‘Starbucks and Fiat Chrysler have been told they must pay back up to £22m in taxes after the European competition commissioner ruled tax breaks used by the firms were illegal.
Sweetheart deals Starbucks had with the Netherlands and Fiat had with Luxembourg were state aid, Margrethe Vestager said. “Tax rulings that artificially reduce a company’s tax burden are not in line with EU state aid rules. They are illegal. I hope that, with today’s decisions, this message will be heard by member state governments and companies alike,” Ms Vestager said.
The firms were found to have used so-called “transfer pricing arrangements” between subsidiaries that let Starbucks shift profits abroad, and Fiat pay taxes on “underestimated profits”. The two countries say they disagree with the Commission, and Starbucks said it would appeal against the decision. The FT notes that the decisions against the Netherlands and Luxembourg are likely have a knock-on effect on other jurisdictions, with the US Treasury signalling concerns that the US may need to credit companies for the extra tax paid in Europe.
Sources: Financial Times, The Daily Telegraph , The Times, The Guardian, The Independent, The Sun’
Fiat’s financing company is based in Luxembourg. According to the commission, taxable profits “would have been 20 times higher” if market conditions had been used to calculate them, rather than an “artificial methodology … which cannot be justified by economic reality”. The desire for light to be shed on this methodology, which was also referred to as “extremely complex”, must have led to cries of “Fiat… Luxembourg… Fiat Lux!” When we consider The Times’ point that the prime minister of Luxembourg at the time of the Fiat tax deal is now president of the European Commission, there is some thickening of the plot. That president is Jean-Claude Juncker, and we’ve had reason to question his suitability for the role before.
As for Starbucks, complexities involving their roasting unit in the Netherlands paying a Swiss unit a “highly inflated price” for coffee beans and a “very substantial royalty” to a UK entity that wasn’t liable to pay UK or Dutch corporation tax are matched only by the complexities of buying a beverage from one of their shops. Given the Herman Melville novel from which Starbucks took its name, it may be feeling like Moby Dick to Ms Vestager’s Captain Ahab. As the captain says to Starbuck in Chapter 36, “That inscrutable thing is chiefly what I hate”. Having said that, anyone with aspirations to take down a giant should be cautious, especially if the giant’s just had a massive (grande? Venti?) cup of coffee (latte? Macchiato? We give up).
If there’s one word that sums up the consequences of all this, it is “uncertainty”. It’s the word that Kevin Reed of Accountancy Age used in his Friday Afternoon Live recap of the story, the video of which can be found here.
