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Competition Authority Clamps Down On Tax Schemes!

Published on Fri, Nov 20,2015 | 23:44, Updated at Mon, Nov 23 at 23:38Source : CNBC-TV18 |   Watch Video :

Imagine CCI going after companies for tax avoidance! Well that’s exactly what’s happened in the European Union recently. The European antitrust authority is now targeting tax schemes by member states. And Starbucks and Fiat were the first two MNCs to fall foul of the European Commission. But, what did these companies do that landed them in such a mess? Why is the EU antitrust regulator going after companies for tax avoidance? And what does this mean for MNCs based in Europe? Aayush Ailawadi finds out…

Starbucks Manufacturing is based in the Netherlands. It sells and distributes roasted coffee and coffee-related products to Starbucks outlets in Europe, the Middle East and Africa.

The European Commission found that a ruling issued by the Dutch tax authorities in 2008 gave a selective advantage to Starbucks Manufacturing, reducing Starbucks Manufacturing's tax burden by €20 - €30 million since 2008.

The ruling permitted Starbucks Manufacturing to pay a massive royalty to Alki, a UK-based company within the Starbucks group, for its coffee-roasting expertise. It also sanctioned an inflated price for green coffee beans to Switzerland based Starbucks Coffee Trading SARL.

EU’s antitrust regulator says that because of this ruling, Starbucks was able to artificially lower taxes paid in the Netherlands.

Suzanne Rab
Barrister, Serle Court Chambers
Competition Law & State Aid Expert

“The concern here is that through intra-group pricing and corporate structure, a company is able to transfer funds within its business with the result that those are not taxable for domestic purposes.”

Heather Self
Partner, Pinsent Masons
Tax Expert

“From a tax perspective, transfer pricing is a big issue for all multinational companies. They need to allocate the profits along the different places on their supply chain. Now, this particular investigation is into one small piece of the Starbucks supply chain. It is into Starbucks Manufacturing BV which is a Dutch company and what it does is, it roasts coffee beans which is not frankly a very complicated operation. Starbucks went to the Dutch tax authorities to get an advanced pricing agreement, an APA, to get certainty on their transfer pricing process and that again is a very normal thing to do. So, it is really surprising that the European Commission has decided to go into what is a pretty ordinary ruling into such depth. I think a lot of us feel that the competition authorities are over stretching the mark here.”  

Fiat Finance & Trade is headquartered in Luxembourg. The company provides financial services, like intra-group loans, to other Fiat group companies.
The European Commission found that a tax ruling issued by the Luxembourg authorities in 2012 gave a selective advantage to Fiat Finance and Trade by allowing it to lower its capital base for tax purposes and show a lower return on capital as well. The European Commission says that without this favourable ruling Fiat’s taxable profits would be 20 times higher and that the ruling helped Fiat reduce its tax burden since 2008 by €20 - €30 million.

Heather Self
Partner, Pinsent Masons
Tax Expert

“The Fiat ruling is the tip of the iceberg in Luxembourg. You will be aware that we have the Lux Leaks, a lot of rulings in Luxembourg which have been issued over several years and the feeling is that the commission is looking in much more detail at Luxembourg. They were very irritated that in the Fiat case, Luxembourg refused initially to divulge full details of the ruling to the commission whereas the Dutch on Starbucks were very happy to give full details and to defend their position. So, I think Luxembourg is on the back foot. They are noted for giving a lot of rulings around Europe and frankly a lot of companies have got favourable finance rulings. So, again, not clear why the commission picked particularly on the Fiat one and the feeling is that perhaps this is the first step into a wider investigation into other rulings given by Luxembourg.”

While these tax rulings by the Netherlands & Luxembourg are legitimate from their tax departments’ point of view - the European Commission says they amount to preferential treatment or selective advantage for these 2 companies and hence fall foul of EU state aid rules!

The Treaty on the Functioning of the European Union says that ‘any aid granted by a member state or through state resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings…be incompatible with the internal market’.

Experts say that the concept of state aid is very wide and can cover any economic advantage such as a loan at a preferential rate or even a tax break. State aid rules say countries have to first notify the European Commission before granting such advantages – which the Netherlands and Luxembourg did not do.

Suzanne Rab
Barrister, Serle Court Chambers
Competition Law & State Aid Expert

“When that procedure has not been gone through and the advantage has already been given through a tax holiday or an advanced ruling that certain practices are acceptable, the beneficiary of the advantage, in this case the companies who benefited from the arrangements according to the European Commission, they risk having to payback that benefit for a period of 10 years from it being granted. So, you have a situation where a private company, a market agent who may consider that they could have received a benefit, there is a risk under the state aid rules, they have to be assured through their dialogue with the government, the authority granting the benefit that either there is no state aid at all or it is being notified to the European Commission and approved as compatible.”

But, tax experts are surprised at the scope of this decision…

Heather Self
Partner, Pinsent Masons
Tax Expert

“It is very unusual and it is quite new. What you do see is that EU Commission looking at particular tax release granted by countries. So, for example if France wanted to give a special release to steel companies because they are suffering at the moment, that would potentially be state aid. France would go to the EU and say there is a particular reason can we please grant this state aid and the commission would say yes or no. What is very unusual here is that the ruling practices are just part of the normal tax system of a country and the commission is looking in great detail and applying state aid principles to tax rulings. What the commissioner, Margrethe Vestager said is that if tax rulings artificially reduce a company’s tax burden then they are not in line with state aid rules, they are illegal. So, the question is whether this is an artificial reduction of a company’s tax   burden? In the case of both, Fiat and Starbucks, we haven’t yet seen the detailed decision by the Commission, we have only seen the preliminary decision. The detailed decision has been issued but has not yet been published. However, what they seem to have done is they have gone in great detail challenging whether the right OECD transfer pricing method has been used. I think that is going to get challenged.”

The Commission has ordered its member states- Luxembourg and the Netherlands to recover the unpaid tax of €20 - €30 million from Fiat and Starbucks respectively, to remove the ‘unfair competitive advantage’ they have enjoyed and to restore equal treatment with other companies in such situations.

Heather Self
Partner, Pinsent Masons
Tax Expert

“We are already seeing multinational companies paying much more attention to state aid issues. So, for example if a company is doing a restructuring or wants to look at their transfer pricing, up till now they have just checked whether it is okay for tax purposes, whether they can get a tax APA on it. Now, they are also asking firms to look at the state aid implications of that and say if we get this tax ruling is there a risk it could be challenged on state aid principles as well. So, it has really moved up the radar for companies. The big problem they have got is that if they have gotten a very favourable ruling from the past, companies still rely on that and if there is a state aid challenge that can claw back the benefits they have had for 10 years almost which is a big potential liability.”

Suzanne Rab
Barrister, Serle Court Chambers
Competition Law & State Aid Expert

“These rulings were granted in 2008 and 2012 and we are now in 2015 so clearly cases are being reopened. Will this lead to floodgate of more cases? Probably there will be further in the pipeline. The day the Fiat and Starbucks cases were announced, Commissioner Vestager indicated that there were pending cases involving Amazon and also Apple.”

It is expected that both- companies and countries will appeal this European Commission decision on the grounds that this isn’t a case of state aid as they believe no selective benefits were granted. That’s at the general court stage, after which the European Court of Justice can be approached, which might turn out to be a long drawn affair. But until then, one thing’s for sure- Apple and Amazon will be watching from the sidelines with bated breath…

In Mumbai, Aayush Ailawadi

 
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