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Corporate tax in Europe is set to change
Oct 22nd 2015 | Online extra
SELDOM do governments try to turn away extra tax. But that is just what
Luxembourg and the Netherlands did this week, after the European Commission
ruled that subsidiaries of multinationals in the two countries were paying
20m-30m ($23m-34m) too little. The commission argued that the favourable tax
treatment the firms were receiving was tantamount to a government subsidy, and
thus illegal under European rules on state aid . The two countries, worried
that the decision will deter other foreign firms from investing, demurred.
The ruling marks an important advance in the battle against tax avoidance by
jurisdiction-shopping multinationals. The commission took issue with an advance
ruling the tax authorities in the Netherlands had provided to a subsidiary of
Starbucks, a coffee chain, confirming that its tax planning in the country was
sound, and with a similar assurance Luxembourg had given a unit of Fiat
Chrysler, a carmaker (whose chairman, John Elkann, sits on the board of The
Economist s parent company). Such comfort letters are fine in principle, the
commission said, but in these two instances had been used to provide
preferential treatment.
The commission suggested that the two countries had connived in the two firms
manipulation of transfer prices, the notional amounts for which different
subsidiaries of the same firm sell goods or services to one another. It claimed
a Fiat finance unit in Luxembourg had provided loans to other divisions at
artificially low prices, shrinking the unit s revenue so that it paid a
twentieth of the taxes it should have. By the same token, the commission said
that a Dutch subsidiary of Starbucks had overpaid a Swiss unit for coffee beans
and a British one for coffee-roasting know-how .
A lengthy legal appeal is all but certain. In the meantime, the commission is
conducting similar investigations into tax deals involving two tech giants,
Amazon and Apple. Whatever the outcome of all four cases, the commission s
stance will doubtless discourage other multinationals from resorting to such
complicated arrangements to minimise their tax, to the delight of bigger
countries dismayed by paltry corporate-tax receipts. As one Dutch tax lawyer
quips, If [multinationals] have to choose, they ll always pick avoiding court
over avoiding taxes.