Commission told ‘see you in court’ by France Telecom

By Peter Chapman

Date: 08/07/04

FRANCE Telecom says it will take on the European Commission in the Court of First Instance if the EU executive orders the telecoms giant to repay €1 billion - worth of what it calls "illegal tax breaks" to the French government.

Mario Monti, the commissioner for competition policy, is expected to press for the repayment at a meeting of fellow commissioners next Wednesday (14 July).

The Italian will argue that the formerly state-owned company received an illegal tax break in 1994-2002 that helped it to fight competitors in the communications sector just when markets were meant to be opening up.

However, senior France Telecom executives confirmed to European Voice that they have no intention of paying the bill.

First, they argue that the tax regime relates to a law passed by the French government in July 1990.

They say it is thus covered by a special provision in the EU's rules which "kill" state aid complaints relating to legal provisions dating back more than ten years.

Secondly, the senior managers say that the regime actually penalized the company if the entire period between 1990, when the law was passed, and 2002, when the Commission launched its investigation, is examined.

The executives argue that France Telecom paid far more to Paris in 1990-94 than an ordinary company would have had to pay in taxes.

Only in the period 1994-2002 were the tax charges, based on property, reduced.

The Commission says benefits to the company during that period amounted to €1bn. But France Telecom says the net "extra" costs, siphoned into the state budget during the period were still €1.75 bn. "Under the regime, France Telecom would only "break even" [in tax terms] by 2030," said one.

However, Commission state aid experts say the European Court of Justice has ruled that the Commission cannot offset "overpayments" against "underpayments" in different periods to arrive at a lower state aid figure.

"The French think they can set off the two parts. We say - and the Court of First Instance says - that you cannot set off different time periods against each other.

"If you were a competitor and you went bust in1996-98 then you have suffered the distortion," explained the official. "Otherwise, you could set off items over the last 100 years," he added, explaining that such a situation would make the battle against illegal aid virtually impossible.

The official said the €1bn figure could, in theory, be changed when commissioners meet. However, the sum was arrived at by the French parliament and is unlikely to be reduced in horse-trading between staff of French commissioners and Monti's team.

Philippe Guibert, a partner with Paris law firm DePardieu Brocas Maffei, said he believes France Telecom will have a strong argument if it takes the case to the Luxembourg-based CFI.

Moreover, he said, the results of the challenge would be eagerly awaited across the Union.

"France Telecom has very serious grounds to challenge the Commission.

"The decision [by the Commission] could be very important for public companies in several member states - if you take some big countries like Italy, Germany and so on, you will find the same systems," he added.

The tax salvo is the first round in a state aid tussle between Brussels and Paris over France Telecom.

Monti is giving himself more time to examine the impact of "supportive" comments by then finance minister Francis Mer in 2002.

The competition chief suspects this helped to reassure investors and enabled the company to raise billions of euro in the capital markets and to escape financial collapse.

But the case is difficult to prove.

The Organization for Economic Cooperation and Development (OECD) this week urged the French to complete the privatization of France Telecom.

In a review of French enterprise policy, the OECD said the telecom group should also be separated from its cable business.

And, claimed the OECD, the powers of the Telecommunications Regulatory Authority should be strengthened to "enhance competition".

The government in Paris still owns 52.5% of France Telecom.