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EU Decision On Fiat, Starbucks Tax Rulings Causes Concerns

by Ulrika Lomas,, Brussels

27 October 2015

The European Commission's decision that tax rulings granted by Luxembourg for Fiat Finance and the Netherlands for Starbucks confer selective tax advantages on the two companies "is a warning shot across the bows of tax authorities generally," George Bull, senior tax partner at Baker Tilly, has said.

In the case of Luxembourg and Fiat, the Commission found that the advance pricing agreement (APA) in question 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." The Commission found that "the expected remuneration applied to this already much lower capital for tax purposes is also much lower compared to market rates."

With regard to 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." It noted that the margin on these beans had more than tripled since 2011.

Commenting on the Commission's findings, Bull said: "A number of multinationals have been criticized recently over their tax affairs, but the important point about this ruling is that it's directed at the countries which provided sweetheart tax deals to certain companies. This is an example of harmful tax competition where two European Union (EU) countries have been accused by the EU of having provided unfair state aid. [The] EU ruling is a warning shot across the bows of tax authorities generally, not simply those in the Netherlands and Luxembourg."

"In an era of greater tax transparency, national tax authorities must understand that they can't just boost their tax takes by luring multinational corporations to their shores with selective offers of favourable treatment. Countries want multinationals to play by the rules and pay a fair amount of tax – something that the recently announced OECD BEPS project is trying to achieve. However, national governments also need to play fair with each other."

According to international law firm Pinsent Masons, the Commission's decisions raise serious questions because they appear to impinge on EU member states' sovereign rights over tax.

Caroline Ramsay, Senior Associate and state aid expert at Pinsent Masons, said there was "considerable surprise that the Commission has commented so explicitly on national governments' tax methodologies. This seems at odds with member states' sovereign right to set their own taxation, and is extremely concerning."

Partner Heather Self added: "Multinationals are particularly anxious about the Starbucks case. The ruling process in the Netherlands is long-established and very well-respected internationally. For competition authorities to challenge very technical tax rulings by competent authorities in this way is extremely destabilizing."

"It has implications not just for companies that have received tax rulings from the Netherlands in the past, but for any multinational operating anywhere in Europe. The fact that EU competition authorities feel it appropriate to intervene in highly complex international tax issues adds another layer of complexity and unpredictability."

TAGS: compliance | tax | European Commission | tax compliance | Netherlands | tax avoidance | revenue guidance | Manufacturing | law | Luxembourg | tax authority | multinationals | tax planning | transfer pricing | advance pricing agreement (APA) | G20 | revenue statistics | European Union (EU) | Europe | BEPS

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