EU Regulators Require That Starbucks, Fiat Pay Back Millions of Euros in Unpaid Taxes
BRUSSELS—The European Union said it will require Starbucks Corp. and Fiat Chrysler Automobiles to pay tens of millions of euros in back taxes after ruling that tax deals they negotiated with two European governments were illegal, in an unprecedented decision by regulators that risks blowing open thousands of corporate tax structures across Europe.
The European Commission, the EU’s executive arm, said Wednesday that tax deals granted to Starbucks in the Netherlands and Fiat in Luxembourg amounted to illegal state subsidies that must be repaid.
The investigations are technically aimed at the governments, which have been ordered to recover the unpaid taxes.
The sums to be reclaimed are modest—amounting to between €20 million ($22.6 million) and €30 million for each company. And Wednesday’s decisions are widely expected to be appealed at the EU’s courts in Luxembourg, a process that can take years.
But experts said the probes have already created a chill in corporate board rooms across the continent. Hundreds, possibly thousands, of companies have used Luxembourg’s holding-company rules to reduce their tax burden from the country’s official 29% rate to almost nothing, according to documents disclosed last year by the Washington-based International Consortium of Investigative Journalists.
“Any company that has a favorable tax agreement with Luxembourg in the past should seek advice and review it,” Heather Self, a partner at London-based law firm Pinsent Masons LLP, said. “They may wish to consider a compromise now rather than wait to be on the receiving end of a full EU investigation.”
“Thousands of other companies risk seeing their tax arrangements re-examined,” said Chris Bryant, partner at London-based law firm Berwin Leighton Paisner. “Billions of euros could be at stake.”
The decision could also have some consequences for the handful of deals being discussed between big multinationals with headquarters or units across Europe. The biggest pending deal is an initial agreement between Belgium-based AB InBev to buy London-based SABMiller PLC for £68 billion ($105 billion). The two companies have tentatively agreed to a deal but are working out details. AB InBev is based in Leuven, Belgium, and EU regulators are separately probing a Belgian tax discount that has benefited AB InBev and a number of other Belgian-based multinationals.
At a news conference Wednesday, EU antitrust chief Margrethe Vestager said she may open more probes if she suspects that EU rules are being violated. She said the tax deals for Fiat and Starbucks “shifted profits from one company to another in the same group, with no valid economic justification.”
“Our decisions today show that artificial and complex methods endorsed by tax rulings cannot mask the actual profits of a company, which must be properly and fully taxed,” Ms. Vestager said.
EU regulators are working on three similar investigations involving Apple Inc. in Ireland and Amazon.com Inc. in Luxembourg, as well as the Belgian tax discount involving AB InBev. It isn’t yet clear when those cases will be decided. All companies have denied receiving special treatment, and the governments have denied giving it.
EU officials admitted that they couldn’t pursue hundreds of similar investigations. But they said they hoped Wednesday’s decisions would lay down principles for the tax deals that are acceptable, which national governments would be expected to implement.
In Starbucks’ case, the EU said the company’s Dutch coffee-roasting unit paid a “highly inflated price” to a Swiss unit for green coffee beans, as well as a “very substantial royalty” to another Starbucks entity in the U.K., Alki, that didn’t reflect the value of know-how. Alki, which has since been dissolved by Starbucks, wasn’t liable to pay corporate tax in the U.K. or the Netherlands, Ms. Vestager said.
Starbucks hit back strongly at the decision, saying it planned to launch an appeal “since we followed the Dutch and OECD rules available to anyone,” a reference to the Organization for Economic Cooperation and Development, a Paris-based international organization that produces corporate tax guidelines.
The coffee chain said it was concerned there were “significant errors” in the decision. A spokesman said the company complies with all international laws and guidelines, and “has paid an average global effective tax rate of roughly 33%, well above the 18.5% average rate paid by other large U.S. companies.”
In a follow-up statement, Starbucks argued that the EU had wrongly claimed that independent companies roasting coffee for Starbucks don't pay equivalent royalties to its own roasting plant in Amsterdam. “A wholly independently owned company pays Starbucks a royalty in order to roast Starbucks coffee beans,” the company said. “This is one of the reasons why Starbucks plans to appeal today’s decision.”
The Dutch Finance Ministry said it was “surprised” by the commission’s decision and would analyze it carefully before deciding on further steps. The ministry said it was “convinced that actual international standards are applied.”
In Fiat’s case, the EU said a tax deal for the company’s Luxembourg-based financing company had used “an extremely complex and artificial methodology to calculate taxable profits, which cannot be justified by economic reality.” Its taxable profits in Luxembourg “would have been 20 times higher if the calculations had been done at market conditions,” Ms. Vestager said.
In a statement published Tuesday, Fiat said it hadn’t received any state aid, and that any back-tax payments would be “immaterial” to the company’s reported results.
Luxembourg’s government said it disagreed with the EU’s decision “and reserves all its rights.” It said the commission hadn’t established “in any way” that Fiat had received selective advantages.
The Starbucks case may be particularly worrisome for multinationals because the Dutch tax-ruling process is “long-established and very well-respected internationally,” said Ms. Self at Pinsent Masons.
The tax probes are a high priority for the commission and have been repeatedly widened in recent months, as regulators requested hundreds of tax agreements from all 28 EU countries.
EU policy makers are eager to close loopholes in the fragmented tax system that allow international groups to sidestep billions of euros in tax at a time of tough national austerity. But governments have been hampered by a requirement that they all agree on any changes to the EU’s tax laws.
The EU’s investigations neatly avoid that issue by using the commission’s extensive powers to enforce the bloc’s state-aid rules, which prohibit selective government subsidies for some companies and not others.
At issue are tax rulings, which are used to confirm the size of companies’ future tax bills, to give company directors certainty as to their future obligations. Regulators suspect that some tax rulings might have granted certain companies an advantage over others, which would be illegal under EU law.
“With the noose tightening around aggressive international tax structures, many large [multinational companies] may find the tax cost of doing business increasing,” said Lee Curthoys, a corporate tax expert at Radius Worldwide, a consultancy.
Still, the scrutiny of complex tax structures may help level the playing field for startups and smaller firms that cannot afford to engage in such arrangements, Mr. Curthoys said.
One fallout from Wednesday’s rulings, experts said, may be to bolster interest in financial centers in the Far East, the Middle East or the Caribbean, away from the watchful gaze of EU regulators.
Another likely group of beneficiaries will be the tax advisers who helped structure the current generation of tax deals, and may now be called on to adjust or unpick them.