On 21 October 2015 the private tax arrangement reached between Starbucks and Dutch tax officials five years ago were found to be an unlawful state aid. Similarly, a deal between Fiat and Luxembourg’s tax authorities has been considered to infringe EU state aid rules. Following two in- depth investigations, the Commission concluded that Luxembourg granted selective tax advantages to Fiat's financing company and the Netherlands did the same with regards to Starbucks' coffee roasting company. Fiat and Starbucks will have now to repay the unlawful state aids (or appeal the decisions to the EU’s General Court).
Basic EU rules on State Aid
Article 107(1) of the Treaty on the Functioning of the European Union (TFEU) provides that any aid granted by a Member State which distorts or threatens to distort competition by favouring certain undertakings, and affecting intra-EU trade, is in principle incompatible with the EU internal market.
Selective tax advantages may amount to state aids within the scope of Article 107(1) TFEU. When the Commission investigates tax measures, it does not call into question the general tax regimes of the Member States, but focuses its analysis on favourable tax rulings that provide advantages to companies in a selective way.
The facts and the Commission’s decision
Both the Fiat and Starbuck Decisions concern tax rulings issued by the national tax authorities. Tax rulings are legal as such. They are ‘comfort letters’ issued to explain to a company how its corporate tax will be calculated or to clarify the use of special tax provisions.
The Decisions of 21 October 2015 found that the tax rulings at issue endorsed ‘artificial and complex methods’ to fix taxable profits for the companies not reflecting their ‘economic reality’.
The Commission considered that the agreements between the companies and the tax authorities consisted in setting transfer prices for goods and services sold between companies of the Fiat and Starbucks groups that do not reflect market conditions. As a result, most of the profits made by Starbucks were shifted to countries where they are not taxed, and Fiat only paid taxes on lower profits.
These tax rulings constitute a breach of EU State aid as tax ruling are not allowed to endorse methodologies in order to establish transfer prices without any economic justification and which unduly reduce the taxes to be paid by the company. The tax rulings also confer upon the beneficiaries an unfair competitive advantage over their competitors, which pay market prices for the goods and services and therefore are taxed on their actual profits.
On this basis, the Commission ordered the Netherlands and Luxembourg to recover the unpaid tax from Fiat and Starbucks, the amounts range being between €20-30 million for each company.
The Fiat and Starbucks cases are part of the Commission’s trend to look at tax rulings in Member States and assess whether they comply with EU state aid law.
Some commentators have observed that the EU Competition Commissioner was more concerned with taking a strong position on the illegality of certain tax avoidance practices, rather than imposing heavy fines on Fiat and Starbucks.55 This confirms that the Fiat and Starbucks cases should be regarded in the context of the Commission’s strategy against tax evasion and tax avoidance.
The fight against tax evasion and fraud has been announced as being a priority for the Commission.
This approach clearly emerges from various initiatives launched in 2015 in the context of the Commission’s Action Plan for fair and effective taxation. Thus, both Fiat and Starbucks are inserted in a framework aiming to ensure effective taxation and to re-launch the Common Consolidated Corporate Tax Base (CCCTB). The Commission’s strategy against unfair tax practices was endorsed in October 2015 when Member States reached a political agreement on an automatic exchange of information on tax rulings.
The Fiat and Starbucks Decisions do not have immediate legal impact on companies other than Fiat and Starbucks, that now have to repay the unlawful aids received. However, these cases constitute a warning to bigger companies operating in the EU. Companies should be aware that the cross-borders arrangements allowing the reduction of tax burdens may be scrutinized by the Commission in light of the EU state aids rules.
It is likely that that Fiat and Starbucks will bring actions for annulment before the EU Courts in Luxembourg against the Decisions. Possible rulings would be welcome since they may set out the clearer criteria for the assessment of tax avoidance arrangements and tax rulings, thereby bringing more legal certainty in a context where it appears to be difficult to draw a clear line between lawful tax rulings and unlawful arrangements.