The EU has today opened another State aid investigation, this time into tax rulings given to Nike by the Dutch tax authorities. At the heart of this investigation is the question - what value is there in the Nike brand?
The Dutch tax authorities had agreed that, in their view, the payment of a royalty - which passed on most of the profits earned by the Dutch company from European sales - was arm's length. In other words, on the sale of a Nike shoe, most of the profit was attributable to the Nike brand and only a small operating margin was attributable to the efforts of the Dutch company responsible for sales and marketing activities.
The EU found this surprising. Surely the fact that the Dutch company employed more than 1000 staff, who were involved in promoting and advertising the Nike products, meant that those companies should be allocated a greater proportion of the profit? Isn’t that what a third party would have required?
The companies that owned the brand that was licenced to the Dutch company did not have any employees. It was a passive holder of a very valuable brand.
So who is correct? As always, this is very fact dependent. Is the Nike brand so valuable that it is responsible for most of the profit? Is this the case even if the work on maintaining and developing the brand is done by the users - albeit effectively at the cost of the brand owner - rather than the brand owner itself? What is the power of the brand?
At the heart of this investigation is the question of whether the Dutch tax authorities applied their own tax and transfer pricing rules correctly. But these are difficult economic questions to answer. Nike will undoubtedly defend its valuation position robustly.