The decision is part of a wider crackdown by the European Union on so-called “comfort letters,” tax rulings issued by countries such as the Netherlands, Luxembourg and Ireland, to companies like Starbucks and Amazon.
The European Union said Wednesday that the Netherlands gave Starbucks an illegal break on its tax bill, and it ordered the Dutch government to collect between $23 million and $34 million from the coffee company.
The decision is part of a wider crackdown by Brussels on so-called “comfort letters,” tax rulings issued by countries such as the Netherlands, Luxembourg and Ireland, to companies like Starbucks and Amazon.
The EU said the specific tax deals with Starbucks and Italian car company Fiat, against which it also ruled Wednesday, allowed the companies to use “artificial and complex” methods to calculate taxable profits that “do not reflect economic reality.”
“The decisions send a clear message: National tax authorities cannot give any company, however large or powerful, an unfair competitive advantage compared to others,” said Margrethe Vestager, the European commissioner in charge of competition, in a statement.
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Starbucks’ Dutch unit operates the Seattle company’s only European roasting facility, from which it distributes products all over Europe, Africa and the Middle East. The EU investigation, begun last year, determined that the subsidiary artificially lowered its profits by paying a “very substantial royalty” to another Starbucks subsidiary in the U.K. for “coffee-roasting know-how.”
The EU says the Dutch subsidiary is the only Starbucks unit to pay a royalty for that know-how, which means that a big chunk of its taxable profits are moved to the U.K., where Starbucks hasn’t paid much corporate tax in recent years.
Starbucks says the EU’s assertion about the uniqueness of the Dutch royalty payments “is false.”
According to the EU investigation, the Starbucks roasting operation also paid “an inflated price” for coffee beans bought from another Starbucks subsidiary in Switzerland. The EU argues that by allowing Starbucks to calculate its profits this way, the Netherlands is giving the company, which until last year had its European headquarters in Amsterdam, an unfair state subsidy.
The Dutch government said it was “somewhat surprised” by the decision, since it believes international standards were applied.
Starbucks says it agrees with Netherlands officials and plans to appeal. The tax deal also followed guidelines set by the Organization of Economic Cooperation and Development on how to calculate costs stemming from cross-border transfers between subsidiaries of the same company, Starbucks says.
The coffee giant, which intends to keep roasting its beans in the Netherlands, also says its worldwide effective tax rate is about 33 percent, and that other large U.S. companies pay on average 18.5 percent.
The amount Starbucks has to pay is relatively small: It amounts to between $3 million and $5 million a year for the seven-year span covered by the EU decision. The company says it has paid $3 billion in global taxes over the same period.
That’s not much of a dent for a company that in 2014 brought home $16.4 billion in annual revenue.
But the ruling is an indication that other U.S. companies might have to redo their taxes as well.
For instance, the EU is investigating a similar tax deal between Amazon and Luxembourg.
Experts say the reputational damage might be limited, too. Starbucks has been stung by European tax disputes before — for years it didn’t pay much corporate tax in the U.K. because it said its profits there were low or nonexistent.
That led former Chief Financial Officer Troy Alstead to be grilled by members of the British Parliament and also prompted Starbucks to voluntarily forgo tax deductions in order to mend fences.
But this time around it’s clear that “a significant proportion of the responsibility lies with the host country,” says Shailendra Jain, a professor of marketing at the University of Washington’s Foster School of Business. “Any intelligent person would conclude that it’s not Starbucks’ fault.”
The EU crackdown comes at a time when many nations in the crisis-ridden region have been dealing with deficits and high unemployment. That has prompted a big shift in public perception of well-known tax strategies that were formerly tolerated and are now perceived as unfair, says Jake Thornock, a professor of accounting at the Foster School.
Tax authorities “have more teeth than they have in the past,” he said.