The European Commission today announced that it has determined that advance pricing agreements granted to a Starbucks subsidiary by The Netherlands and to Fiat subsidiary by Luxembourg were illegal state aid because they sanctioned the allocation of too little profit to activities in those countries and thus artificially lowered the tax paid by the companies.
In so deciding, the Commission confirmed its preliminary opinions concerning the Starbucks and Fiat rulings, which were announced in November 2014 and June 2014, respectively.
While the final decisions have not yet been made public, the Commission said in a press release that both companies must pay the unpaid taxes of €20 — €30 million to the governments involved. The precise amount is to be determined by the Luxembourg and Dutch tax authorities based on a formula set out in the Commission decisions.
EU Competition Commissioner Margrethe Vestager said at a news conference that Netherlands and Luxembourg tax authorities have two months to calculate and begin collecting the taxes due. Otherwise, “maybe we will see each other in court,” she said.
In separate statements, representatives of both Luxembourg and The Netherlands suggested that court may be where the disputes are headed. Both defended their transfer pricing and tax ruling practices, but said they needed to study the Commission’s decision before taking further steps.
The companies, too, contested the outcome. Starbucks said outright that it intends to pursue legal remedies. “We plan to appeal since we followed the Dutch and OECD rules available to anyone,” the company said.
Fiat Chrysler Automobiles said in its statement that no state aid was involved in the ruling granted by Luxembourg. The advance pricing agreement “was based on a fully documented transfer pricing analysis carried out pursuant to well recognized methodologies,” the company said.
Commission conclusions
As in the preliminary decisions, the Commission concluded that Luxembourg granted a selective tax advantage to Fiat’s financing company, Fiat Finance and Trade (FTT), and that The Netherlands gave a selective advantage to Starbucks’ coffee roasting company, Starbucks Manufacturing EMEA BV (Starbucks Manufacturing).
The Commission said it concluded that Starbucks Manufacturing’s Dutch advance pricing agreement wrongly sanctioned the subsidiary’s excessive payments to related parties for royalties for coffee roasting know-how and for green coffee beans. This allowed most of the profits of Starbucks’ coffee roasting company to be shifted abroad, where the profits are also not taxed, the Commission said.
Commenting on the ruling granted by the Luxembourg tax authority to FFT, the Commission said that the Fiat subsidiary, which provides financing through loans and bonds to other companies within the group, has activities are similar to a bank’s. As a result, it is acceptable to determine FFT’s taxable profits by figuring a return on capital deployed for financing activities, the Commission said.
However, in the instant case, the calculation of profit sanctioned by the ruling included “economically unjustifiable assumptions and down-ward adjustments that reduced the capital base,” and the estimated remuneration applied to that base is much lower as compared to market rates, the Commission said. According to the Commission, FTTs taxable profits in Luxembourg would have been 20 times higher if the calculations had been done at market conditions.
Implications
James Stewart, an associate professor of finance at Trinity College, Dublin, said although the dollar amount of the potential tax recovery in the two state aid cases is relatively small, possibly amounting to less than the legal fees, the implications of the Commission’s decisions are huge. These decisions could affect “thousands of cases, particularly for those firms using a Luxembourg holding company strategy,” Stewart said.
Stewart also predicted that, because of the Commission decisions, it will become more difficult for EU states to grant favorable tax rulings to companies, especially given recent EU decisions to exchange tax ruling information. All these decisions, he said, could be viewed as “a part of a movement toward a common consolidated corporate tax base.”
Stewart said that even though Commissioner Vestager was careful to say that the cases decided today do not prejudge the outcome of other pending state aid probes, he expects the Commission will also move against the tax ruling granted by Ireland to Apple.
Ireland has already announced its intention to appeal any adverse ruling to the European Court of Justice, Stewart said. He added, though, that Ireland may not find success in the courts because the “ECJ has a track record of supporting the Commission in cases involving the ‘four freedoms’ and the single market.”
Stewart also noted that the Commission stated in its press release that, in both the Starbucks and Fiat cases, the Commission used powers newly acquired in 2014 to collect information from other member states and companies to complete its state aid assessment. This is a key development, he said.
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