The European Union pulled little punches Tuesday in its ruling that mandated both Starbucks and Fiat Chrysler pay their fair share of taxes to the Netherlands and Luxembourg, respectively. The strong ruling comes as the EU expands its efforts to keep corporations from avoiding taxes, leaving many asking where the EU might strike next.
James Kanter of The New York Times had the day’s news:
The European Union on Wednesday ordered the Dutch government to recover money from Starbucks and told Luxembourg to claw back funds from a Fiat Chrysler unit, in an expanding crackdown on tax avoidance by corporations.
Margrethe Vestager, the antitrust chief of the European Union, said that Luxembourg and the Netherlands had given the multinational corporations illegal state aid by letting them shift profits and pay lower tax rates than those available to other companies.
The decisions are a sign of Europe’s determination to counter increasingly sophisticated tax strategies used by multinational companies. And the actions by Ms. Vestager could be just the first of a series of enforcement moves by her office, which has been investigating tax arrangements that some European countries have used to attract multinational companies, including big American technology companies like Apple in Ireland and Amazon in Luxembourg.
Other European Union members say the arrangements often amount to unfair competition that deprives them of tax revenue. And American officials have raised questions about whether some multinationals are using European tax shelters to avoid paying their full share of taxes in the United States.
Tom Fairless of The Wall Street Journal explained the background behind each company’s case:
In Starbucks’ case, the EU said that most of the profits of the company’s Dutch coffee-roasting unit are “shifted abroad, where they are also not taxed.” The roaster, the EU said, pays an “inflated price” for green coffee beans to Starbucks’ Swiss unit, as well as a “very substantial royalty” to a U.K. entity, Alki, which doesn’t reflect its value. Alki, which has since been dissolved by Starbucks, isn’t liable to pay corporate tax in the U.K. or the Netherlands, Ms. Vestager said.
Starbucks said it plans to appeal the EU’s decision “since we followed the Dutch and OECD rules available to anyone,” it said in reference to the Organization for Economic Cooperation and Development, the Paris-based international organization that produces corporate tax guidelines.
The company is concerned that there are “significant errors” in the decision, according to a spokesman. He said Starbucks complies with all international laws and guidelines, and “has paid an average global effective tax rate of roughly 33%, well above the 18.5% average rate paid by other large U.S. companies.”
In Fiat’s case, the EU said the company’s Luxembourg-based financing company “only paid taxes on underestimated profits.” It said the tax deal involved a number of “economically unjustifiable assumptions and downward adjustments” to the unit’s tax base, and that the tax “applied to this already much lower capital for tax purposes is also much lower compared to market rates.”
In a statement published Tuesday, Fiat said it didn’t receive any state aid, and that any back-tax payments would be “immaterial” to the company’s reported results.
The BBC quoted a Starbucks spokesperson who said there were “errors in the decision”:
The Dutch government said it was “surprised” by the decision and that it was convinced its arrangement with Starbucks was in line with international standards.
A Starbucks spokesman said: “Starbucks shares the concerns expressed by the Netherlands government that there are significant errors in the decision, and we plan to appeal, since we followed the Dutch and OECD rules available to anyone.”
The Luxembourg Ministry of Finance said the Commission had “used unprecedented criteria in establishing the alleged state aid”.
“Luxembourg disagrees with the conclusions reached by the European Commission in the Fiat Finance and Trade case and reserves all its rights,” it said.
Fiat Chrysler denied receiving any illegal state aid from Luxembourg.
Cassie Werber of Quartz named other companies that could be impacted from similar probes:
Some companies will be readying themselves for their own moment in the spotlight. Apple, Google, Amazon, and Qualcomm are all subject to probes. Multinational firms with bases in several different companies have been accused for some time of creative accounting, which has changed some practices already. Earlier this year, Amazon changed the way it paid tax in Europe.
Starbucks even voluntarily overpaid tax in the UK after its barely-existent taxes became an issue there.
Other multinational companies will think harder about how to account—and how to do business in Europe. The big problem here is uncertainty. If the Commission can overturn agreements made by a government, companies will ask what assurance they can ever have that changes won’t be made retroactively?
“For competition authorities to challenge very technical tax rulings by competent authorities in this way is extremely destabilizing,” said Heather Self, a partner at law firm Pinsent Masons, in the Guardian.
