US coffee retailer Starbucks and the financing arm of Italian carmaker Fiat must repay 20 million to 30 million euros (23 million to 34 million dollars) in illegal tax advantages granted by the Netherlands and Luxembourg, the European Commission said Wednesday.
It is the first time that the European Union’s executive has weighed in on so-called tax rulings, which countries issue to provide companies with clarity on how their taxes will be calculated.
Taxation is usually a national issue in the 28-country bloc, but the commission believes it can intervene in these cases because the tax arrangements constitute state aid, an area it regulates.
“This decision sends a clear message: national tax authorities cannot give any company, big or small, large or powerful, an unfair competitive advantage compared to others,” EU Competition Commissioner Margrethe Vestager said in Brussels.
“[These] companies pay almost no tax on profits made,” she added. “More cases may come if we have indications that EU state aid rules are not being complied with.”
The EU has moved to crack down on corporate tax avoidance in the wake of the so-called LuxLeaks scandal, in which a journalism consortium reported that Luxembourg had helped multinational companies avoid billions of euros in taxes.
The commission found that the tax rulings issued for Fiat’s financing arm in Luxembourg and Starbucks in the Netherlands used “artificial and complex methods” that “do not reflect economic reality” and thereby “unduly reduced” the taxes paid by the two companies.”
It said that profits were under-estimated in the 2012 Luxembourg tax ruling for Fiat Finance and Trade, which grants loans and bonds to other companies in the Fiat group. The Luxembourg-based company was thus taxed less than it should have been. Its declared profits should have been 20 times higher, the commission said.
In the case of the 2008 tax ruling for Starbucks Manufacturing in the Netherlands, it found unjustifiable profit-shifting. The commission said the Dutch subsidiary for instance paid a “very substantial” royalty to a British Starbucks firm for “coffee-roasting know-how,” even though other arms of the company did not have to do this.
The commission ordered the Netherlands and Luxembourg to recover the illegal tax benefits from Starbucks and Fiat. It estimated the amount at 20 million to 30 million euros, but said the precise amounts would have to be determined by Dutch and Luxembourg authorities.
Vestager acknowledged that these sums are not “spectacular,” but noted that they compare to less than 400,000 euros and less than 600,000 euros that Fiat Finance and Trade and Starbucks Manufacturing paid respectively in corporate taxes less year.
Luxembourg and the Netherlands now have two months to carry out their calculations and start the recovery process.
But the two countries on Wednesday denied any wrongdoing.
“The commission has not established in any way that Fiat Finance and Trade received selective advantages with reference to Luxembourg’s national legal framework,” its Finance Ministry said in a statement.
In a statement issued on Tuesday, Fiat had also said that it “never sought any derogation from the general law.”
The Dutch Finance Ministry, meanwhile, said that the tax arrangements with Starbucks were in line with guidelines from the Organization for Economic Cooperation and Development.
“The method used by the Netherlands in the file of Starbucks Manufacturing is internationally recognized,” it said in a statement, adding that the Dutch government was “somewhat surprised” by the commission’s decision.
The country will analyze it before deciding how to proceed. Luxembourg also said that it “reserves all its rights” in the case.
“This is a union of law, so of course maybe we’ll see each other in court,” Vestager noted.
The commissioner said that she does not think these cases are “the poster children of bad taxing behaviour,” but rather “examples of what is not right.”
Tax rulings remain legal, as long as they do not “artificially reduce a company’s tax burden,” she added.
The EU is still in the process of carrying out several other investigations into tax regimes for multinationals, notably those granted by Ireland to US technology giant Apple and by Luxembourg to online retailer Amazon.
Vestager said the decisions taken on Wednesday do not prejudge the outcome of those probes. She said she could not give a date for those findings, but Irish Finance Minister Michael Noonan has said he expects an outcome in the Apple case by Christmas.