The European Commission has decided that Luxembourg and the Netherlands have granted selective tax advantages to Fiat Finance and Trade and Starbucks, respectively. These are illegal under EU state aid rules.

Following investigations launched in June 2014, the commission concluded that Luxembourg has granted selective tax advantages to Fiat’s financing company and the Netherlands to Starbucks’ coffee roasting company. In each case, a tax ruling issued by the respective national tax authority artificially lowered the tax paid by the company.

Tax rulings as such are perfectly legal. They are letters issued by tax authorities to give a company clarity on how its corporate tax will be calculated or on the use of special tax provisions. However, the two tax rulings under investigation endorsed artificial and complex methods to establish taxable profits for the companies that did not reflect economic reality.

At issue was the practice called transfer pricing, the amount charged by one division of a company for goods and services provided to another. In this case, by setting prices for goods and services sold between companies of the Fiat and Starbucks groups that do not correspond to market conditions, most of the profits of Starbucks’ coffee roasting company are shifted abroad, and Fiat’s financing company only paid taxes on underestimated profits.

This, ruled the commission, is illegal under EU state aid rules. Tax rulings can’t use methodologies to establish transfer prices with no economic justification and which unduly shift profits to reduce the taxes paid by the company. It would give that company an unfair competitive advantage over other companies, typically smaller businesses that are taxed on their actual profits because they pay market prices for the goods and services they use.

The Commission has ordered Luxembourg and the Netherlands to recover the unpaid tax from Fiat and Starbucks, in order to remove the unfair competitive advantage they have enjoyed and to restore equal treatment with other companies in similar situations. The amounts to recover are $22 million to $33 million for each company. The companies can no longer continue to benefit from the advantageous tax treatment granted by these tax rulings.

Furthermore, the commission continues to pursue its inquiry into tax rulings practices in all EU member states.