(Bloomberg) Starbucks Corp. and a Fiat Chrysler Automobiles NV unit must each pay as much as 30 million euros ($34 million) in back taxes after the European Union said they were handed illegal fiscal deals by the Netherlands and Luxembourg.
The coffee company and the Italian carmaker are the first two companies facing repayment orders as EU regulators seek to clamp down on tax-dodging corporations. The decision now sets up a showdown with Apple Inc. and Amazon.com Inc., which are also embroiled in the two-year-long tax probe.
“Tax rulings that artificially reduce a company’s tax burden are not in line with EU state aid rules. They are illegal,” Margrethe Vestager, the EU competition commissioner, said in an e-mailed statement. “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.”
Starbucks, Fiat, Apple and Amazon may be the tip of the iceberg after revelations of widespread use of sweetheart tax deals hit the headlines last year. Documents leaked by a group of investigative journalists showed that Luxembourg alone struck hundreds of secret fiscal deals known as tax rulings with companies from around the world, from PepsiCo Inc. to Walt Disney Co. Amazon, which has more than 1,000 people working in the tiny nation, said in July its taxes could increase in case of a negative decision by the EU in its case.
‘Legal Rationale’
The amounts to recover “are 20-30 million euros for each company,” Vestager said. “It also means that the companies can no longer continue to benefit from the advantageous tax treatment granted by these tax rulings. The Dutch and Luxembourg tax authorities must work out the actual amounts based on a method provided by the commission.
Luxembourg disagrees with the European Commission’s conclusions and “will use appropriate due diligence to analyze the decision of the commission as well as its legal rationale,” the country’s finance ministry said in a statement.
Luxembourg, which still faces an ongoing EU probe into a tax ruling set up with Amazon in 2003, said the regulator’s criteria in finding state aid in these accords were “unprecedented” and that it “has not established in any way” a selective advantage to the Fiat unit.
The Dutch government said it “is somewhat surprised about the decision” that Starbucks received state aid. The EU’s conclusion “raises a lot of questions and requires careful consideration. The Netherlands is convinced that actual international standards are applied and shall, therefore, analyze the commission’s criticism carefully before taking a decision on further steps.”
OECD Rules
Starbucks said it “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.” Starbucks said it paid $3 billion in global taxes between 2008 and 2014.
The Organization for Economic Cooperation and Development, a research institute funded by 34 countries including the U.S., sets tax standards used by countries across the world.
Fiat “did not receive any state aid” and “any finding in this matter would be immaterial to the FCA Group’s reported results,” the company said in an e-mailed statement on Tuesday. A Fiat spokesman in Turin said Wednesday that the company had no further comment on the issue.
‘Material’ Amount
Apple raised a flag in April about the potential cost if the company is required to pay past taxes to Ireland as part of the commission investigation. While Apple hasn’t been able to estimate the amount, it could be “material,” the Cupertino, California-based technology company said in a filing with the U.S. Securities and Exchange Commission.
Vestager said regulators are still poring over cases involving Amazon, Apple and the system of fiscal rulings in Belgium. They are all different and will each be assessed on their merits, Vestager told journalists in Brussels Wednesday. Additional cases may also be in the pipeline, she said.
“We do not stop here. We continue the inquiries into tax rulings in all EU members states,” Vestager said at a press conference. “In terms of timing” of the open probes, “fast is always better than slow but best of all is to be just” and the EU will make a decision “when a case is ready.” Amazon and Apple declined to comment.
The estimated amounts the two companies will have to pay back to Luxembourg and the Netherlands “are not spectacular sums, but basically that’s not the message here, the message here is the principle,” Vestager said. Also, the amounts are “much much more than what has previously been paid.”
Fairer Tax
The EU repayment order isn’t enough to force big companies to pay their share, according to a group campaigning for fairer taxation.
“It’s obviously still worth the risk to try and avoid taxes, when the worst that can happen is that a few of them get caught and have to pay their taxes, while the rest of them can continue enjoying a free ride,” said Tove Ryding, coordinator of tax justice at the European Network on Debt and Development.
In the Starbucks case, the commission said a Dutch unit paid millions of euros to a U.K.-based arm of the company that isn’t taxed in Britain in exchange for a technique to roast coffee beans. Exaggerated tax-deductible royalty payments for this technique allowed Seattle-based Starbucks to unfairly lower its Dutch taxes.
Starbucks said the commission “wrongly asserts that independent third parties which roast coffee beans for Starbucks do not pay equivalent royalties as our own roasting plant in Amsterdam. This is false.”
Court Appeals
In the Fiat case, the commission said a unit in Luxembourg benefited from a selective advantage since 2012 when it was given a tax ruling. As a result of the special arrangement, the unit ended up paying only “a small portion of its actual accounting capital at a very low remuneration” and if estimations had been in line to market conditions, “the taxable profits declared in Luxembourg would have been 20 times higher,” Vestager said.
The Brussels-based commission is bracing itself for legal challenges and spent months honing its arguments so they stand up in court.
—With assistance from David de Jong in Amsterdam, Dara Doyle and Joe Brennan in Dublin and Tommaso Ebhardt in Milan.
