The European Union Cracks Down on Member State Corporate Tax Agreements

Corina McIntyre, Vol. 37 Associate Editor

On October 21, 2015, the European Commission ruled that Luxembourg and the Netherlands granted illegal tax agreements to Fiat Finance and Trade and Starbucks.  In essence, the European Commission determined that these tax agreements created anticompetitive effects by granting these multinational corporations unfair tax advantages.  European Union member states are generally allowed to issue these types of tax agreements with corporations.  These agreements serve to clarify how that particular country will calculate a company’s corporate tax and whether any special tax provisions will apply.[1]  But corporate tax agreements are subject to European Commission investigation and review.  In particular, the European Commission seeks to ensure that “national tax authorities [do] not give any company, however large or powerful, an unfair competitive advantage compared to others.”[2] With respect to the Fiat decision, the European Commission determined that the Luxembourg tax ruling utilized a “complex and artificial methodology” that “cannot be justified by economic reality.”[3]  This resulted in Fiat’s payment of taxes based on underestimated profits that allegedly should have been “20 times higher if the calculations had been done at market conditions.”[4]  In the Starbucks decision, the European Commission concluded that the company reduced its taxable profits in the Netherlands through the use of royalty by shifting the “majority of its profits” to its UK company that is not subject to corporate taxes in the Netherlands.[5] As a remedy, the European Commission ordered Luxembourg and the Netherlands to collect the unpaid taxes resulting from the tax agreements with Fiat and Starbucks, respectively.  The companies will not be fined since they were abiding by orders from Luxembourg and the Netherlands, but they will be required to pay an estimated €20 – €30 million in back taxes.[6] This ruling is considered an “unprecedented decision that risks overturning thousands of corporate structures across Europe.”[7]  In Luxembourg, for example, hundreds or perhaps even thousands of companies have used the country’s holding-company rules to reduce their tax burden from 29% to essentially nothing.[8]  The uncertainty has created a “chill in corporate boardrooms across the continent” since the European Union indicated it will launch formal investigations whenever it receives information that EU state aid rules are not followed.[9]  The European Commission has further stated that the “fight against tax evasion and tax fraud” is one of its “top priorities.”[10] In response to the ruling, corporate attorneys are recommending that companies with favorable tax agreements with EU member states seek legal advice and review.  The decision has potentially far reaching consequences for multinational corporations.  The Commission will continue to retroactively analyze previous tax agreements between member states and companies operating within their borders.  Companies that receive favorable tax treatments with EU member states must be aware that these agreements could be subject to EU review at any point in the future and pose a risk within 10 years.[11] In the case of Fiat and Starbucks, however, the next step remains to be seen.  Starbucks stated that it would appeal the European Commission’s ruling on the basis that there were “significant errors in the decision” and that they complied with “Dutch and OECD rules.”[12]  Fiat has issued similar statements.[13]  In the meantime, Luxembourg and the Netherlands are under an “immediate obligation” to determine and collect the amount of the “illegal state aid” from these companies since the filing of a court action against a Commission decision does not suspend this obligation.[14]

[1] European Commission Declares Illegal Certain Cross-Border Tax Arrangements of Starbucks and Fiat Under EU State Aid Law and Orders Recovery of €20-30 Million from Each Company (Oct. 23, 2015), http://www.bakerbotts.com/ideas/publications/2015/10/international-tax-update-european-commission. [2] Statement by Commissioner Vestager on Commission state aid decisions regarding illegal tax advantages granted by Luxembourg (Fiat) and the Netherlands (Starbucks) and on the optical disk drives cartel (Oct. 21, 2015), http://europa.eu/rapid/press-release_STATEMENT-15-5881_en.htm. [3] Id. [4] Id. [5] Id. [6] European Commission Press Release IP/15/5880, The Commission (Oct. 21, 2015). [7] Tom Fairless, EU Regulators to Require Starbucks, Fiat Pay Millions of Euros in Back Taxes, The Wall Street Journal (Oct. 21, 2015, 12:41 PM), http://www.wsj.com/articles/eu-rules-that-starbucks-fiat-benefited-from-illegal-tax-deals-1445419279. [8] Id. [9] Id. [10] Supra note 6.    [11] European Commission Declares Illegal Certain Cross-Border Tax Arrangements of Starbucks and Fiat Under EU State Aid Law and Orders Recovery of €20-30 Million from Each Company (Oct. 23, 2015), http://www.bakerbotts.com/ideas/publications/2015/10/international-tax-update-european-commission. [12] Starbucks to appeal EU tax decision, cites “errors,” Reuters (Oct. 21, 2015, 5:36 AM), http://www.reuters.com/article/2015/10/21/eu-taxavoidance-starbucks-appeal-idUSB5N10A00420151021#5vVYGUvZaKWzqiIH.97. [13] James Kanter, E.U. Orders 2 Nations to Recover Taxes From Starbucks and Fiat, The N.Y. Times (Oct. 21, 2015), http://www.nytimes.com/2015/10/22/business/international/starbucks-fiat-eu-tax-netherlands-luxembourg.html. [14] EU Rules Starbucks, Fiat Received Tax Advantages from The Netherlands and Luxembourg Constituting Illegal State Aid, Must Pay Back Taxes (Oct. 2015), http://www.jonesday.com/eu-rules-starbucks-fiat-received-tax-advantages-from-member-states-constituting-illegal-state-aid-must-pay-back-taxes-10-21-2015/.