Back in October of 2015, the European Commission ordered the Dutch government to recover approximately €30 million (or about $34 million) from Starbucks. The EC determined that the arrangement made between the two entities was illegal and had given Starbucks an unfair advantage in the marketplace. The Netherlands and Starbucks are expected to appeal the decision.
The EC ruling is significant for a number of reasons. For one, it brings attention to the complex maneuvers multinational corporations employ in order to receive the best tax treatment. And it also highlights how serious the European Union has become in its efforts to crackdown on tax avoidance. While the sum that the Dutch government is required to recover in back taxes is not outrageously large, the decision may prove to be extremely important as a portent of future events.
The Decision
The European Commission found that the tax deal made between the Netherlands and Starbucks enabled the multinational coffee company to shift profits and dramatically lower its tax burden. Through its ruling, the EC intends to shut down the tax avoidance strategies utilized by large companies. Such strategies are usually highly sophisticated and unavailable to start-up companies and small to medium sized businesses. Hence, even though Starbucks maintains it didn’t violate any established rules, the arrangement compounds the preexisting economic advantage Starbucks already possesses.
Although it may be tempting to immediately side with the EC, it should be kept in mind that EU states face an increasingly competitive world and tax deals are just one means to attract foreign investment. And if Starbucks is able to employ complex tax strategies which give it an advantage, perhaps this is just a natural consequence of how the market works? And besides, even if this ruling curtails tax avoidance strategies in the short-term, what guarantee exists that companies will not respond with even more creative strategies in the future?
Starbucks may be stuck with a sizable tax bill, but the days of sophisticated tax structuring are far from over.
Image credit: Paul Bischoff