Last year, the European Commission opened formal EU State aid investigations into specific cross-border tax arrangements relied on by Apple (in Ireland), Starbucks (in the Netherlands), Fiat Finance and Trade, and Amazon (both in Luxembourg). On 21 October 2015, the Commission announced1 that it has concluded two of those investigations (Starbucks and Fiat) and has decided that the tax arrangements that were the subject of the investigations constitute illegal State aid that must be repaid. It has ordered the Netherlands to recover €20-30 million from Starbucks and ordered Luxembourg to recover €20-30 million from Fiat. The exact amounts to be recovered must be determined by the tax authorities in each country, based on the methodology set out in the Commission’s decisions.
Both cases concern tax rulings issued by the national tax authorities, i.e., comfort letters that provide clarity to a company on how its corporate tax will be calculated, or on the use of special tax provisions.
- Starbucks case: The Commission found that Starbucks’ coffee roasting company, established in the Netherlands (“Netherlands Entity”), was paying an unjustifiably high royalty (for coffee roasting “know-how”) to a UK Starbucks entity that was not liable to pay corporate tax in the UK, or in the Netherlands. Meanwhile, the Netherlands Entity was also purchasing coffee beans from a Swiss Starbucks entity at an inflated price. The high royalty paid to the UK entity, coupled with the high prices paid to the Swiss entity, reduced the taxable base for the Netherlands Entity. The Commission held that the tax ruling issued by the Netherlands authority, endorsing Starbucks’ arrangement, constituted illegal State aid.
- Fiat case: A Fiat entity established in Luxembourg (“FFT”) was providing financial services to other companies in the Fiat group, e.g., intra-group loans. The Commission held that FFT’s activities were comparable to those of a bank and therefore its taxable profits should be calculated in a similar way as for a bank. The Commission found that a tax ruling issued by the Luxembourg authority had unduly reduced Fiat’s tax burden because (i) it relied on unjustifiable assumptions and down-ward adjustments to approximate Fiat’s capital base, and (ii) the level of remuneration estimated in the tax ruling was considerably lower than market rates.
Differences in corporate tax regimes among EU Member States has long been a sensitive topic. Certain EU Member States are keen to offer favorable tax arrangements for large companies in an effort to attract investment and stimulate job creation; meanwhile, other Member States have expressed frustration that they receive disproportionality low taxes from some companies, compared to the revenue earned within their borders. The European Commissioner for Competition, Margrethe Vestager, has stated that the Commission’s State aid investigations into tax rulings are not an attempt to harmonize tax policy “by the back door”.2 In this regard, Ms. Vestager has distinguished her task, which is to take “corrective measures”, from those of her colleagues, who are tasked with proposing harmonizing “legislative, preventive measures”.
Thus, the key issue in investigations such as Fiat and Starbucks is not the general tax policy adopted by the Member State, but rather tax rulings that give advantages to businesses in a selective way. This raises a fundamental problem, however, because tax rulings may often be seen as a specific compromise between the tax authority and a particular company and, therefore, inherently selective in nature. Also, it is quite obvious that, notwithstanding Commissioner Vestager’s public statements, the Commission sees these investigations as one of several vehicles to combat what it and many Member States perceive as aggressive tax structuring.
While the Fiat and Starbucks decisions do not have immediate legal consequences for companies other than Fiat and Starbucks, for many large companies operating in the EU, the decisions are a cause for concern. At a minimum, they should be seen as a warning shot to companies utilizing complex cross-border arrangements to minimize their tax burden in the EU. Among other factors, jurisdictions issuing such rulings may feel pressure to reconsider their application depending on the circumstances.
The decisions also create legal uncertainty for companies relying, or seeking to rely, on tax rulings from national Member State authorities. The official press release issued by the Commission on 21 October offers little in the way of clarity. On the one hand, the Commission asserts that “tax rulings as such are perfectly legal”. Yet, the Commission also states that tax rulings endorsing “artificial and complex methods to establish taxable profits” that “do not reflect economic reality” may fall foul of the State aid rules. In practice, it will be difficult for companies to distinguish between lawful tax rulings and those that might be unlawful due to the “artificiality” or “complexity” of the underlying calculations. The non-confidential versions of the Starbucks and Fiat decisions should provide greater clarity on this dividing line, however, the decisions are not yet publicly available and are unlikely to be published for some time.
In all likelihood, the Starbucks and Fiat decisions will be subjected to judicial review before the EU Courts, which should eventually provide greater legal certainty. However, the procedure before the EU Courts is typically lengthy (a few years, or even longer if there is an appeal to the Court of Justice of the EU). Until then, companies may need to take a cautious approach when considering their tax arrangements in the EU and carry out State aid risk assessments, as appropriate, in light of the information that is publicly available concerning the Starbucks and Fiat cases (e.g., the Commission’s 2014 decisions to initiate formal investigations in these cases).3 A cautious approach is particularly advisable considering that the Commission signaled in its official announcement on 21 October that it is prepared to open “additional formal investigations into tax rulings if it has indications that EU state aid rules are not being complied with”. It is difficult to predict, at this stage, how many such investigations the Commission might pursue.
As a result, companies that have received favorable tax treatments in the EU should consult with counsel regarding the potential for possible liabilities, and consider some restructuring, where appropriate. Importantly, companies should be aware of the retrospective nature of State aid recovery: the Commission has the power to order recovery of illegal State aid granted during the past 10 years. Thus, it is not only future tax rulings that pose a risk but also existing and past rulings.