Today, the Commission has adopted two decisions concerning tax rulings granted by Luxembourg to Fiat and by the Netherlands to Starbucks. The tax rulings have artificially reduced the tax burden of both companies. This is illegal under EU state aid rules.
The decisions send a clear message: National tax authorities cannot give any company, however large or powerful, an unfair competitive advantage compared to others. For most companies, especially the small and medium-sized, I hope this is a reassuring message – for those who have paid their fair share in tax.
The tax rulings we investigated endorsed submissions by both companies which contained complex arrangements. We found a large variety of methods, one more complex than the other. They put an artificial price tag on transactions between group companies that could have been priced on the market.
These arrangements shifted profits from one company to another in the same group, with no valid economic justification.
But the result is that the company pays almostno tax on profits made.
Our decisions today show that artificial and complex methods endorsed by tax rulings cannot mask the actual profits of a company, which must be properly and fully taxed.
To be clear, tax rulings as such are legal, if used by tax authorities to give clarity to a company on how its corporate tax will be calculated. But they cannot endorse the setting of prices for goods and services sold within entities of the same group – so-called ‘transfer prices’ – that do not correspond to market conditions. Doing so would disadvantage all the stand-alone companies that are not part of a group. They are taxed on their actual profits because they pay market prices for the goods and services they use.
I would now like to explain to you in more detail the two decisions that we took today.
Tax advantages for Fiat in Luxembourg
One decision concerns a tax ruling that the Luxembourg tax authorities have granted to Fiat Finance and Trade in 2012. Fiat Finance and Trade provides financing through loans and bonds to other European companies within the Fiat group.
The Commission’s investigation showed that the tax ruling since 2012 unduly reduced the company’s tax burden by a total of between €20 and €30 million.
This is because the tax ruling accepts an extremely complex and artificial methodology to calculate Fiat Finance and Trade’s taxable profits, which cannot be justified by economic reality. As a result Fiat Finance and Trade only paid taxes on its underestimated profits. The Commission’s analysis showed that its taxable profits in Luxembourg would have been 20 times higher if the calculations had been done at market conditions.
Tax advantages for Starbucks in the Netherlands
In a separate investigation, we also found that since 2008 Starbucks Manufacturing EN BV has benefitted from undue tax advantages. Starbucks Manufacturing is the Starbucks group’s only coffee roasting company in Europe.
It sells and distributes roasted coffee and other products to Starbucks outlets in Europe, the Middle East and Africa.
Our investigation showed that the tax ruling has unduly reduced Starbucks Manufacturing’s tax burden since 2008 by a total of between €20 and €30 million. This was done mainly in two ways:
First, Starbucks Manufacturing paid a very substantial royalty to another Starbucks company in the UK for using coffee-roasting know-how. This royalty cannot be justified because it does not reflect market value. Other Starbucks group companies and independent roasters are not required to pay a royalty for using the know-how in essentially the same situation.
Second, Starbucks Manufacturing also pays a highly inflated price for green coffee beans to Switzerland-based Starbucks Coffee Trading SARL.
As a result of both, Starbucks Manufacturing’s taxable profits in the Netherlands are substantially reduced. The royalty shifts the large majority of its profits – which cover coffee but in reality are largely generated from tea, pastries and cups etc. – to the group company in the UK. This company is not liable to pay corporate tax in the UK, nor in the Netherlands.
Where do we go from here?
Luxembourg and the Netherlands must now recover the unpaid tax from Fiat and Starbucks, respectively. This will remove the unfair competitive advantage they have enjoyed and restore equal treatment with other companies in similar situations. This amounts to between €20 and €30 million for each company. For comparison, last year, Fiat Finance and Trade paid not even €0.4 million in corporate tax and Starbucks Manufacturing paid not even €0.6 million.
We do not stop here. We continue the inquiries into tax rulings practices in all EU Member States, as well as the ongoing investigations into tax rulings in Ireland, Luxembourg and Belgium. Since 2014, we have a new market investigation tool that require companies suspected of receiving state support, and their competitors, to hand over information relevant to our inquiries – this tool has already been helpful in today’s cases.
More cases may come, if we have indications that EU state aid rules are not being complied with.
In terms of timing, I stand by what I have said before – Fast is always better than slow, but best of all is to be just. When a case is ready, we will take a decision.
Of course, each case is assessed on its merits, so today’s decisions do not prejudge the outcome of these ongoing probes.
At the same time it is important to recognise that we will not be able to achieve fair tax competition in Europe with enforcement of state aid rules alone. The fight against tax evasion and tax avoidance can only be won with a smart combination of legislative action and competition enforcement.
That is why it is so important to implement the Commission’s Action Plan for fair and efficient corporate taxation, presented in June this year by my colleagues Valdis Dombrovskis and Pierre Moscovici. The re-launch of the Common Consolidated Corporate Tax Base is important because it can eliminate loopholes and the mismatches between national systems, which companies can currently exploit to avoid tax. It would also close off opportunities for profit shifting. Additionally, more transparency is also crucial. For all this, we of course need Member States to be on board.
There are encouraging signs that national governments are coming round to new realities. The G20 Finance Ministers reached an agreement just two weeks ago to endorse the OECD’s Base Erosion Profit Shifting project.
It contains revised transfer pricing guidelines that put clear emphasis on the need for taxation to take place where value is created.
I also look forward to seeing the final report of the European Parliament’s Special Committee on Tax Rulings and would like to thank them for their strong support for our state aid work to tackle aggressive tax planning.
Last but not least, I believe that we need a more fundamental shift in corporate philosophies – if it isn’t part of it already, paying one’s fair share of tax should be firmly integrated in a company’s corporate social responsibility.
So as you can see, EU state aid enforcement is just one part of a wider package that needs to come together to effectively address corporate tax avoidance and tax evasion. But it also means that there is a big team that can get to work – here in the Commission, and together with the European Parliament, EU Member States, the OECD and other international partners as well as businesses.
Cartel decision
I would also like to briefly mention another important decision we took. Today, the Commission has imposed fines of more than €116 million on companies who operated a cartel for optical disk drives, such as those used by millions of European consumers in their desktops and laptops. The companies are Philips, Lite-On, their joint venture, Toshiba Samsung Storage Technology, Hitachi LG Data Storage, Sony, Optiarc and Quanta.
These companies colluded on bids for tenders organised by Dell and Hewlett Packard to buy CD and DVD drives, for different durations between 2004 and 2008. For example, they shared information about their bidding strategies and the results of procurement tenders.
Philips, Lite-On and their joint venture don’t have to pay their fine because they were the first to reveal the cartel to us. Our leniency programme exists precisely to encourage companies in a cartel to reveal it to us.
The companies in this case were well aware that their behaviour was illegal and took measures to avoid being detected.
Apart from using generic names or abbreviations, they also met in car parks or cinemas. But whatever strategies companies may put in place, they will not escape our attention.
An interesting aspect of this cartel is that the contacts between the companies took place outside the EU – in Asia and the US. But the effects were very much felt in Europe because the disk drives were sold into the EU. The message to cartelists is clear – we will investigate and fine anticompetitive practices anywhere in the world, that harm consumers on EU markets.
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