Starbucks’ European Tax Controversy
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. Corporations such as Apple and Google often shift corporate funds between neighboring states for 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 by multinational companies. From the perspective of the EC, Starbucks’ European tax avoidance maneuver gave the company a competitive advantage. That’s because small to medium-sized businesses often lack the wherewithal to carry our similar maneuvers. Let’s look at the details of the case. We’ll get a good sense of what happened.
Overview of Starbucks’ European Tax Controversy
The main allegation against Starbucks by the EC is that the company engaged in illegal profit shifting. It allegedly did so 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 claim that this allegation is erroneous and lacks sufficient factual basis. Despite their objections, none of their objections have yet been successful. Again, the EC’s case is that such dealings will push smaller, less financially savvy companies out of the market. That’s because 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. Vestager also aimed at other multinational companies engaging in similar behavior. The penalty imposed on Starbucks was not particularly large. At least not when viewed in context given the size of the company. But Vestager made the point that the sum represents a more general attempt to make the marketplace as equitable as possible and cancel any unfair preference. In other words, the sum was just as much a form of symbolic punishment as it was financial punishment. Vestager hopes the ruling will deter other corporations from this same sort of future behavior.
At present, Starbucks’ European tax case still continues, as Starbucks and the Netherlands still have appeal rights. Accordingly, either may attempt to overturn the ruling. Interestingly, Starbucks and the Dutch government both deny that what has occurred constitutes illegal state aid. Starbucks, in fact, is 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. Ditto 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.
Call Our New York City Tax Attorneys For Assistance
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 tax attorney in NYC will assist you right away.
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