Oxera welcomes the initiative of the European Commission (the Commission) to provide formal guidelines on the application of certain provisions of the Foreign Subsidies Regulation (the FSR Draft Guidelines). We support the objective of enhancing predictability and providing a clear analytical framework for enforcement. However, we have identified some key areas where the Draft Guidelines could be improved to provide clearer guidance to companies, practitioners and other stakeholders.

Overall, we identified three main themes for improvement in the FSR Draft Guidelines, in addition to specific points which we discuss in our full response:

1. The Draft Guidelines do not set out a clear standard for the assessment of distortions. The Draft Guidelines do not define a clear welfare standard under which the ‘effect on competition and the “level playing field”’ should be understood in order to assess when foreign subsidies distort the internal market. Instead, the Draft Guidelines propose a broad notion of ‘alteration or interference with competitive dynamics’, which appears to consider primarily the potential impact on competitors rather than relying on a consumer or total welfare standard. A clearly defined welfare standard is necessary to provide predictability on what subsidies are likely to be found problematic and what types of arguments may be taken into account by the Commission during FSR investigations.

2. Overly broad and low thresholds for assessing the improvement of the position of an undertaking in the internal market. The Draft Guidelines propose a standard of ‘likelihood’ of cross-subsidisation. To assess this likelihood, the Draft Guidelines clarify that the Commission ‘may consider the ability and incentive’ of the undertaking to cross-subsidise and transfer resources. The Draft Guidelines propose a number of tests to rule out the risk of cross-subsidisation. However, these tests are likely to apply to only a subset of specific cases and/or are likely to be too complex to implement in practice for collections of foreign subsidies. In addition, the Draft Guidelines dismiss transfer pricing rules as a way of ruling out the risk of cross-subsidisation. Overall, we argue that the standard and criteria proposed in the Draft Guidelines would set too low a bar, which could result in many subsidies being erroneously found to improve the competitive position in the internal market.

3. The Draft Guidelines do not set out a sufficiently robust methodology to relate foreign subsidies to specific behaviours. The Draft Guidelines propose a two-step test to assess actual or potential effects on competition. The first step is to determine how subsidies will affect the behaviour of the beneficiary.However, the methodology to be applied for this step lacks clarity and robustness. In particular, we consider that the current draft does not sufficiently set out how indicators would inform and affect the Commission’s assessment. In addition, further clarity could be provided in the context of foreign subsidies facilitating the acquisition of other undertakings.

Key recommendations

• The final version of the Guidelines should clarify the welfare standard to be applied.
• The final version of the Guidelines should be based on a revised standard to demonstrate the likelihood of cross-subsidisation, or provide guidance on ways to demonstrate that the ability and incentive to cross-subsidise are not met. In particular, we recommend that the Commission provides guidance on the evidence that may be provided to demonstrate that subsidies do not ‘free up resources’ or that their design renders cross-subsidisation unlikely.
• The final version of the Guidelines should recognise the relevance of transfer pricing methodologies, subject to certain adjustments if needed, to assess whether the competitive position of the undertaking in the internal market has improved, i.e. to rule out potential cross-subsidisation.
• In order to ensure that there is a sufficiently robust methodology to relate subsidies to specific behaviours, we recommend that the final version of the Guidelines set out a clear framework of relevant indicators that could be used in the assessment, assigning a primary role to indicators such as the nature and frequency or periodicity of the foreign subsidies. Furthermore, the different degree of potential distortions resulting from recurring as opposed to one-off subsidies should be adequately recognised.
• In the context of the assessment of distortions of competition relating to the acquisitions of other undertakings, we recommend that the final version of the Guidelines makes a number of clarifications, in particular when subsidies are found not to affect the ranking of the bids or when no other bidders have been identified. The Guidelines should also recognise that a range of valuations may be found to be on market terms, and discuss the Commission’s approach to foreign subsidies enabling transactions in the first place.
• As a general point, we recommend that the final version of the Guidelines clarifies the extent to which foreign subsidies mirroring the structure of compatible aid, according to any of the Commission’s State Aid Guidelines, would positively contribute to the assessment.