EU-Commission decides selective tax advantages for Fiat in Luxembourg and Starbucks in the Netherlands are illegal under EU state aid rules

2. 11. 2015

The EU- Commission has concluded that selective tax advantages provided by local tax authorities for Fiat in Luxembourg and Starbucks in the Netherlands are illegal under EU state aid rules. The tax authorities issued tax rulings which artificially lowered the tax paid by the company.

Each company received a tax ruling about selective tax advantages which were perfectly legal. The tax ruling explained how the corporate tax will be calculated and how will be special provisions used. However, the tax authorities approved such methods for calculating taxable profits that European Commissions has found as artificial a complex, without reflecting economic reality. For example, the transfer prices of goods and services sold between companies of Fiat and Starbucks didn't reflect the real market conditions. Furthermore, Starbucks shifted profit earned abroad, where it wasn't taxed as well. Fiat taxed only a small part of the actual profit earned.

EU state aid rules don't allow to use tax rulings which establish transfer pricing methods without any economic justification with the aim to shift profit abroad and lower taxes paid. Such situation gives the companies an unfair competitive advantage over other companies that are taxed on their actual profits because they pay market prices for the goods and services they use. Therefore the Commission decides that the approved tax authorities have to recover the unpaid taxes in the amount from €20 to €30 million from Fiat and Starbucks. The companies also can't exploit the selective tax advantages any more.

Fiat has provided financial services, most often intra-group loans, to other Fiat group car companies. The Commission has concluded that Fiat works on a similar basis as a bank therefore the taxable profits can be determined as a calculation of return on capital deployed by the company for its financing activities. However, the methodology of Luxembourg tax authority used to calculate taxable profit allowed to make several down-ward adjustments, which ended in a tax ruling having much lower capital than the company's actual capital. In addition, the estimated remuneration applied to this already lowered capital for tax purposes and is also much lower compared to market rates. As a result, Fiat paid taxes only from a small amount of the actual accounting capital at a very low remuneration, although the level of capitalisation of the company has to be comparable to financial industry standards. The taxable profit was therefore twenty times lower in comparison to reality.

Starbucks in the Netherlands was paying very substantial royalty to Alki, a UK-based company in the Starbucks group, for coffee-roasting know-how and also a very high price for coffee beans to Starbucks Coffee Trading based in Switzerland. The Commission has found the royalty as unjustifiable because they weren't required from any other companies in Starbucks group as well as from the independent subcontractors. A huge amount of taxable profit was transferred to Alki, which is not obliged to tax duty neither in Great Britain, nor in the Netherlands. Starbucks tax base was also unduly reduced by the highly inflated price it paid for coffee beans to a Swiss Starbucks Coffee Trading and therefore Alki shifted mainly profit generated from sales of other supplementary products offered by Starbucks.

Commission in both cases has set out a methodology, how to calculate the value of the undue competitive advantage. It is the difference between what the company paid and what it would have paid without the tax ruling. The amount of the selective tax advantage is €20 - €30 million for each, Fiat and Starbucks.