The European Commission recently decided that the Netherlands granted preferential tax treatment–allegedly amounting to state aid–to Starbucks Corp (SBUX). Both the Netherlands and Starbucks Corp. have chosen to dispute this ruling.
The ruling by the EU made waves with its unprecedented severity, and many are left wondering what the recent crackdown will mean for other large corporations ensconced within European borders.
Whether the Netherlands will succeed in its dispute will likely take years to decide, but this much is certain: the current EU leadership will work hard to secure taxes on corporate income.
What Happened?
There’s nothing unusual about a country or region offering incentives to large companies; take the Mercedes-Benz operations in Alabama, for instance, or BMW in South Carolina. However, the Netherlands apparently offered Starbucks Corp. such significant tax breaks that the European Commission would like to classify these breaks as state aid–state aid is illegal under EU treaties.
Since 2008, Starbucks Corp. has saved about $34 million in taxes, and it will all be headed back to the Dutch government if the dispute doesn’t make any headway.
Important to note: the EU is not ordering the collection of penalties; it has simply ruled that Starbucks pay back the $34 million in taxes that it initially avoided.
In line with its competition treaties, the European Commission forbids certain forms of preferential treatment between corporations and governments. Developing countries, the treaties argue, do not receive fair opportunity when other countries who can afford huge tax breaks (such as the Netherlands) are drawing in all of the major corporations.
Starbucks Corp’s Controversial Overseas Tax Evasion
Beyond the overly-generous tax sanctions on the part of the Netherlands, Starbucks engaged in wealth-retention strategies that went against EU regulations.
Corporations regularly use “shell companies” in third countries to dilute earnings and assets, thereby masking earnings or spreading them out too thinly for a governing body to accurately track (and therefore tax).
When assets or goods are transferred from one shell company to another, the shell companies must charge the same rates that an outside entity would charge. This is referred to as dealing “at arm’s length.” The European Commission alleges that Starbucks forewent the “arm’s length” approach entirely, thus breaking policy.
Can the EU Demand Tax Payments from Starbucks to the Netherlands?
In short, yes. The aforementioned concern of the European Commission–that preferential treatment by the Netherlands hurts competition in the EU–has led it to exercise its authority to demand payments from Starbucks to the Netherlands.
The EU derives its power from the countries it represents through a parliament system and a body of elected officials; countries that join the EU must remain consistent with the regulations and treaties agreed upon by the elected parliament. You can read a detailed explanation of the EU here.
What Does the Future Hold?
Via CNN Money: “Tax rulings that artificially reduce a company’s tax burden are not in line with EU… rules. They are illegal,” said Margrethe Vestager, Europe’s top anti-trust official. “All companies, big or small, multinational or not, should pay their fair share of tax.”
Such is the sentiment among current EU leadership. Multinational corporations will face increasing pressure to pay up, and recent global agreements will lead to increasing transparency in business dealings.
New rules will dictate that member nations share information including mergers, business deals, tax strategies, income, and more. The increased sharing of information will allow governing bodies to more accurately track international financial transactions; such tracking will lead to fewer evasions earned through 3rd-country shell companies.
Furthermore, the EC will set time limits on tax disputations; some critics have expressed concern that corporations may have to pay taxes in multiple countries due to the new sanctions, and the EU will try to give companies the benefit of a quick dispute resolution in such cases.
In Conclusion
Starbucks simply did what many multinational corporations must do–it found ways to earn more money and increase value for shareholders. By relying on the authority of the Netherlands, though, Starbucks didn’t obtain the permission of the top relevant officials–the European Commission–to benefit from huge tax breaks. As a result, Starbucks Corp. must now pay about $34 million in back taxes–not a pleasant way to bring in the New Year.