The EU has ruled that favourable tax rulings for Starbucks and Fiat constituted illegal state aid. Both companies face substantial costs as a result, but that is not the significance of what has happened.
That significance comes in other ways.
First, there will be many other such rulings from Luxembourg and the Netherlands that will need unpacking now: as we know such rulings were issued on an industrial scale in Luxembourg and all reports I have seen suggest they were also common in the Netherlands.
Second, this then hits at the very heart of the EU corporate tax haven system.
Third, although there will no doubt be appeals the defence that Starbucks is making that it complied with OECD rules and so it must be in the clear is obviously unsatisfactory: the time has surely come when such arguments about minimal compliance cease to be seen as credible by anyone, including tax lawyers.
Fourth, the issue of what tax compliance is has been very obviously moved on by this ruling. It is no longer enough to say you're compliant. It is not even enough to get a letter from a tax authority saying that you are compliant. In the full face of publicity that has also to be true. And what that means is that, in effect, transparency has now to become the norm on tax.
So deliver on full public country-by-country reporting, which would help expose such practices.
And roll out the Fair Tax Mark (which has a new company in the scheme today).
And bring on disclosure of all tax agreements, again in public.
Then and only then will we have fair competition between companies, large and small, wherever they are located. What we have had to date is tax competition. And what the EU is really saying today is that tax competition is cheating and that is not the same as fair competition. And that is very significant indeed.
The corporate world of tax abuse does really need to take note.
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It’s interesting that there’s no suggestion in the EU ruling that UK taxes have been underpaid as a result of Starbucks transfer pricing arrangements. That’s contrary to the position you’ve held for the last few years.
Respectfully, that is a quite absurd suggestion
The Dutch transaction has a double entry
And you of course choose to ignore that
Now why would you want to do that?
Which appears to be income in the UK and excessive deduction (for a royalty payment) in The Netherlands hence the reason that the Dutch are being asked to impose a Dutch tax charge. How does less income in the UK increase the UK’s tax bill?
The payment from the Netherlands came out of an income stream I to the Netherlands
Partly from the UK
It’s not hard to figure out, is it?
The EU does but have the power to trace the consequences
The UK might wish to do so
So if it’s an in and out in the Netherlands why is there a Dutch tax loss?
There was an over-payment
You are mis-stating facts
Please do not waste my time
Sorry, I am not trying to waste your time, just trying to contribute to your blog.
I have read the facts of the ruling. This says that too little tax was paid in the Netherlands. The transaction mentioned with regard to the UK is a payment by the Dutch company to a UK company. They found this was excessive. So the UK was receiving too much income so on that basis it’s hard to see how having that receipt on a more reasonable level would result in more UK tax being due.
You then mention another “income stream” to the NL company partly out the UK company. This is not mentioned in the facts; however, let’s pursue that line of thought. You seem to suggest that this payment was excessive and so really did reduce the UK tax bill. However, it would in turn increase the income of the Dutch company.
So, if you are right, this would lead to the strange conclusion that the Dutch company was trying to inflate it’s taxable income on an excessive receipt of income from a UK company whilst simultaneously reducing it’s tax bill via an excessive the payment (mentioned in the ruling) of another amount back to a UK. Is that your position?
I think you will find the UK company was not any such thing but was instead a non resident LLP taxed on its tax haven based members
It was not the UK operating company as you seek to imply
I think you have your facts quite wrong
I don’t think I have got the facts wrong. You are saying that the excessive receipt by the UK company/LLP was not the taxed in the UK because it went to a tax haven. The Dutch company sought to get a tax deduction for this excessive amount. The finding of the ruling was this payment was excessive and so should be reduced as it was effectively State Aid given by the Dutch authorities. So, how does the a reduced receipt by a company/LLP, even if it is not taxed in the UK, result in more UK tax being due? I can see it results in a Dutch tax loss as it apparently overpaid, which is the finding in the EU ruling.
Royalties to the Netherlands started in the UK
They did not originate in the Netherlands
As I have already said: why is that so hard to understand?
So, if the royalties started in the UK and were used by the Dutch company to fund the royalties paid by it back to the UK, why isn’t the Dutch company flat? If it both received and paid these amounts, why did the EU ruling find that the Dutch company paid too little tax? Wouldn’t it have been in the same position as if these amounts had never gone through its book?
You really are making a hash of this
The money left the UK and elsewhere and went to the Netherlands
Then it went through a tax transparent entity that happened to be registered but not tax resident in the UK to tax haven or US entities that appeared to be untaxed
The payment to those tax haven entities was deemed too high
Your problem is?
I note you have ignored the position of the Dutch company. So your position is it is UK tax avoidance and there was no Dutch tax avoidance, despite that being the opposite of what the EU ruling actually said.
Mary
Respectfully, you wasting my time
Please don’t do so again or you know what will happen
Trolling is unwelcome here and I am well aware that is what you are doing
Richard
I love normally love your analysis Richard but is your position right with regard to the transactions between the UK and Holland?
If the payment by the UK company to Holland was excessive, as you content, why didn’t the EU find that the HMRC transfer pricing agreement with Starbucks UK was State Aid as well? Surely the EU would have considered all EU countries in its findings. However, it only found against the Dutch (in the case of Starbucks).
The Dutch gave the ruling that was the subject of the enquiry
This was not a tax enquiry
It was a state aid enquiry and only the Netherlands was subject to it on the grounds it gave the clearance being investigated
I see, thank you for explaining. So the EU only looked at the rulings for the excessive payments made by the Dutch company and didn’t look at the excessive receipts it received in determining the tax underpaid.
I thought the issue covered by the decision is the use of rulings to provide state aid. If so, unless they got a ruling from HMRC, it is not surprising that there is no mention about whether the UK is appropriate or not. As a side note, the press release does mention that Alki, the UK recipient of the royalties, was not subject to corporate tax in the UK.
Precisely
No idea if this is feasible but couldn’t UK tax law be changed so that we move towards sales taxes, against which corporation tax duties could be offset, set at rates whereby non-cheaters’ existing tax liabilities change very little but cheaters’ tax liabilities grow?
NO
That is a tax in consumption and not capital
It would be regressive
And we already have a sales tax that is widely evaded
No doubt Fiat and Starbucks will both appeal, and it will become an argument about whether the transfer pricing was done on an appropriate basis (and indeed whether there was any selectivity in the ability to seek a tax ruling).
After these two cases, and Apple and Amazon, how many other tax rulings do you expect the Commission will investigate on state aid grounds? A handful? Thousands?
According to the preliminary decision letter sent last June,
http://ec.europa.eu/competition/state_aid/cases/253201/253201_1596706_60_2.pdf
Alki was a limited partnership, so it would not be paying UK tax anyway. Its members were a US corporation and a Dutch CV, which is transparent in the Netherlands. The CV’s members were another CV and two US corporations, and the second’s CV’s members were three US corporations. As a result, in the absence of a taxable presence in the UK or the Netherlands, the royalties should be taxed in the hands of the US corporations.
I’m not a US tax expert, but I expect with appropriate checking of boxes, the royalty could be disregarded in the US. If so, this is a classic example of a cross-border hybrid mismatch which the BEPS proposals should stop by denying the deduction if the receipt is not taxed.
Mary Snell might like to read your comments
And, the EU has made clear an ALP TP defence is inappropriate as I see it
Are you suggesting that the Commission have gone beyond or rejected the arm’s length price? As I read it, they are just saying that neither company’s transfer pricing method was appropriate to determining a proper arm’s length price for its transactions.
The Starbucks company essentially claimed to be a low risk toll manufacturer, so its small taxable margin was calculated on that basis. No doubt there is scope for arguing about who really bears risk in relation to the coffee beans, or what an appropriate royalty for the knowhow might be.
Similarly, no doubt Fiat will argue that it correctly calculated its capital base and risk premium according to appropriate comparables.
Assuming the taxpayers appeal, as I expect they will, a court will have to decide each case based on the evidence.
It seems to me that they simply think it did not work
And rightly so
Let’s cut to the chase on this – the MNCs do not set up what appear to be Byzantine structures without considering their “tax efficiency”.
There are people in the MNCs gaming the “system” in much the same way as their people in banks doing the same thing.
The only way to defeat these people is to change the “system”. This has to be done incrementally against enormous opposition of the vested interests that are exploiting it for their own benefit. Invariably this is done to the detriment of most in society and involves stealth, deceit & tricky.
The current negotiations on TISA TTIP and TPP demonstrate this admirably.
A step towards this direction is “Country by Country” reporting which should make the MNC’s accounts more transparent, so it is easier to see the legal scams that MNCs perpetuate.
They, the vested interests wish to freeload, let’s be clear about this, ride on the back of the masses, becasue they believe with almost religious zealotry that they are special and deserve privileges.
For example, they continue to “perpetuate” the job creator myth, which Nick Hanauer so ably laid to rest in his TED talk.
Throughout history ordinary people have had to fight for their rights against oppressors (vested interests).
Nothing is going to change.
The battle is going to be eternal.
As soon as ordinary people allow themselves to be distracted by “bread and circuses” their rights will be removed one by one by the “trickle away” routine.
For example the Internet is currently subject to the malign attention of the elite, because it is becoming a nuisance to them!
A left field suggestion that if the corporations want to be treated as persons they should be taxed on income as we are.