European Commission rules that Fiat and Starbucks tax deals constitute illegal state aid

Following the in-depth investigation opened in June 2014, the European Commission issued landmark decisions ordering Luxembourg and the Netherlands to recover illegal state aid in the amount of 20-30 million Euros from Fiat and Starbucks, respectively. The decisions are a realistic indicator on how the Commission will decide in similar cases concerning tax rulings regarding Apple in Ireland and Amazon in Luxembourg as well as a Belgian tax scheme.

In its decisions the Commission made clear that tax rulings are not illegal state aid per se. However, if tax rulings give companies an unfair competitive advantage over other companies, this may constitute state aid in form of a tax benefit as the Commission concluded it was the case with Fiat and Starbucks. Both companies relied on those tax rulings and established complex methods optimising the tax to be finally paid.

The Commission concluded that the system of intra-group transfer prices, i.e. the prices to be paid for the goods and services sold between companies of Fiat and Starbucks, was not appropriate for the calculation of taxable profits and did not reflect the economic reality. According to the Commission, the two intra-group transfer price systems created underestimated profits without any economic justification, which gave Fiat and Starbucks a selective advantage in comparison with other companies, especially SMEs who were obliged to pay the tax on their actual profits and did not have the opportunity to allocate profits to other jurisdictions with a lower tax base. Accordingly, the selectivity criterion will be the focal point of both decisions.

Independent of the question whether tax rulings conferred a specific advantage to multinational companies (only) in contrast to national companies, we wonder whether the Commission’s approach accurately reflects the competition of tax systems between Member States. The same advantage (i.e. a lower or higher tax base) applies for all purely national companies being active in the respective Member States and reflects this competition of systems by offering more or less attractive conditions for setting up a company. We therefore wonder whether State aid is the right measure to interfere in this competition of systems by restricting the possibility of multinational companies to choose a preferable tax base or would the issue better be addressed with policy initiatives such as the Commission’s Action Plan for fair and effective taxation and the relaunch of the Common Consolidated Corporate Tax Base (CCCTB), expected in 2016.