Margrethe Vestager, member of the EC in charge of Competition, at press conference on Fiat and Starbucks tax ruling on October 21, 2015 / ec.europa.eu

Europe’s top competition official, Commissioner Margrethe Vestager, announced that Luxembourg and the Netherlands granted illegal tax advantages to Fiat Finance and Trade and Starbucks. This is the first in a series of long awaited market-sensitive tax investigation decisions.

“Tax rulings that artificially reduce a company’s tax burden are not in line with EU state aid rules,” said EU Commissioner Vestager. “They are illegal. I hope that, with today’s decisions, this message will be heard by Member State governments and companies alike. All companies, big or small, multinational or not, should pay their fair share of tax.”

Launched in June 2014, the Commission’s in-depth investigations have now concluded that in both the Fiat and Starbucks cases, tax rulings issued by the respective national tax authorities artificially lowered the tax paid by the companies.

Brussels has ordered Luxembourg and the Netherlands to recover the unpaid tax from Fiat and Starbucks “in order to remove the unfair competitive advantage they have enjoyed and to restore equal treatment with other companies in similar situations,” stated the Commission.

Vestager confirmed that the amounts to recover are “20 to 30 million euros for each company,” but both countries, Luxembourg and the Netherlands, have now two months to make their own calculation and communicate their conclusions.

So far, “the companies can no longer continue to benefit from the advantageous tax treatment granted by these tax rulings,” the Commission said.

Speaking after announcing the investigation results, Vestager acknowledged that a strong deterrent for illegal state aid was lacking, but that the tax recovery system was fair because tax recovered by a member state will benefit the taxpayers of that country, as it should have done in the first instance.

“In the state aid work, basically, we do not work with punishment. It’s a very simple rule. If you have granted a subsidy, or given fiscal aid and it’s not legal, then you have to recover, to reinstate a level playing field,” Vestager said.

Reactions to the Commissioner’s announcement were immediate and mixed. The Liberal group in the European Parliament (ALDE) said it “strongly welcomed the decision of DG Competition in the European Commission to declare illegal the tax rulings that allowed big companies to avoid taxes in certain countries of the European Union.”

Michael Theurer, a Liberal member of the European Parliament (MEP) and co-rapporteur in the Special Committee for Tax Rulings (TAXE), said: “We want fair tax competition in Europe, and there is no reason why your local corner coffee bar should pay normal taxes, while big MNCs [multi-national companies] such as Starbucks should not.”

Luxembourg to open a legal challenge?

The Government of Luxembourg said it disagreed with the conclusions reached by the European Commission in the Fiat case. A government spokesperson immediately issued a statement disputing the Commission’s findings.

Challenged to explain what would happen next, Vestager explained the European Commission can force members states to proceed.

“Well, the next thing that has to happen after a negative decision, is for the member state to follow the decision, which means they have two months to do their own calculations and to start the recovery. And we have a procedure for doing recovery in order to get it done,” Vestager said.

“Of course, member states and businesses, they have their opportunities – this is a Union of law – so of course, maybe we will see each other in court. But otherwise, it’s a two month period for the member states to do their calculations.”

A Luxembourg Government spokesperson, in a written statement, maintained: “…the European Commission has used unprecedented criteria in establishing the alleged state aid.”

However, setting out its rationale the Commission explained the new information tools were authorised under a European Council decision affirmed in 2013.

Medieval indulgences

Fabio De Masi, MEP in the United European Left / Nordic Green Left (GUE/NGL) commented: “The rulings against Starbucks and Fiat are like medieval sales of indulgences. The EU Commission still refuses to take serious measures against the tax dumping of international corporations.”

De Masi, who is the GUE/NGL shadow rapporteur on the TAXE committee, added: “The completion of the state aid investigation is no reason to celebrate. We know now that EU law was violated – in Luxemburg during the leadership of the current President of the Commission, Jean-Claude Juncker, and in the Netherlands under President of the Eurogroup, Jeroen Dijsselbloem.”

Vestager sought to clarify that her investigation was not trampling on member states’ right to issue tax rulings, she asserted that these tax investigation are matters of competition law relating to state aid, not the principle of tax rulings.

The Commission stated that as long as they are in the books, “comfort letters” are perfectly legal – letters which are issued by tax authorities to give a company clarity on how its corporate tax will be calculated.

However, the Commission maintains that the schemes worked “by setting prices for goods and services sold between companies of the Fiat and Starbucks groups [so-called transfer prices] do not correspond to market conditions.”

The Commission found that “most of the profits of Starbucks’ coffee roasting company are shifted abroad, where they are also not taxed, and Fiat’s financing company only paid taxes on underestimated profits.”

Commissioner Vestager explained that tax rulings cannot organize “transfer prices with no economic justification and which unduly shift profits to reduce the taxes paid by the company”. This would, in effect, give an “unfair competitive advantage over other companies, typically SMEs [small to medium sized companies] that are taxed on their actual profits”.

Vestager confirmed that her department also has three ongoing in-depth investigations where it raised concerns that tax rulings may give rise to state aid issues, concerning Apple in Ireland, Amazon in Luxembourg, and a Belgian tax scheme.

She is said to be under increasing political pressure to avoid the appearance of an anti-American tax hunt, an appearance which could hinder the delicate Transatlantic Trade and Investment Partnership (TTIP) negotiations.

  • Author: Brian Maguire, Euranet Plus News Agency