Starbucks and Fiat face repaying millions of euros in tax

Starbucks and Fiat face tens of millions of euros in tax repayments when the EU issues a landmark decision this week on tax avoidance by multinational companies, according to people involved in the case.

Beyond the size of the repayment, the case — led by Margrethe Vestager, the EU’s competition commissioner — is expected to set a far-reaching legal precedent designed to curtail practices that are routinely used by multinationals in Europe to limit their tax bills.

It also sets the stage for a potentially bigger showdown with Apple and Amazon, whose tax affairs have been the target of investigations by Ms Vestager. One senior EU official involved in the cases said Fiat and Starbucks were only "the tip of the iceberg".

The cases focus on tax rulings — sometimes called “comfort letters” — issued by governments to thousands of companies across the continent seeking to determine in which jurisdiction they can pay the lowest tax.

Ms Vestager’s decision is expected on Wednesday and will signal that tax rulings issued to Starbucks by the Netherlands and to Fiat by Luxembourg amounted to illegal state aid. The commission has demanded that almost all EU member states hand over their tax rulings for examination.

“We are entering a new era. State aid will have to be part of the considerations of any multinationals setting up a structure in Europe,” said Caroline Ramsay at law firm Pinsent Masons.

When the cases were launched last year, state aid lawyers had speculated that recovery orders could run to billions of euros, based largely on Apple’s tax affairs in Ireland.

Estimates of the sums involved in this week’s cases are more modest. The countries will probably receive detailed descriptions from the commission of how to calculate the uncollected taxes, rather than an exact amount.

People close to the Starbucks case estimate a sum of less than €30m. The commission is likely to rule that Starbucks Manufacturing BV was paying an effective rate of 2.5 per cent, rather than the full Dutch corporate tax rate of 25 per cent.

Estimates of Fiat's tax are more vague. The commission is expected to say that Fiat Chrysler Finance Europe was in effect paying a rate of about 1 per cent in Luxembourg, rather than 29 per cent. People involved say that means it will owe more than Starbucks but not more than €200m.

Lawyers and other people involved in the cases said that Ms Vestager was more concerned with establishing a tough line on the illegality of certain types of aggressive tax avoidance than imposing heavy financial penalties on Fiat and Starbucks.

“She is slapping the companies now but saying, in future, she won’t accept anything of the same nature,” said one lawyer following the cases.

At heart, the cases concern transfer pricing, whereby companies reduce their taxable profit through complex cross-border trades.

The Dutch government claims that Starbucks’ local coffee roasting unit was allowed to reallocate a large slice of its profit and attribute it elsewhere internally in the form of royalty payments. The essence of the government’s argument is that much of Starbucks’ profit derives from its brand value and other intellectual property such as recipes, which are not created within the Netherlands.

The commission has questioned these internal royalty payments. It has also queried whether Starbucks was inflating its costs internally by marking up the prices of coffee beans imported from Switzerland.

The Dutch government claims that all of the calculations it used to assess Starbucks’ tax burden were legal.

All of the countries and companies involved in the first four cases — Starbucks in the Netherlands, Apple in Ireland and Fiat and Amazon in Luxembourg — insist that they have done nothing wrong. Lawyers predict that the cases will almost certainly be appealed to the European courts. (- Copyright The Financial Times 2015)