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State raid

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.