Fiat and Starbucks state aid rulings "impinge on member states’ sovereign rights over tax", says expert

State aid expert Caroline Ramsay of Pinsent Masons, the law firm behind Out-law.com, was commenting as the Commission announced its decisions in its investigations into rulings given by Luxembourg to Fiat's financing company and the Netherlands to Starbucks' coffee roasting company. The Commission said that the countries concerned would be required to recover €20 to €30 million from each company to claw back the benefits of the state aid received.

“It is highly likely that these decisions will be appealed but there is already considerable surprise that the Commission has commented so explicitly on national governments’ tax methodologies. This seems at odds with member states’ sovereign right to set their own taxation, and is extremely concerning.” Caroline Ramsay said.

The Commission said a tax ruling issued by the Dutch authorities in 2008 gave a selective advantage to Starbucks Manufacturing, a Netherlands company, which had the effect of reducing its tax liability by €20 million to €30m. The Commission said the ruling "artificially lowered" taxes paid by Starbucks Manufacturing because it paid a "very substantial" royalty to a UK-based entity in the Starbucks group for coffee-roasting know-how and it paid an "inflated price" for coffee beans to a Swiss group company.

According to the Commission, a tax ruling issued by the Luxembourg authorities in 2012 gave a selective advantage to Fiat Finance and Trade, a Luxembourg company providing financial services to other Fiat group companies. It said that Fiat's activities were comparable to those of a bank and so its taxable profits should be calculated as a return on capital deployed by the company for its financing activities.

However, the Commission said that due to "a number of economically unjustifiable assumptions and down-ward adjustments" the capital base of the company used in the tax ruling was much lower than the company's actual capital. It also said that the return made by the company on its activities was lower than the market rate.

The Commission said: "Tax rulings cannot use methodologies, no matter how complex, to establish transfer prices with no economic justification and which unduly shift profits to reduce the taxes paid by the company. It would give that company an unfair competitive advantage over other companies (typically SMEs) that are taxed on their actual profits because they pay market prices for the goods and services they use."

Commissioner Margrethe Vestager, in charge of competition policy at the European Commission 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. All companies, big or small, multinational or not, should pay their fair share of tax."

Heather Self, a tax expert Pinsent Masons, said “Multinationals will be particularly anxious about the Starbucks case. The ruling process in the Netherlands is long-established and very well-respected internationally. For competition authorities to challenge very technical tax rulings by competent authorities in this way is extremely destabilising.”

“It has implications not just for companies that have received tax rulings from the Netherlands in the past, but for any multinational operating anywhere in Europe. The fact that EU competition authorities feel it appropriate to intervene in highly complex international tax issues adds another layer of complexity and unpredictability.” she said.

“There is also a risk that the EU competition authorities may end up creating outcomes that are at odds with the current OECD initiative that looks at transfer pricing - the Base Erosion and Profit Shifting (BEPS) project.” Heather Self said.

The Commission has ordered Luxembourg and the Netherlands to recover the unpaid tax from Fiat and Starbucks. It estimates that the amounts that should be recovered will be €20m to €30m for each company. However, the precise amounts will be determined by the Luxembourg and Dutch tax authorities on the basis of the methodology established in the Commission decisions.

The European Commission does not have direct authority over national direct tax systems. However, it can investigate whether certain advantageous fiscal regimes would be prohibited under its state aid rules, which are intended to prevent the distortion of competition when national governments grant advantages or incentives to particular companies. If the Commission rules that member states have given unlawful state aid, it can require the member state to make any company pay back any illegal reliefs granted over a period usually covering up to 10 years.

The Commission is also investigating rulings given by Ireland to Apple and Luxembourg to Amazon. The decisions in these two cases are expected before the end of the year.