In two landmark decisions this week, the European Commission ruled that Fiat in Luxembourg and Starbucks in the Netherlands have benefitted from certain illegal tax advantages that reduced their corporate tax bills. They send a clear message: whether a company sells coffee or cars, at your local store or globally, it should pay its fair share of tax. This is in the interest of both social fairness and economic efficiency.
Both companies were granted preferential ‘tax rulings’ from national tax authorities which gave them selective advantages that are illegal under EU state aid rules. Thanks to its ruling, Fiat’s financing company, which grants loans to other companies in the Fiat group, only paid taxes on understated profits. This was achieved through a variety of artificial and complex methods, which largely underestimated how much profit Fiat’s internal bank actually makes. For Starbucks, most of the profits its European coffee roasting company generates were shifted from the Netherlands to another Starbucks entity in the UK - but it is not taxed on its profits there either. The result is that the two Fiat and Starbucks companies paid almost no tax on the profits they in fact made. In neither case does there seem to be a valid economic justification for the arrangements. The Commission has now ordered them to return between €20 and €30 million in unpaid dues to the tax authorities in Luxembourg and the Netherlands.
We do not question each country’s right to shape its taxation policy and set its own tax rates. What the Commission’s state aid probes look at is whether a country has granted unfair tax benefits to a select few. This is illegal under EU state aid rules because it distorts competition. It hurts those businesses that pay their taxes fair and square and it creates an unfair system for European taxpayers. To use this week’s cases as an illustration: the statutory corporate tax rate in Luxembourg is around 29per cent, and it’s 25per cent in the Netherlands. The tax rulings endorse arrangements under which the Fiat and Starbucks companies effectively only paid about 1per cent and 2.5per cent in taxes respectively on their actual profits (to be clear, these figures relate to Fiat’s financing company and Starbucks’ European coffee roasting company and not to the two groups’ global activities).
These two decisions mark an important step in the EU’s fight against corporate tax avoidance, with more to come. We are pursuing our inquiries into tax ruling practices in all EU countries, as well as specific investigations into tax rulings in Belgium, Ireland and Luxembourg. These cases are a matter of priority and quality comes first. We will take decisions that are based firmly on the facts and on the law.
But EU state aid rules alone cannot stop corporate tax avoidance. We have to address the root of the problem through a combination of competition enforcement and improved corporate tax policy. That’s why the Commission has put tackling tax abuse at the heart of its political agenda. And we are already delivering.
In March, we proposed legislation requiring EU tax authorities to regularly exchange information on tax rulings, some of which have granted undue tax advantages to certain companies, undetected. Just seven months later, EU Finance Ministers backed these new rules, so that as of 2017 all EU countries will share information with each other on all of their cross-border tax rulings and pricing arrangements. With the cover of secrecy gone, it will be harder for companies to clinch so-called sweetheart deals that breach state aid rules.
The Commission has also in June proposed a root-and-branch overhaul of the business tax environment to make it fairer, more efficient and more conducive to growth. We will continue working on corporate tax transparency including a new EU approach to tax havens. We are drawing up stricter rules for preferential tax regimes. And we will soon re-launch a proposal known as the Common Consolidated Corporate Tax Base (CCCTB), which will close loopholes and mismatches between national systems which companies currently exploit to avoid tax, while also cutting compliance costs for businesses operating across borders.
From its first day in office, this Commission has put fairer taxation at the top of its agenda. And now we already have some tangible results. Our work will continue with the same pace and ambition, and we’ll repeat our message until it gets through: this is not about new or higher taxes. This is about companies paying their fair share of tax, no matter the size of the company. Most companies and citizens pay their fair share and this is about contributing to society and fair competition. These are sound principles and we rely on cooperation of the European Parliament and the Member States for our work to bear fruit. Our message is in a way like a pop song: You hear it once and probably forget it - but with a few more plays, it gets firmly stuck in your head.
Margrethe Vestager is European Commissioner for Competition and and Pierre Moscovici is European Commissioner for Economic and Financial Affairs