Starbucks and Fiat in Trouble for Illegal Tax Practices

by | Nov 11, 2015

The war on tax avoidance just got a few new casualties. Usually, discussion on the international taxation of multinationals could be compared to an episode of the classic cartoon series, Tom and Jerry where Jerry always gets away in the end, snickering self-satisfactory. This time though, it seems that Tom caught him and held on.

On October 21, 2015, the European Commission for Competition ruled that the tax advantages granted to Starbucks by the Netherlands and to Fiat Chrysler by Luxemburg were illegal and did not meet the criteria of the European Union State Aid rules. Netherlands and Luxemburg have been ordered to retrieve up to $30 million dollars from the companies for back taxes.  The European Commissioner, Margrethe Vestager, made a statement regarding the situation. “Tax rulings that artificially reduce a company’s tax burden are not in line with EU state aid rules. They are illegal.” She continued.  “I hope that, with today’s decisions, this message will be heard by member state governments and companies alike.”

The multinationals were accused of transfer pricing, a tax strategy that is indeed legal but highly controversial. Transfer pricing is the price charged for goods or services by one entity of a company to another entity in the same company. Ideally, the transfer price in this transaction would reflect what the seller would charge an independent, unrelated source but undercharging could lead to a whole array of questionable tax practices if it is used to ‘lower profits’ thereby lowering taxes.

“Although “comfort letters” or “tax rulings” by governments are legal, the arrangements with Starbucks and Fiat Chrysler do not reflect economic reality,” Vestager said. Luxemburg and the Netherlands are not happy with this decision and Starbucks plans to appeal the decision. The commission is already looking into several other multinationals and nations with questionable arrangements.

Jacob Stein provides sophisticated tax planning for multinationals and individuals with financial interests in Europe.

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