25th October 2015

EC: tax breaks for Starbucks and Fiat are illegal state aid

Last week the European Commission, specifically the Commissioner for Competition Margarethe Vestager, announced a breakthrough state aid decision. In two different cases, Starbucks in the Netherlands and Fiat in Luxembourg, it found that the tax deals struck by the companies with the local tax authorities are to be viewed as state aid and are thus illegal. Both member states were ordered to calculate the due tax based on EC´s methodology, and to recover it – some €20-30 million in each case.

Commissioner Vestager opened several big investigations recently, including against Apple and Amazon. The decision announced last week can be viewed as a precedent. Until now, state aid was identified only in cases of subsidies or other more direct selective support schemes. Now, as part of the EC´s drive against tax evasion, also tax arrangements come into scope. Both companies have established absurdly complex tax schemes, including subsidiaries in other jurisdictions, to pay very low taxes. To make sure, the companies negotiated the so-called comfort letters with the Dutch and Luxembourgish authorities. In such deals, the local authorities bindingly stated that the companies´ tax schemes are to be viewed as legal. In theory, such practice is not problematic. However, transactions between the companies in Starbucks´ and Fiat´s complex schemes were deemed economically unjustified by the EC. This is the cornerstone of the case and the reason why the endorsement of such practices by tax authorities amounts to state aid.

Good example is Starbucks. The Dutch-based Starbucks paid an unusual royalty to a sister company in the UK, where royalties are exempt from tax. No other Starbucks company across the EU pays such royalty. Also, the Dutch Starbucks paid unusually high prices for coffee beans to a Swiss sister-company. Other EU Starbucks companies pay much less, or even use a different business model based on outsourcing. It is therefore not usual business practice in the EU, even for Starbucks itself. Endorsement of this unusual and economically unjustified practice by the Dutch tax authority presents an advantage for Starbucks over small- and medium-sized local coffee businesses. That is why it is illegal as state aid. The EC also calculated, how economically justifiable transactions would look. The difference between its calculations and actual amounts in the Starbucks scheme gave €20-30 million as difference in paid taxes. The Dutch authority was ordered to re-calculate the tax and recover the due part.

As stated above, this is a landmark decision. It reinforces the image of Commissioner Vestager as EU competition tzar and provides good indication on how future decisions will look. As such, it is viewed as a warning against big multinationals and their tax sweetheart deals with EU tax havens such as Luxembourg. In what is regarded as a tactical move, the EC did not target companies from the US at first, notably Apple and Amazon. It must also be stated, that both companies and both states refused any wrongdoing and announced that they plan to appeal the decision before the EU court.

For more, click here, here, here and here.

Members of the American Chamber of Commerce in the Czech Republic