Multinational corporations wishing to reduce their tax burden have for years looked to Europe, where some countries offer generous, sweetheart deals and a hands-off approach in sharp contrast to the U.S.'s IRS. But Wednesday's decision by European Commissioner for Competition Margrethe Vestager may curb, if not ultimately put an end to, maneuvers such as the "double Irish with a Dutch sandwich." The decision centers on two companies, Fiat Chrysler Automobiles NV (FCAU) and Starbucks Corp (SBUX), but could have wider implications for corporate tax strategies, not to mention other companies already under investigation. 

Fiat Chrysler

According to Verstager's statement, Fiat Chrysler's deal with Luxembourg is illegal under EU state aid rules because it "accepts an extremely complex and artificial methodology to calculate Fiat Finance and Trade's taxable profits." Fiat Finance and Trade, the Luxembourg subsidiary of the London-headquartered, Italian- and U.S.-listed company, has been paying taxes on perhaps 5% of its actual profits under the deal, which was struck in 2012. Having paid perhaps €400,000 ($454,000) in the past three years, the company now owes between €20 million ($22.7m) and €30m ($34m) in back taxes

Fiat Chrysler's revenues for fiscal 2012-2014 were $346 billion; it paid $196 million in income taxes in this period (in 2013 it received a net tax credit of $1.29b); its net earnings were $4.63b. Fiat Chrysler's shares are down 3.4% in Wednesday morning trading, compared to a 0.2% rise in the S&P 500.


The other company affected by this decision is Starbuck's Netherlands subsidiary Starbucks Manufacturing EN BV. Under a tax ruling from 2008, the company was allowed to pay "a very substantial royalty" to a UK subsidiary in exchange for "coffee-roasting know-how." Alki, the now-defunct UK subsidiary, was not liable for corporate taxes in the UK or the Netherlands. The royalty exceeded market value, and no such payments were made between Starbucks group companies in other jurisdictions. Starbucks Manufacturing also paid high prices for beans to a Switzerland subsidiary. This removed taxable profits from the Netherlands saved Starbucks between €20 million ($22.7m) and €30m ($34m).

Starbucks' revenues for fiscal 2012-2014 were $4.59b; it paid $1.53b in income taxes (including a $239m net credit in 2013); its net earnings were $11.75b. Starbucks shares are down 0.4% in morning trading.

Who's Next?

Vestager was careful to state that "each case is assessed on its merits, so today's decisions do not prejudge the outcome of […] ongoing probes," but a precedent has been set: national tax authorities cannot issue get-out-of-tax-free cards to multinationals. Inc (AMZN) and McDonald's Corp (MCD) in Luxembourg, Apple Inc (AAPL) in Ireland, Anheuser-Busch InBev SA/NV (BUD) in Belgium and others are currently under investigation. 

The Bottom Line

Brussels is getting tougher when it comes to corporate taxes, though this exercise of EU authority may exacerbate tensions with national governments with consequences that are difficult to predict. Meanwhile the U.S. has strengthened its anti-inversions regime, discouraging AbbVie Inc (ABBV) from acquiring its way into Ireland through Shire plc (SHPG). Not all is doom and gloom for corporate tax acrobats, however: Canada's newly elected Liberal PM Justin Trudeau hinted back in May that his party would not rule out reductions to the corporate tax rate if the U.S. were to implement its own. Canada's rate was low enough to attract Burger King – now one half of Restaurant Brands International Inc (QSR) – in December 2014.

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