In the first of what is likely to be a series of announcements, the European Commission ruled today that Starbucks and Fiat both received unlawful state aid in the form of preferential tax treatment from the Dutch and Luxembourg authorities, which artificially lowered the amount of tax they paid. This is one of the highest profile cases in the portfolio of Margrethe Vestager, the EU's competition commissioner, and concludes a two year investigation. The Commission has now ordered the tax authorities in those countries to recover the unpaid tax, which amounts to approximately €20 - €30 million for each company.


Commissioner Vestager has made it clear that the fight against tax evasion and tax fraud is one of the top priorities of her Commission. The Commission's state aid enforcement powers have in recent years been used primarily as a tool to examine subsidies provided to rescue and restructure firms in financial difficulty, but the Commission is sending a clear message that it is willing to scrutinise whether national authorities have used tax rulings to conclude "sweetheart" deals with multi-national companies. The Commission's policy objective is to establish a framework for fair tax competition, working in parallel with other policy initiatives such as the Commission’s Action Plan for fair and effective taxation and the relaunch of the Common Consolidated Corporate Tax Base (CCCTB), which is expected in 2016. 

There are other cases in the pipeline: the Commission has three ongoing in-depth investigations where it has raised concerns (via a Statement of Objections) that tax rulings may give rise to state aid issues, relating to Apple in Ireland, Amazon in Luxembourg, and a Belgian tax scheme. It is also examining the tax ruling practices of all EU Member States, having broadened its investigation in December 2014. 

Why did the Commission conclude that these tax rulings were unlawful? 

The Commission's investigation focused on intra-group transfer prices and concluded that Starbucks avoided taxes when one of its Dutch units paid its UK subsidiary for a technique to roast coffee beans on a complex basis which the Commission claims had no economic justification and which resulted in profits being shifted artificially to a lower tax jurisdiction. In response, Starbucks insists it has complied with all relevant rules, laws and OECD guidelines, and pays a global effective tax rate of around 33 per cent.

In Fiat's case, the Commission has concluded that Luxembourg's arrangements with one of its units, Fiat Finance & Trade, resulted in favourable tax treatment for Fiat by using economically unjustifiable assumptions to reduce its capital base and by underestimating its taxable profits. The Commission claims that the estimates of capital and remuneration applied by the authorities resulted in a "selective" tax advantage

Does this mean that all tax rulings raise potential EU state aid concerns? 

No. The Commission has stressed that tax rulings (i.e. comfort letters issued by tax authorities to give a company clarity on how its corporate tax will be calculated) are perfectly legal, and the Commission does not have direct authority over national direct tax systems. However, under the EU state aid rules, tax rulings cannot use methodologies to establish transfer prices which have no economic justification and which shift profits to lower tax jurisdictions, thereby providing the recipient with an unfair competitive advantage over other companies. 

What happens now? 

The Commission has ordered Luxembourg and the Netherlands to recover the unpaid tax from Fiat and Starbucks, respectively, in order to remove the tax advantage granted by the earlier tax rulings. Fiat and Starbucks may now launch an appeal against the Commission's ruling. If they do not do so, then the tax authorities will have to recover the difference between what the companies paid and what they would have paid without the tax rulings in question (together with compound interest), based on the methodology set out in the Commission decisions. 

The Commission has emphasised that today's announcement does not prejudge the outcome of its ongoing probes into Apple and Amazon (and its investigation into tax rulings in Belgium). The Apple investigation relates to two advance pricing arrangements (APAs) issued by Ireland in favour of Apple in 1991 and 2007, which relate to intra-group transfer pricing arrangements. In that case, the Commission has indicated that it is considering whether tax margins may have been "reverse engineered" without economic basis and tied to concerns about local employment. Apple has criticised the basis for the Commission's investigation.