Brussels, 21/10/2015 (Agence Europe) - On Wednesday 21 October, the European Commission found that the companies Starbucks and Fiat Finance and Trade had been given a selective advantage through the tax rulings granted by Netherlands and Luxembourg respectively.
The news came as no surprise, having been doing the rounds of the international press for more than a week (see EUROPE 11411), but it nonetheless comes as a very convenient time, two weeks after the agreement of the Ecofin Council on the automatic exchange of information between states on these tax rulings (see EUROPE 11404). With this exchange, and the two test cases represented by Fiat and Starbucks, the Commission can now take determined action on all fronts. With its decision on Wednesday, it is showing its determination to use its exclusive competence in competition matters to ensure that multinationals pay their fair share of tax. The Commissioners for Taxation, Pierre Moscovici, and for Competition, Margrethe Vestager, are fond of stating that they complement each other, as one of them represents the preventative plank and the other the corrective one.
The two companies targeted by Wednesday's decisions will each have to pay back between €20 and €30 million to the budgets of Luxembourg and the Netherlands. By way of comparison, Vestager explained that in 2014, Fiat paid less than €0.4 million and Starbucks €0.6 million in corporate tax. Obviously, these decisions do not prejudge the outcome of other cases currently under examination (Apple in Ireland and Amazon in Luxembourg, see EUROPE 11333), but they show that tax arrangements of the 'ruling' type cannot approve the setting of transfer prices which do not reflect market conditions, Vestager explained. In the future, she is not ruling out laying down guidelines for the granting of tax rulings, referring in passing to the binding nature of these.
The Commissioner went on to stress that the Commission is not the poor relation of the agreement on the automatic exchange of information on tax rulings, which defined the information to be received by the European institution and stated that the Commission could use this information only to verify that the exchange had indeed taken place. “It's not that important if we don't get detailed information. If there is a complaint, a hearing in the national parliament, then of course we can pick it up”, explained Vestager. Some cases have on occasion been opened due to the situations described by the Commission. However, Markus Ferber (EPP, Germany) said that the decisions taken on Wednesday are proof positive that the Commission should have access to all the information exchanged. The EP will vote next week on the 'Ferber' report, which is critical of the approach selected by the Council on the exchange of information on rulings (see EUROPE 11410).
Peter Simon (S&D, Germany) said that the Commission had added a new dimension to the fight against tax avoidance. Speaking on behalf of the Greens/EFA, Eva Joly of France said that the money reimbursed should not go to governments which had been caught out. “We are not working with punishments”, Vestager replied. Unimpressed, Fabio De Masi (GUE/NGL, Germany) and the NGO Oxfam repeated their calls for binding measures requiring public country-by-country reporting. Under the umbrella of ACCA Global, the accountancy experts take the view that if the companies acted in good faith, it is the governments and their tax authorities which should be penalised, as these tax arrangements were made possible by loopholes in the national legislations, or because member states have set in place tax schemes designed to encourage multinationals to transfer their profits into their jurisdiction.
Regarding the specific case of Fiat Finance and Trade, the Commission explained that its analysis had shown it that a ruling issued in 2012 by the Luxembourg authorities had, since then, given the company a selective advantage, allowing it to save between €20 and €30 million in tax. The reasoning is as follows: as Fiat Finance and Trade carries out activities similar to those of the bank, its taxable profit can be determined in the same way as for a bank, in other words by calculating the yield on the capital used by the company for its financing activities.
However, the Commission takes the view that the ruling approves an artificial and extremely complex method, which is unsuitable to calculate taxable profit under market conditions. This means that it artificially reduces the amount of tax paid by Fiat Finance and Trade in two ways. Firstly, on the grounds of a number of hypotheses and economically unjustifiable downwards adjustments, with the estimation of the base capital in the ruling far lower than the real level of company capital. Secondly, the estimation of the remuneration of this capital is also well below the levels observed on the market. “The Commission's analysis showed that the taxable profit in Luxembourg would have been twenty times higher if the calculations had been done under market conditions”, Vestager explained.
Starbucks Manufacturing, which is based in the Netherlands, is the only coffee roasting company which Starbucks owns in Europe. It was granted a ruling in 2008 which is alleged artificially to have reduced the tax it paid in the country, in two ways. Firstly, by means of a very high level of royalties to Alki, a company of the group based in the United Kingdom, for the knowledge it uses in coffee roasting and, secondly, by means of excessive prices paid for green coffee beans to Starbucks Coffee Trading SARL, Switzerland.
On the former aspect, the Commission notes that the existence of the royalties (Starbucks Manufacturing is the only company of the group which has to pay these royalties) and their level mean that a significant proportion of its taxable profit is unduly transferred to Alki, which is not liable for corporate tax in either the United Kingdom or the Netherlands.
As for the second aspect, the high price for beans means that the roasting activities of Starbucks Manufacturing would not, on their own, make it possible to generate sufficient profit in order to pay Alki the royalties for the use of its coffee roasting expertise. This means that the main purpose of these royalties is to transfer to Alki the profits generated by the sales of other products available at Starbucks outlets, such as tea, pastries and mugs, which constitute most of the turnover of Starbucks Manufacturing.
The ball is now in the court of the two states - the Netherlands and Luxembourg - to determine the amount of tax to recover, under the method specified in the Commission's decisions. The Luxembourg and Dutch ministers, who are opposed to the Commission's conclusions, will be carefully analysing the arguments put forward before deciding on their next steps. Luxembourg explained that it wishes to reserve all its rights. Starbucks has announced its intention of appealing against the decision. (Original version in French by Elodie Lamer)