In an unprecedented decision with implications for the tax strategies of multinational corporations, the European Union on Wednesday ordered two European governments to collect back taxes from Starbucks and a unit of Fiat Chrysler after finding that tax breaks they had given the companies were illegal.
The European Commission, the EU’s executive arm, said the deals granted to Starbucks in the Netherlands and Fiat in Luxembourg amounted to illegal state subsidies and the two countries must now recover up to 30 million euros, or about $34 million, from each of the companies.
“Tax rulings that artificially reduce a company’s tax burden are not in line with EU state aid rules,” Commissioner Margrethe Vestager, the EU’s antitrust chief, said in a news release. They are illegal. I hope that … this message will be heard by member state governments and companies alike. All companies, big or small, multinational or not, should pay their fair share of tax.”
The amount of back taxes is modest and the decisions can be appealed. But The Wall Street Journal said thousands of corporate tax structures across Europe could now be at risk.
“Thousands of other companies risk seeing their tax arrangements re-examined,” Chris Bryant, a partner at London-based law firm Berwin Leighton Paisner, told the WSJ. “Billions of euros could be at stake.”
According to the commission, the Starbucks deal allowed it to improperly shift most of the profits of its coffee roasting company to a U.K. entity that had no tax liability in the Netherlands. In the case of Fiat, its arrangement with Luxembourg meant that its financing company paid taxes on underestimated profits, the commission said.
The Netherlands and Luxembourg “endorsed artificial and complex methods to establish taxable profits for the companies,” the EU said. “They do not reflect economic reality.”
EU regulators have been working on similar tax break investigations involving Apple in Ireland, Amazon.com in Luxembourg, and AB InBev in Belgium.
“I don’t think the EU authorities are going to stop with two or three companies, and the mere threat of enforcement action is going to lead companies to change their ways,” Annette Schild, the founder of the ALSchild law firm in Brussels, told The New York Times.