Subsidy control first step: Which international agreements apply?

This article is the first of two subsidy control articles which focus on the replacement to the EU state aid regime. The first will centre broadly on the primary indicators as to which international agreements could be relevant to your proposed measure/subsidy. The second will focus on granting a subsidy where the new UK EU Trade and Co-operation Agreement (TCA) applies.

Background and introduction

Much to widespread relief, the EU and the UK government have agreed the terms of a trade agreement to govern (some parts of) the trading relationship between the two powers from 1 January 2021.

A key point of dispute between the two blocs was how the UK would depart from the EU state aid regime yet maintain an effective subsidy control regime of its own. Public sector bodies in particular were keen to understand what the new system would entail and how it would operate so that they could ensure the lawfulness of any measures contained within their corporate and commercial strategies for the New Year.

By way of the TCA the UK has agreed that it will establish an independent body/authority to govern a new independent subsidy control regime. Unfortunately, details of such are yet to be detailed by the UK government which has led to issues arising surrounding the legal certainty of measures being granted in the here and now.

Helpfully the Department for Business, Energy and Industrial Strategy (DBEIS) has published a technical guidance in respect of the UK’s subsidy control commitments which can be found here. Public bodies are required to have regard to this guidance and thus the contents of such form the subject of this article.

The background to the guidance is that the UK is subject to various international agreements which govern the ability to grant subsidies, not just the new TCA. This ranges from WTO based commitments, the Northern Ireland Protocol and other free trade agreements including that with Japan. Public bodies may be concerned that in leaving the remit of the state aid regime, they are suddenly encumbered by agreements to which previously they had given little consideration. There is no great need for alarm. Outside of central government and measures adopted by the devolved authorities the TCA is likely to be the primary agreement with which to be concerned. Nonetheless, it is important to establish for certain on a case by case basis which agreements your measure could be within the remit of. That assessment is the focus of this first article in which we summarise the DBEIS guidance.

The DBEIS guidance sets out as follows the steps required to determine which international agreements could be relevant to your proposed measure:

1. determine if the measure in question could amount to a ‘subsidy’
2. determine whether the proposed measure is intended to support a goods or service based activity
3. determine if the measure could impact trade with another country.

1.    Is the measure a subsidy?

Spotting the indicators of a potential subsidy is the first and most vital step in the challenge of remaining onside of subsidy control regulation. The DBEIS technical guidance helpfully sets out four points which if the potential measure meets, could mean it amounts to a subsidy worthy of further legal consideration. (Please note that these are primary indicators, the actual definition of a subsidy within the TCA is slightly more developed and will be considered in our second article).

If the proposed measure does not have any one of the following characteristics, then it is unlikely to be considered a subsidy.

• Firstly, a subsidy must constitute a financial (or in kind) contribution such as a grant, loan or guarantee.
• In addition, the financial contribution must be provided by a ‘public authority’, including, but not limited to, central, devolved, regional or local government.
• Thirdly, the award of the subsidy must also confer a benefit on the recipient in the sense of an economic advantage that is not available on market terms.
• Finally, the subsidy must cause a distortion in or harm to competition, trade or investment.

Many public bodies will recognise the substance of these requirements from their assessments of what constituted ‘state aid’ under the older regime so (whilst they are not identical) will be adept at undertaking this first instance analysis hand in hand with their legal advisors.

2.    Goods or services?

Should the proposed measure have the potential to be a subsidy for the above purposes, the next step is to consider whether the measure is aimed at goods based activities or services based activities. This is important because the UK’s international agreements have varying scopes dependent upon which agreement applies and the issues involved.

The WTO based obligations for example are applicable to measures aimed at supporting goods based activity. UK negotiated trade agreements however often extend further to include measures supporting service based activities, including the new TCA with the EU. The Northern Ireland Protocol only applies to goods and the wholesale electricity market.

The DBEIS technical guidance recommends that authorities determine whether the subsidy is being granted in relation to a ‘good’ or a ‘service’ based activity by assessing whether the matter in question is within the scope of either the “General Agreement on Tariffs and Trade” and thus a good, or the “General Agreement on Trade in Services” and thus a service.

We recommend specific and careful analysis is undertaken or that specialist advice is sought to confirm this assessment.

3.    Is there an impact on trade with another country?

The DBEIS technical guidance highlights that international subsidy commitments are often only applicable if a subsidy impacts either trade between countries, trade between the EU and Northern Ireland for the purposes of the Northern Ireland Protocol, or trade and investment between the UK and EU when it comes to the TCA. Where there is no such impact, the measure is unlikely to be within the scope of an international agreement.

The question thus becomes with which country (or bloc) could the proposed measure cause an impact on trade. If, for a subsidy related to a service based activity the measure could impact trade/investment with an EU country, you could be within the scope of the TCA. If there is a subsidy relating to a goods based activity which could impact a non-EU country, the WTO Agreement on Subsidies and Countervailing Measures (ASCM) may be applicable. At section 2.3 of the DBEIS technical guidance a decision tree sets out the processes detailed in this article and may be helpful for those engaged in training around this subject.

(Do note that the assessment of ‘impact’ here only guides the reader to the appropriate international agreement. That agreement itself may within its own framework have a lesser or more stringent definition of ‘impact’ compared to others. This is discussed within the context of the TCA in our next article. It may be that authorities decide at this initial stage of the analysis to apply a low threshold when considering if there has been an impact out of an abundance of caution.)

Awarding a subsidy

If the indicators set out above are met or have the potential to be met, then the authority should consider the next steps to lawfully awarding the potential subsidy in accordance with the agreements they assess to be applicable. As discussed above, in many cases the relevant agreement will be the TCA and so our next article focuses on awarding a subsidy within the scope of that agreement. If however, the TCA is not the end result of the above assessments then further specialist advice should be sought. Our team of lawyers are also on hand to assist.

For further information regarding the above, please contact a member of the Public Sector Team.

Source: DBEIS Technical guidance on the UK’s international subsidy control commitments (31.12.20)