU. Exxon’s German and Dutch subsidiaries filed the lawsuit.
This regulation was adopted at the European level to support Member States wishing to prop up fiscal support to households and companies after a spectacular rise in energy prices following Russia’s war in Ukraine.
The regulation establishes a 33% tax on profits exceeding 20% of the profits generated on average between 2018–2022. This contribution applies in addition to the taxes and levies applicable in each EU Member State. The whole package would cost oil majors billions of euros.
ART. 122 TFEU • The EU cannot legislate without a legal basis. Each new legislation must be grounded in a specific article of the TFEU, that gives it the power to act.
The legal basis for Regulation 2022/1854 is Article 122(1) TFEU, which allows the Council to decide by qualified majority, on a proposal from the Commission, "upon the measures appropriate to the economic situation, in particular if severe difficulties arise in the supply of certain products, notably in the area of energy”.
Article 122 thus makes it possible to bypass the European Parliament and the ordinary legislative procedure to take emergency measures.
Many important pieces of legislation have been adopted on this legal basis since the beginning of the Covid-19 pandemic.
The regulation establishing a temporary emergency support instrument (SURE) at the beginning of the pandemic
The regulation establishing the Next Generation EU (NGEU) recovery fund
The majority of energy emergency regulations
PRECEDENTS • The EU cannot misuse the powers it got from the Treaties. In order not to be subject to annulment by the judge for lack of legal basis, legislation taken on this basis can only concern:
Exceptional measures
Temporary measures
Economic policy measures
The fact that the EU has the competence to legislate via these emergency powers is not self-evident. In 2020, the Council of the EU carried out a detailed analysis — a 68-page opinion — on the suitability of Article 122 as a legal basis for NextGenEU. The German Federal Constitutional Court ruled on 6 December that the EU had not acted beyond its competence (ultra vires) in using Article 122 as the legal basis for NGEU.
EXXON v. EU • Now, back to Exxon. The oil major is asking the General Court of the EU to overturn the regulation establishing the windfall tax for lack of legal basis.
Article 122(1) expressly provides that the EU may take emergency measures "in particular if serious difficulties arise in the supply of certain products, especially energy".
ExxonMobil disputes that the "temporary solidarity contribution" is really an "economic policy" measure.
The first point is not controversial. Disruptions in energy supplies are expressly mentioned. In addition, the list of situations that may be deemed “exceptional” is not meant to be exhaustive.
The second, however, is more serious. Here’s why:
Tax basis, rate, base...all this vocabulary is very reminiscent of a good old tax, and rather not of an “economic policy” measure.
Fiscal matters fall under another chapter of the TFEU, for which unanimity is required — not qualified majority voting as for Article 122 TFEU.
Exxon will try to convince the General Court that dressing up a “temporary solidary contribution” as an economic policy just cannot do the trick.
WHAT NEXT • It is not certain that ExxonMobil will be allowed to challenge the regulation before the General Court. The legal test for having standing to challenge an EU regulation is very difficult for individuals or companies to meet. Now what should be expect?
If ExxonMobil is allowed to challenge the regulation, it will give the European courts a chance to rule on the limits of the EU's use of its emergency powers.
If Exxon convinces the General Court that the regulation passed under Article 122 was a fiscal measure and not an economic policy measure, the windfall tax could be annulled. Chances of that happening? Quite low.
In Case You Missed It
SWEDISH COUNCIL • On 1 January, the presidency of the Council of the EU was transferred to Sweden, after Czech Republic completed its 6-month rotation. The position gives the country a key role in agenda-setting and driving forward the Council’s work on EU legislation. Sweden has already outlined its policy priorities, with security being at the top of the list, followed by competitiveness, the energy transition, and the rule of law.
It is however still unclear how Sweden will act in this position. At home, newly elected PM Ulf Kristersson is dependent on the far-right and Eurosceptic Sweden Democrats (SD) in Parliament. SD is known for its hard line on immigration and its indulgence on Viktor Orban and the rule of law — two central issues for the Council, which is currently trying to untie the Hungary situation and will have to work on the Migration and Asylum Pact.
For now, the extent to which SD will influence the Swedish Presidency remains uncertain, but some diplomats fear that the presidency’s position on some key issues could be affected.
US SUBSIDIES • Biden’s Inflation Reduction Act (IRA) — a 369 billion dollar plan that has been causing nightmares to EU officials for months — and its pro-US industry measures are (almost) ready to kick in. The legislation aims to foster the energy transition in the US and decrease reliance on China through multiple measures that include tax credits for electric vehicles produced in the US.
EU countries are extremely worried about IRA’s impact on Europe’s industry, and have actively voiced their concerns, notably through a US-EU task force on the matter. So far, results have been mixed, with Biden’s acknowledging the EU’s concerns but Congress being quite unapologetic on the issue.
Last week, the US Treasury Department published a white paper that featured a more understanding position towards the EU. This document deals with the critical mineral and battery component needed to benefit from the new clean vehicle credit. According to the white paper, the US will adopt a broader definition of countries with which the US have a “free trade agreement” to include EU countries.
The Treasury Department has also published guidance on a separate tax for clean commercial vehicles — vehicles that will be leased, not new vehicles sold to consumers. This could allow EU EV manufacturers to have access to the US leasing market. The Commission welcomed the move, but is still worried about the main 7,500 US dollar tax credit for cars assembled in the US, Canada, or Mexico. The Treasury Department should provide further guidance on this topic in March.
FOREIGN SUBSIDIES • Before 2022 ended, the EU’s new regulation on Foreign Subsidies distorting the Internal Market (FSR) has entered into force.
The regulation aims to close a loophole in the EU’s legal protection of its internal market. Before, goods subsidised by non-EU countries could be targeted by anti-dumping duties. Yet, extra-EU subsidies to companies operating in the EU’s single market which had the effect of facilitating mergers/acquisitions or public procurement bids, escaped these duties.
This gave non-Member States an unfair advantage, since Member States are strictly bound by European state aid law in these areas. This loophole was especially problematic during the Covid-19 crisis, when many companies could be bought up for relatively low valuations.
As part of this new regulation, companies will have to notify the Commission of financial contributions they receive from non-European public bodies for large concentrations (M&A) and public procurement procedures.
The Commission will also be able to launch market investigations when it suspects that certain foreign subsidies distort the internal market. The Commission will then have the power to correct distortions wher they occur, using remedies inspired by antitrust procedures.
What We’re Reading
Politico has a guide to the agenda of the incoming Swedish presidency to the Council of the EU.
In the Financial Times, Marton Dunai and Martin Arnold report from Croatia on the Balkan state’s preparedness for the official adoption of the euro.
For the Social Science Research Network (SSRN), Dr. Lena Hornkolh gives a precise description of the new regulation on FSR and assesses its reach and efficiency.
This week’s newsletter is brought to you by Augustin Bourleaud and Maxence de La Rochère. See you next Monday!