EU Officials Say Starbucks And Fiat Got Illegal Tax Breaks

European Union Commissioner for Competition Margrethe Vestager says tax breaks give some companies an unfair advantage.

Thierry Monasse/AP

The European Union wants Starbucks to pay up to $34 million in back taxes, ruling that the company received illegal state aid from the Netherlands.

EU officials also alleged that Fiat benefited from a similar deal with Luxembourg.

"Tax rulings that artificially reduce a company's tax burden are not in line with EU state aid rules," said EU Competition Commissioner Margrethe Vestager. "They are illegal. All companies, big or small, multinational or not, should pay their fair share of tax."

"Tax rulings" are letters from governments specifying how much a company must pay in taxes. A statement from the EU said letters to Starbucks and Fiat enabled them to take advantage of "artificial and complex methods" to lower their taxes, "by setting prices for goods and services...that do not correspond to market conditions."

"As a result, most of the profits of Starbucks' coffee roasting company are shifted abroad, where they are also not taxed, and Fiat's financing company only paid taxes on underestimated profits."

This puts competing companies that pay their fair share of taxes at a disadvantage, it said.

In the case of Starbucks, the company lowered its taxes by paying a "very substantial royalty" to a subsidiary based in the United Kingdom for "coffee roasting know-how," the EU said. The statement also said Starbucks paid an inflated price to a Swiss trading arm for green coffee beans.

As for Luxembourg, the EU said Fiat's financing arm in that country used "an artificial and extremely complex methodology that is not appropriate for the calculation of taxable profits reflecting market conditions."

The Dutch government said it was "somewhat surprised" by the decision.

"The fact that the Commission observes that there would be State aid in the Starbucks file raises a lot of questions and requires careful consideration. The Netherlands is convinced that actual international standards are applied and shall, therefore, analyze the Commission's criticism carefully before taking a decision on further steps."

Both the Netherlands and Luxembourg said they disagreed with the ruling and were exploring their legal options.

Starbucks also took issue with the decision:

"Starbucks shares the concerns expressed by the Netherlands government that there are significant errors in the decision, and we plan to appeal since we followed the Dutch and OECD rules available to anyone.

The dispute between the European Commission and the Netherlands as to which OECD rules we and others should follow will require us to pay about €20m to €30m on top of the $3 billion in global taxes we have already paid over the seven years in question (2008-2014).

Starbucks complies with all OECD rules, guidelines and laws and supports its tax reform process. Starbucks has paid an average global effective tax rate of roughly 33 percent, well above the 18.5 percent average rate paid by other large US companies."

The EU announced in June 2014 that it had launched investigations into the tax deals involving Fiat and Starbucks, as well as another between Ireland and Amazon. No decision has been announced yet in the third case.

Vestager also said last year that other ongoing investigations into similar deals are taking place. Vestager's office is also involved in a high-profile antitrust fight with Google, saying it uses its dominance in its market to promote its services.