Brussels orders EU countries to claw back ‘illegal’ tax rulings

Commissioner for Competition, Margrethe Vestager, underlined that professional football is a commercial activity, and therefore all the clubs should respect the principle of level playing field. [EBS]

Europe’s competition chief ordered the Netherlands to recover €20-30 million in back taxes from Starbucks on Wednesday (21 October) and told Luxembourg to claim the same amount from Fiat Chrysler Automobiles.

The move is a heavy blow to profit-shielding arrangements used by many multinationals.

Antitrust commissioner Margrethe Vestager said all firms must pay a “fair share” and ordered the Netherlands to recover €20 million to €30 million in back taxes from the U.S. coffee shop chain. Luxembourg must recover a similar amount from Italian-U.S. carmaker Fiat.

The sums will barely dent revenues. The bigger impact lies ahead for global corporations whose strategies to avoid tax are under attack on various fronts from cash-strapped governments. One leading consultant said this first of several EU cases to be concluded would “rock the corporate world to its very core”.

Starbucks immediately said it would appeal, echoing the Dutch government in accusing the European Union executive of significant “errors” in its assessment. Luxembourg, where much of the economy has been built on attracting multinational firms, said it disagreed and reserved its right to appeal.

Fiat denied receiving any aid from the Luxembourg state.

Vestager, a Dane who has denied accusations of anti-American bias in launching other tax probes into Apple Inc and Inc and competition inquiries into Google Inc, took care to avoid intruding on EU governments’ jealously guarded rights to set their own tax rates. The issue, she stressed, was firms being treated differently within the same national system.

“The decisions send a clear message,” she told reporters in Brussels. “National tax authorities cannot give any company, however large or powerful, an unfair competitive advantage compared with others. For most companies, especially the small and medium-sized, I hope this is a reassuring message.”

The Commission said Starbucks benefited from a tax ruling – an assurance of future tax levels – from Dutch authorities in 2008 and Fiat from a ruling in Luxembourg in 2012. It concluded that the taxable profits for Fiat’s Luxembourg unit could have been 20 times higher under normal market conditions.

The precise sum to be paid must now be set by Luxembourg and the Netherlands on the basis of the Commission’s methodology.

Marc Sanders of tax advisers Taxand said the ruling would rock the corporate world to its very core, throwing tax planning into disarray: “Whilst multinationals were lured to EU states with offers of low tax rates as an incentive, little did they know that, despite having agreement at the highest national level, this would come back and bite a decade later,” he said.

‘We do not stop here’

Warning that “we do not stop here”, Vestager described the cases of Apple in Ireland and Amazon in Luxembourg, where the Commission also suspects the companies of benefiting from illegal state subsidies via the tax system, as “very different”. She declined to say when she would rule on them.

Inquiries are also continuing into the Belgian government’s treatment of dozens of unidentified companies.

“More cases may come if we have indications that EU state aid rules are not being complied with,” she warned, while noting that there was a broader EU and global attempt, coordinated by the rich nations of the OECD, to crack down on tax avoidance using artificial cash flows through ultra-low tax regimes.

“We cannot achieve fair tax competition in Europe with enforcement of EU state aid rules alone,” Vestager said. “The fight against tax evasion and tax avoidance can only be won with a combination … of state aid rules and legislative responses.”

Apple did not respond to a request for comment on Wednesday’s ruling and the commissioner’s statement. Amazon declined to comment.

Vestager said Fiat’s Luxembourg unit paid “not even” 0.4 million euros in corporate tax last year and Starbucks’ Dutch subsidiary less than 0.6 million euros. Starbucks said it paid an average global effective tax rate of about 33 percent.

“Starbucks 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,” a spokesman said.

The Commission’s decision could force “real soul searching” by U.S. multinational companies considering investments in Europe, said Robert Willens, an independent corporate tax consultant in New York. The tax strategies the Commission is now calling illegal state aid are used by many companies, he said.

Commission President Jean-Claude Juncker has rejected calls for him to resign because the Luxembourg tax system was developed during the near quarter-century he served as finance minister and prime minister.

Since taking up the EU post a year ago, he has said the Commission will work to level the international playing field. His successors in the Luxembourg government insist that their small economy, which turned to finance when steelmaking collapsed, is continuing to attract investment.

In the European Parliament, the Socialists and Democrats (S&D) group hailed the Commission’s move. "This decision gives the fight against tax avoidance a new dimension,” said Peter Simon, S&D Group spokesperson on the special TAXE committee in the European Parliament. “This should be the beginning of the end of the business model 'tax avoidance organized by the state'. This is an important victory for tax justice and honest tax payers, including companies which did not receive special treatment."

"This decision shows that EU competition law is a powerful weapon against tax avoidance models. The Commission now needs to use all further possibilities in this area. Starting from these cases we need detailed EU state aid guidelines in the area of corporate taxation.”

However, Simon stressed that EU state aid law should not be seen as a panacea in the fight against tax avoidance by multinational companies. “The current momentum needs to be used in order to set up a comprehensive legal framework for fair corporate taxation including a common corporate tax base and mandatory country-by-country reporting for companies. The aim is that profits are taxed where they are made."

The Alliance of liberals and democrats (ALDE) also hailed the Commission move as a “historic landmark decision against tax avoidance deals” that would reverberate across Europe. "There is no reason why your local corner coffee bar should pay normal taxes, while big multinational companies such as Starbucks should not," said Michael Theurer MEP, co-rapporteur on the Parliament’s TAXE committee.

The Greens/EFA group also praised the Commission decision as an “important blow against sweetheart tax avoidance deals, which multinationals have used as part of their strategy to avoid their tax responsibility.” However, it encouraged the Commission to continue investigating the matter noting that “Luxembourg is far from alone in this practise, so the Commission is so far only dealing with the tip of the iceberg."

Bas Eickhout MEP, the Green economic and finance spokesperson, urged the Commission to address flaws in the EU's state aid rules more generally. “We urgently need proper transparency on corporate taxation and finally proposing and agreeing on public country-by-country reporting obligations for companies would be an important step to this end. Introducing a mandatory corporate tax base, with a minimum rate, would also help tackle tax dumping and the moves by companies to shift their profits to low tax jurisdictions to avoid their tax responsibility. We would urge the Commission to be more proactive on this."

The Association of Chartered Certified Accountants (ACCA) said it supports the Commission in its effort to improve tax transparency. But it warned against hitting at the wrong target.

“Most Member States issue rulings for very valid reasons,” said Chas Roy-Chowdhury, head of Taxation at ACCA, adding they “can attract investment and create jobs.”

“However, things are different if the tax ruling breaches EU state aid rules or the Code of Conduct’s principles of fair tax competition, and intentionally gives preferential treatment to certain companies, encouraging them to artificially shift profits there, thereby leading to severe tax base erosion for other Member States.”

“We thus think that, rather than the companies themselves - of course where they operated in good faith -, these are the national governments and their tax authorities that should be penalised.”

The fight against tax evasion is one of the Juncker Commission's main priorities. News of the systematic, state-sanctioned tax evasion practices of many multinationals based in Luxembourg, known as the Luxleaks scandal, broke shortly after the new Commission was sworn in.

On 18 March, the executive presented a package of measures aimed at strengthening tax transparency, notably by introducing a system for the automatic exchange of information on tax rulings between member states. 

The so-called Tax Transparency Package will force the EU's 28 member states to share details of any tax deals agreed to with some of the world's biggest multinationals, in information sent automatically every three months. The plan aims to end the secrecy that allowed member states to often compete against each other to attract business and investment.

It does not however question the perfectly legal practice of offering companies tax rulings, the executive said, this being the strict responsibility of member states.

Activists criticised the fact that the tax ruling would remain out of the public eye, remaining privileged information for tax authorities.

>>Read: Brussels mulls clampdown on tax avoidance after Luxleaks


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