The EU general court rejected on Tuesday (24 September) the European Commission’s decision that Starbucks had enjoyed a selective advantage in the Netherlands but confirmed assessment that Fiat had benefited from an unlawful tax ruling in Luxembourg.
The EU competition authority suffered a setback as the block’s top court dismissed an order for Starbucks to return up to €30 million in unpaid taxes, while it won a new case against Luxembourgish tax ruling schemes.
In 2015, after a long investigation launched by former competition chief Joaquin Almunia, the EU executive considered that the Netherlands and Luxembourg had issued tax rulings that artificially lowered the tax paid by Starbucks and Fiat, respectively, in violation of EU state aid rules.
Both the Netherlands and Luxembourg challenged the decision in court. A similar case involving a tax ruling benefiting Apple in Ireland, for which the tech-giant was ordered to repay €13 billion in 2016, is still pending.
“Each case has its specificities and involves complex legal questions. We will study the judgments carefully before deciding on possible next steps,” Competition Commissioner Margrethe Vestager said in a statement following the ruling.
According to the Commissioner, the decisions gave “important guidance on the application of EU state aid rules in the area of taxation.” However, the Commission has not confirmed yet whether it will appeal the ruling.
Starbucks vs Fiat
In the Starbucks-Netherlands case, the Court argued that the Commission had failed to demonstrate how the company benefited from an economic advantage as a result of tax rulings issued by the Dutch authorities in 2008.
After a long investigation, the Commission concluded in 2015 that Starbucks, acting in agreement with the Dutch authorities, had benefited from an artificial reduction of its tax burden by paying a substantial royalty to Alki –a member of the Starbucks group- for coffee-roasting know-how.
The Court considered, however, that the EU competition authority failed to prove it.
“This judgment means that the Dutch Tax and Customs Administration did not treat Starbucks any differently than other companies,” Menno Snel, the Dutch secretary of state for finance, said in a statement.
In a separate ruling, the EU general court confirmed the Commission’s decision on Fiat Chrysler Finance Europe, a company providing financial services for transactions within the Fiat cars group.
In 2012, Luxembourg issued a tax ruling endorsing the company’s method of establishing the price of the services provided by the company within the Fiat group below market rates and therefore affecting its profits, as well as taxes. The Commission considered that this resulted in a selective advantage.
The Court confirmed the EU competition authority assessment as the tax ruling resulted in lowering the company’s tax liability “as compared to the tax that it would have had to pay under Luxembourg tax law.”
Court backs ‘arm’s length principle’
The European Commission applied in both cases the ‘arm’s length principle’ according to which profits in a multinational group must be allocated within different parts of the company in a way that reflects economic reality, under the market conditions that would apply to independent businesses.
The EU authorities argued that tax rulings involving both Starbucks and Fiat allowed establishing transfer prices “with no economic justification and which unduly shift profits to reduce the taxes paid by the company.”
This, according to the EU authorities, gave competitive advantages to these companies over others, taxed on their actual profits.
Luxembourg and the Netherlands contested the use of this principle arguing that it violates member states fiscal autonomy. However, in both rulings, the Court backed the Commission’s application of the principle.
“The judgments confirm that, while member states have exclusive competence in determining their laws concerning direct taxation, they must do so in respect of EU law, including state aid rules,” Vestager said.
“The Commission will continue to look at aggressive tax planning measures under EU state aid rules to assess if they result in illegal State aid,” the Commissioner warned.
[Edited by Zoran Radosavljevic]