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Thursday, October 22, 2015

EU slams Starbucks and Fiat advance tax rulings as state aid; Is Apple next?

The European Commission decided two of its major tax subsidy cases on Wednesday, October 21, and the rulings could not have been worse for Starbucks and Fiat (h/t Chillin' Competition). These cases can be seen as a barometer of what is to come in the legally similar but much larger case of Apple, where potentially billions of euros could be at stake.

The gist of the three cases is that tax haven subsidiaries of each company (Starbucks in the Netherlands, Fiat in Luxembourg, and Apple in Ireland) were given advance tax rulings by each country that were so removed from economic reality as to constitute illegal subsidies ("state aid" in Euro-speak) under EU competition law. In the Commission's decision, it was emphasized that the artificially low tax bills created by the rulings gave them an unfair competitive advantage over competitors, especially small business ("small and medium-sized enterprises" or "SMEs" in Euro-terminology).

Since the alleged subsidies were not notified to the European Commission in advance as required by EU law, the Commission has ruled that Starbucks and Fiat have to repay the illegal aid to the granting countries, with interest. The decision states that each company will owe 20-30 million in aid repayments.

 Of course, both of these cases will be appealed to the European court system, all the way to the Court of Justice of the European Union (CJEU), the highest court in the EU. Tax haven shenanigans are built into the economic structure of both Luxembourg and the Netherlands, and the two countries will do everything they can to maintain the status quo. The Apple case is much bigger, because it goes back all the way to 1991, and some estimates have put its tax savings at billions per year. If Apple loses, and I think it will, we can again be assured that the case will be appealed to the CJEU.

If the Commission makes these decisions stand up on appeal, it will dramatically change the shape of tax havens in Europe (including Switzerland, which the EU holds as being subject to the state aid rules through its free trade agreement). It won't put them out of business, because the decisions pertain to corporate income tax rather than personal income tax, but the amount of revenue lost on the corporate tax alone is a very big deal.

Cross-posted at Angry Bear.

2 comments:

  1. Starbucks is an odd one for several reasons. First of all - its effective tax rate is still high. Its UK affiliate is not paying excessive royalties as they are the same rates as what is being charged to 3rd parties. They may be mailing the check to a tax haven when it should go to the US parent but why is this not an IRS complaint rather than an EU complaint. And of course, Europe is just about the only market that does not make high profits. If this is Base Erosion, it is a rather feeble effort. So yea - Apple will be more interesting.

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    1. Starbucks in the UK has reported negative income for something like 14 years, but was caught on an investor conference call boasting about how profitable its UK operations are. Thus, the UK government certainly has an interest in this. We'll need to see more detail when the decision is released.

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