Starbucks, Fiat tax breaks declared illegal in Europe. More to follow?

Nationally negotiated tax breaks for Starbucks and Fiat have been ruled illegal by the European Union. The companies are expected to pay millions in back taxes.

Luke MacGregor/Reuters/File
Raindrops are seen on the Starbucks logo on a signage at a branch of the coffee shop chain in London in this October 8, 2012 file photo. Europe's competition chief ordered the Netherlands to recover 20-30 million euros in back taxes from Starbucks on October 21, 2015 and told Luxembourg to claim the same amount from Fiat Chrysler Automobiles, saying their favourable tax arrangements breached the bloc's rules.

The European Union (EU) has ruled that Starbucks and Fiat need to repay millions of euros after benefiting from illegal tax breaks given by national governments, a decision that could have consequences for hundreds of multinational corporations doing business in Europe.

Margrethe Vestager, the EU’s competition commissioner, announced Wednesday that tax breaks given by the Netherlands to Starbucks and by Luxembourg to Fiat are illegal, and the countries must collect back taxes. The exact amount will be determined through a method decided by the EU. Starbucks is estimated to owe between $23-34 million and Fiat will need to pay a similar amount, according to Reuters.

“All companies, big or small, multinational or not, should pay their fair share of tax,” Ms. Vestager said in a statement.

Starbucks, the Dutch government, the Luxembourg government, and Fiat have all expressed a desire to appeal the decision. 

Starbucks “shares the concerns expressed by the Netherlands government that there are significant errors in the decision, and we plan to appeal since we followed the Dutch and OECD rules....” a company representative said in a statement.  

Fiat has also denied receiving any state aid or incentives from Luxembourg, according to Reuters.

As multinational companies in the EU are only required to pay taxes in the country where their regional headquarters is located, there is intense competition between member countries to attract large corporations.

The competition has led to European countries offering lower tax rates or other incentives to companies in exchange for locating their headquarters there. Leaked documents show that Luxembourg struck hundreds of similar tax deals with multinational companies, according to Bloomberg News.

Countries in the European Union have the sovereign right to assign their own tax rate. However, when lower tax rates are only offered to specific companies and not available to all businesses, the EU can rule them illegal because it gives those companies unfair financial advantage. The practice has drawn increasing political ire from larger countries in the EU as companies shift their headquarters to nations with lower tax rates and higher incentives.

The latest ruling against tax breaks for Starbucks and Fiat opens many other deals between multinationals and national governments to scrutiny.

“Thousands of other companies risk seeing their tax arrangements re-examined,” said Chris Bryant, a partner at law firm Berwin Leighton Paisner, to The Wall Street Journal. “Billions of euros could be at stake.”

The Commission, the executive branch of the European Union, is also investigating Amazon and Apple for their tax deals with Luxembourg and Ireland, respectively. Each case is being inspected individually, but the potential loss for Amazon and Apple might be much higher than the costs for Starbucks and Fiat, according to Bloomberg Business.

“We do not stop here. We continue the enquiries into tax rulings,” Ms. Vestager said to the Associated Press. “More cases may come if we have indications that EU state aid rules are not being complied with.”

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