by Dan Dulvac
One year after the ‘Luxembourg Leaks’ scandal revealed the shocking scale of corporate tax dodging, the European Commission has taken a small step in tackling tax havens. The Commission has recently ruled that the agreements for a 90% tax reduction offered by the Netherlands and Luxembourg to Starbucks and Fiat, respectively, are an “illegal form of state aid and an infringement of EU Competition Law”.
Starbucks and Fiat are now facing paying back uncollected taxes estimated at €30m euros each, accrued over the last 7 and 3 years respectively.
These agreements, referred to as ‘conform letters’, are negotiated in secret between governments and companies. They are issued almost always to multinationals and are used to attract them with sweet tax break opportunities.
The political rhetoric continues to the trend of ‘tax competition’ between governments. It is essentially a regulatory ‘race to the bottom’ which incentivises multinationals to exploit corporate law loopholes in search of lower-taxing jurisdictions, as opposed to paying their fair share of taxes where the value is created and the profits are actually made.
European Competition Commissioner Margrethe Vestager has expressed in a Press Statement that the decisions in relation to Starbucks and Fiat sent “a clear message: national tax authorities cannot give any company, however large or powerful, an unfair competitive advantage compared to others”. She added that state aid investigations were “just one part of a wider package that needs to come together to effectively address corporate tax avoidance”.
Oasis of tax havens: the ‘arm’s length’ principle! What happened to Starbucks and Fiat?
‘Starbucks Manufacturing’, based in the Netherlands, is the only coffee roasting company in the Starbucks group in Europe. It sells and distributes roasted coffee and related products to European Starbucks outlets.
In order to pay reduced taxes, Starbucks has shifted profits within its subsidiaries by creating opaque corporate structures and artificial prices.
Starbucks Manufacturing has bought green coffee beans at an inflated price from its Swiss sister-company Starbucks Coffee Trading SARL. It also paid a very substantial royalty to Alki, a UK-based company in the Starbucks group which is neither liable to pay corporate tax in the UK, nor in the Netherlands. This royalty was paid for coffee-roasting techniques or ‘know-how’, a royalty no other Starbucks company nor independent roasters are required to pay in the same situation. The large payments to its subsidiaries meant that Starbucks Manufacturing created significantly less profit in the Netherlands, therefore only had to pay a fraction of the taxes.
Legally, this is possible because transactions between companies in the same group are treated as transactions between independent parties. This is called the ‘arm’s length’ principle, which was carefully incorporated in the OECD Guidelines on Taxation and transfer pricing, guidelines which most countries follow.
A similar story happened with Fiat Chrysler Automobiles
Fiat Finance and Trade, based in Luxembourg, provides financial services, such as intra-group loans, to other Fiat group car companies. Its activities are similar to those of a bank and its taxable profits assessed accordingly.
The European Commission found that Fiat Finance and Trade has endorsed an artificial and extremely complex tax calculation methodology which does not reflect market conditions, thus paying significantly reduced taxes in Luxembourg.
These investigations reveal just the ‘tip of the iceberg’ of a bigger culture of tax avoidance. The rulings are concerned more with setting up a precedent of illegality for such practices, rather than imposing financial burdens on these companies.
The European Commission is now examining tax agreements between multinationals and over 23 Member States, including deals made between Microsoft, Pfitzer, Kraft Foods and the Dutch tax authority.
The rulings are preparing the net for catching bigger fish, such as the tax deals made by Amazon in Luxembourg or Apple and Facebook in Ireland. These large companies rarely exhibit a clear understanding of how to assess the profitability across their subsidiaries. In Europe, Apple is paying taxes bases on a €2m – €20m profit bracket, despite Apple’s tax adviser confession to the European Commission that “there was no scientific basis for the figure”. In the UK, Facebook paid less than £5000 in taxes in 2013, despite having paid in the same year a £35m bonus scheme to its employees.
“We serve our shareholders’ best interest!”
Multinationals follow the Wall Street’s model of maximizing shareholder value at all costs. They minimise their corporate costs through offshoring their production to low-wage countries and transferring their profits to tax havens. Instead of contributing to public services by paying their share of taxes, paying decent wages or investing their cash reserves in creating value, tax avoiders feed their cash reserves to the financial markets to make even more money.
They believe their decisions are justified, because shareholders’ interest is always profit-maximization. However, corporate financialization has adverse social implications, leading to poorer countries, higher discrepancy in wealth distribution and overall lower living standards.
Check out this video from The Centre for Research on Multinational Corporations (SOMO) on how Apple has become more of a bank than a tech company (and how it uses a corporate law loophole, referred to as the Double Irish with a Dutch Sandwich, to avoid paying taxes in the US).
The European Commission has virtually no powers to dramatically challenge the tax deals offered by governments to multinationals. Nor it seems one of its priorities. They can only intervene where these deals are not offered to all market participants, but are offered selectively. The lack of transparency in these deals is a powerful tool used by governments to minimize their degree of accountability.
Therefore leaked information has become the main source of public information concerning the tax evasion schemes of multinational companies; however, this information does not come easy, since whistle-blowers and journalists could, in principle, face prosecution and years in prison for revealing such schemes.