As we mentioned earlier in our post about Apple’s repatriation tax, multinational corporate juggernauts often use creative – and sometimes ethically questionable – means to reduce their tax burden. It’s not uncommon for corporations such as Apple, Google and Walmart to shift corporate funds between neighboring states, or to specific locations known for their favorable tax treatment. Starbucks’ European tax controversy reveals that the company also engages in this same tax game: in October of 2015, the European Commission ordered the Dutch government to collect €30 million (roughly $36 million) from Starbucks, holding that dealings between the company and the Dutch government conferred an unfair advantage on the company.
Following the ruling by the EC, the Dutch government was able to successfully recover nearly the entire sum owed by Starbucks, but both Starbucks and the Dutch government raised objections to the ruling. Starbucks eventually appealed the ruling, but failed to have the ruling overturned. The significance of this case is greater than it may seem at first glance: this decision by the EC represents a broader attempt to crack down on complex tax avoidance maneuvers by multinational companies. From the perspective of the EC, Starbucks’ European tax avoidance maneuver gave the company a competitive advantage because small to medium-sized businesses often lack the wherewithal to carry our similar maneuvers. Let’s look at the details of the case and get a good sense of what happened.
Overview of Starbucks’ European Tax Controversy
The main allegation made against Starbucks by the EC was that the company engaged in illegal profit shifting by paying artificially inflated prices to its subsidiaries in other countries. By overpaying its subsidiaries, Starbucks’ European tax liability was minimized by effectively transferring funds to its neighboring corporate units. The EC determined that such behavior constituted illegal state aid from the Dutch government. Both Starbucks and the Netherlands claimed that this allegation was erroneous and lacked sufficient factual basis, but none of their objections have yet been successful. Again, the crux of the EC’s case is that such dealings will inevitably push smaller, less financially savvy companies out of the market as they’re unable to fairly compete with corporate giants such as Starbucks on this front.
This ruling against Starbucks by the EC actually occurred simultaneously with a similar ruling against Fiat Chrysler. There, the EC ordered the state of Luxembourg to recover a substantial sum (also about €30 million) from Fiat, as the EC determined that the car manufacturer had likewise engaged in shady tax practice which conferred an unfair advantage and distorted the marketplace.
Precedent for Future Activity
Margrethe Vestager, the top antitrust official of the EU, took a hard line against Starbucks and other multinational companies engaging in similar behavior. She recognized that the penalty imposed on Starbucks was not particularly large – at least not when viewed in context given the size of the company – but that the sum represented a more general attempt to make the marketplace as equitable as possible and cancel out any unfair preference. In other words, the sum was just as much a form of symbolic punishment as it was financial punishment. Ms. Vestager and others who share her position hope that this ruling will deter other corporate juggernauts from taking part in this same sort of behavior in the future.
At present, Starbucks’ European tax case is still not fully resolved, as Starbucks and the Netherlands are expected to exhaust their appeals and attempt to have the ruling overturned. Interestingly, Starbucks and the Dutch government both deny that what has occurred constitutes illegal state aid, and Starbucks has been adamant that it followed all applicable rules throughout the course of operating its business. The Seattle-based coffee company highlighted the fact that all of its dealings were in line with Dutch law and the guidelines established by the Organization for Economic Cooperation and Development (OECD). Regardless of the merits of its objections, there’s no question that the EU ruling will cause many corporations doing business throughout the EU to pause and seriously consider their tax strategies. Even if Starbucks is able to recover all or just a portion of the Penalty imposed, the company has already suffered considerably in terms of time and energy.
As usual, it’s awareness of fascinating tax developments on the global scene, such as the Starbucks’ European tax controversy, which sets the firm of Mackay, Caswell & Callahan, P.C. apart from the rest. Our attorneys and staff spend a great deal of time keeping up with current rules and both domestic and foreign trends in order to better serve and maximize our clients’ experience. We always strive to bring as much value to our clients as possible, and keeping up with developments such as these contributes toward this goal. If you have a complex tax issue and need assistance, reach out to our firm and one of our top New York tax attorneys will assist you right away.