Starbucks and Fiat decisions likely to cause serious concerns for multinationals, says expert

"Multinationals need to take notice," said Heather Self of Pinsent Masons, the law firm behind Out-Law.com. "If the decision goes against Starbucks, this will show that the European Commission is not backing down even when a full transfer pricing analysis is done."

The Commission has been investigating the tax paid by the Netherlands subsidiary of Starbucks, which buys coffee beans from a Swiss group company and then roast and packages them in the Netherlands and sells them to other European group companies. The Netherlands company licenses intellectual property from an associated limited partnership in return for a royalty payment.

The Commission is investigating an advance pricing agreement (APA) which the Dutch tax authorities entered into with Starbucks in relation to the prices charged between the Netherlands company and other group companies. APAs are tax rulings used to confirm transfer pricing arrangements, which are the prices charged for commercial transactions between various parts of the same group of companies.

In a preliminary view published in November last year, the European Commission said that it considered that the ruling may constitute unlawful state aid. Both Starbucks and the Dutch tax authorities refuted the Commission's allegations. In a letter to the Netherlands House of Representatives, the Netherlands State Secretary for Finance, Eric Wiebes, stated that the method of calculating prices in the APA with the Starbucks Netherlands company conformed to transfer pricing guidelines issued by the Organisation for Economic Cooperation and Development (OECD). He stated that the Starbucks APA had been carefully and sufficiently substantiated and that the company did not enjoy a 'selective advantage'.

"Companies need tax rulings for certainty and having the competition authorities trying to second-guess a technical tax ruling is not a good direction for policy," said Heather Self.

In relation to Fiat Finance and Trade, the Commission is scrutinising a ruling issued by Luxembourg's tax authorities on the calculation of the taxable basis in Luxembourg for the financing activities of the company.

If the Commission finds that unlawful state aid was given to these companies they are likely to have to repay the benefits they have obtained from the rulings. 

State aid expert Caroline Ramsay of Pinsent Masons said: "If the commission finds that state aid has been given, this is unlikely to be the last we will hear about these cases. Both the member states concerned and the companies are likely to appeal."

“While this appeal process could take some years, in practical terms, we are already entering a new era. Multinationals are already ensuring that state aid is part of their considerations in setting up a new tax structure in Europe,” she said

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.

The Commission is investigating a 2003 tax ruling granted to Amazon's Luxembourg-based subsidiary, Amazon EU Sàrl, which is still in force. The ruling allows the company to pay a tax-deductible royalty to a limited liability partnership established in Luxembourg but not subject to Luxembourg corporate tax. The effect of the arrangement is that most of Amazon's EU profits are not taxed in Luxembourg despite being recorded by Amazon EU Sàrl, according to the Commission.

The Apple investigation relates to two APAs issued by Ireland in favour of Apple in 1991 and 2007.In September 2014 a letter setting out the Commission's preliminary findings said that tax margins appeared to have been "reverse engineered" without economic basis and tied to concerns about local jobs. It also criticised the length of the 1991 agreement which lasted 16 years.

"The Amazon decision is likely to be of most concern to multinationals because many groups will have adopted financing structures in Luxembourg," said Heather Self. "As a result of the 'Lux leaks' documents the Commission already have details of many of those with Luxembourg rulings. Anyone who still has a structure in Luxembourg needs to take a long and hard look at it."

In November 2014 the International Consortium of Investigative Journalists published leaked documents, it had obtained of over 300 companies with tax rulings in Luxembourg resulting in some companies paying an effective 1% rate of tax on profits moved from higher tax jurisdictions to Luxembourg.

"The EU has requested rulings from a large number of EU countries," said Caroline Ramsay. "It is understood that documentation has been sent by the truck-load and that questions are already being asked about specific cases.”

"Once these four initial decisions are out, the Commission is likely to move on to investigating other companies. It will probably pick another handful of companies to look at in detail. While investigations to date have mainly focused on US companies, the complaints from the US Treasury Department about what they see as the targeting of American companies may well mean that the next wave of state aid cases throws the spotlight on more European companies,” she said.