The European Commission has put pressure on Ireland, the Netherlands and Luxembourg over the countries’ corporate tax regime, announcing last week that it would investigate the tax treatment of Apple, Starbucks and Fiat.
The EU will examine whether tax breaks granted to the multinationals, in order to attract investment and jobs, are in line with EU state aid rules.
The investigations relate to tax rulings concerning Apple in Ireland, Starbucks in the Netherlands and Fiat Finance in Luxembourg. Tax rulings are individual decisions by tax authorities, which are used to inform the taxpayer in the form of a comfort letter.
EU Competition Commissioner Joaquin Almunia said, “We have serious doubts about the compatibility of these three particular rulings decisions with the Treaty [on the Functioning of the European Union] rules on state aid.
“We are not putting into question ‘tax rulings’ in general, but particular decisions for three companies in three member states,” he added.
The commission believes that certain multinationals shift profits from high tax countries to low tax countries by manipulating so-called transfer prices applied to commercial transactions between entities that are part of the same group.
By accepting transfer prices that do not reflect competitive market conditions, as required by transfer pricing rules, member states would be able to grant a selective, favorable treatment to companies, in violation of state aid rules.
“Such aid is in principle incompatible with the single market because it would give these companies an unfair advantage and would distort competition,” Mr. Almunia said.
In 2013 the U.S. Senate Permanent Subcommittee on Investigations heard from Apple officials that the company had agreed a special tax rate in Ireland.
“Apple told the Subcommittee that, for many years, Ireland has provided Apple affiliates with a special tax rate that is substantially below its already relatively low statutory rate of 12 percent. Apple told the Subcommittee that it had obtained this special rate through negotiations with the Irish government,” the Senate Subcommittee report said.
The U.K. parliament’s public accounts committee questioned executives from Starbucks, Google and Amazon in November 2013 over intellectual property royalties the companies pay to affiliates in the Netherlands. These payments effectively reduce the profit earned and taxed in the U.K., where Starbucks paid only £8.6 million (US$14.6 million) in taxes on more than £3.4 billion (US$5.8 billion) in revenue between 1998 and 2012.
In response to the EU investigation, Apple denied it had received any selective tax treatment from Irish authorities, while the Irish government said it was confident that it has not breached state aid rules and will defend its position vigorously.
A Starbucks spokesman said, “We comply with all relevant tax rules, laws, and OECD guidelines and we’re studying the Commission’s announcement related to the state aid investigation in the Netherlands.”
Eric Wiebes, Dutch state secretary of finance, said he is convinced the investigation will find the agreement with Starbucks respected OECD rules on tax deductions and does not constitute state aid.
The state aid investigation was launched in September 2013, when the European Commission sent requests for information to the three member states.
Together with further investigations into the three tax rulings, the commission also opened an infringement procedure against Luxembourg, stating authorities in the country did not respond fully to information requests in relation to tax rulings and to “patent boxes” – a special tax regime for intellectual property rights.