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EU Commission Outlaws Starbucks, Fiat Rulings

by Ulrika Lomas,, Brussels

21 October 2015

Luxembourg's tax ruling for Fiat Finance and the Netherlands's ruling for Starbucks do not reflect economic reality such that they grant selective tax advantages to the two companies in breach of EU law, the European Commission has concluded.

The findings come after sixteen months of investigations into advance pricing agreements provided to the multinationals by the two EU member states. The Commission has yet to decide on two further rulings for Apple, from Ireland; and Amazon, from Luxembourg. It is also probing Belgium's excess profit ruling system.

The Commission has said the companies can no longer benefit from the "advantageous tax treatment" provided by the rulings and Luxembourg and the Netherlands have been ordered to recover an amount of between EUR20m and EUR30m in "unpaid tax" from Fiat and Starbucks, respectively.

Announcing its decision, the Commission stated: "Tax rulings as such are perfectly legal. They are comfort letters issued by tax authorities to give a company clarity on how its corporate tax will be calculated or on the use of special tax provisions. However, the two tax rulings under investigation endorsed artificial and complex methods to establish taxable profits for the companies. They do not reflect economic reality. This is done, in particular, by setting prices for goods and services sold between companies of the Fiat and Starbucks groups (transfer prices) that do not correspond to market conditions. As a result, most of the profits of Starbucks's coffee roasting company are shifted abroad, where they are also not taxed, and Fiat's financing company only paid taxes on underestimated profits."

The Commission found that the ruling for Fiat Finance and Trade was not at "arm's length" because of "a number of economically unjustifiable assumptions and downward adjustments," which meant that "the capital base approximated by the tax ruling is much lower than the company's actual capital." Further, "the estimated remuneration applied to this already much lower capital for tax purposes is also much lower compared to market rates," it said.

The Commission said its assessment shows that in the case of Fiat Finance and Trade, if the estimations of capital and remuneration applied had corresponded to market conditions, the taxable profits declared in Luxembourg would have been 20 times higher.

In the case of Starbucks, the Commission said: "Starbucks Manufacturing pays a very substantial royalty to Alki (a UK-based company in the Starbucks group) for coffee-roasting know-how [and] it also pays an inflated price for green coffee beans to Switzerland-based Starbucks Coffee Trading SARL," noting the margin on these beans had more than tripled since 2011.

The Commission concluded: "The Commission's investigation established that the royalty paid by Starbucks Manufacturing to Alki cannot be justified as it does not adequately reflect market value. In fact, only Starbucks Manufacturing is required to pay for using this know-how – no other Starbucks group company nor independent roasters to which roasting is outsourced are required to pay a royalty for using the same know-how in essentially the same situation… the existence and level of the royalty means that a large part of its taxable profits are unduly shifted to Alki, which is neither liable to pay corporate tax in the UK, nor in the Netherlands."

Highlighting the significance of the rulings, EU Competition Commissioner Margrethe Vestager said: "Tax rulings that artificially reduce a company's tax burden are not in line with EU state aid rules. They are illegal. 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."

TAGS: Finance | tax | European Commission | Belgium | Ireland | Netherlands | Manufacturing | Luxembourg | agreements | multinationals | transfer pricing | Switzerland | services | Europe | Tax

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