The Danish tax reaper cometh

A primer on Margrethe Vestager’s crackdown on tax avoidance.

The days of multinationals avoiding paying their share of taxes in Europe could be coming to an end.

Margrethe Vestager, Europe’s competition commissioner, ordered Fiat and Starbucks on Wednesday to cough up tens of millions of euros in unpaid taxes. And she’s unlikely to stop there, with Apple and Amazon next on her hit list.

The rulings will have far-reaching consequences for EU countries that are eager to attract corporations with favorable tax deals, for companies that fear they are the next targets, and for Vestager as she continues to burnish her reputation as an enemy of corporate greed.

The Fiat Group and Starbucks took an equal hit in Wednesday’s announcement. Fiat made billions selling Italian cars to the world. Yet the Italian-owned firm parked its profits in tiny Luxembourg, a country with half a million people and fewer than 400,000 cars.

The automaker scored a tax deal in 2012 with the Grand Duchy’s tax authorities that allowed the Turin-based company to pump billions of euros through its internal bank in Luxembourg, safe in the knowledge that its tax bill was capped in the hundreds of thousands.

Vestager, who has already picked fights with corporate giants such as Google and Gazprom, tore up the deal and ordered Fiat to pay Luxembourg as much as €30 million in extra taxes — even though Luxembourg’s treasury says it does not want the carmaker’s money. Vestager ordered the Dutch tax authorities to also recoup between €20-€30 million from Starbucks.

One year into the job, this was Vestager’s toughest decision yet. She must face down a wide spectrum of interests, from multinationals to member countries to U.S. officials concerned at European protectionism.

Above all, she must tread a fine political line over public outrage at aggressive tax planning while not incriminating her boss, European Commission President Jean-Claude Juncker, who as Luxembourg’s prime minister positioned the Grand Duchy as a low-tax haven.

Here some key questions she’ll face Wednesday:

Wait a second, can Vestager actually set corporate tax rates?

No, she can’t. Tax rates is one of the areas where national capitals reign supreme. But some of them — especially Luxembourg City and Dublin — have been offering ultra-low tax rates to attract some of the world’s biggest corporate names, and the money, jobs and prestige that come with them.

Ultra-low tax rates are fine, says Vestager, provided they are available to all companies and not just the chosen few, who would enjoy an advantage over smaller, less-well-connected rivals. Think Starbucks over local coffee shops, Amazon over family-owned retailers, Apple over smaller mobile phone makers, or Fiat’s subsidiaries over the makers of car parts. Giving the big players such an advantage would breach EU competition rules, says Vestager.

All four companies deny breaking EU law.

Why is Vestager first targeting Fiat and Starbucks, not Apple or Amazon?

Since taking office, Vestager has charged Google with breaching EU competition law, and opened probes into Qualcomm and Amazon. So maybe she felt it was time to give U.S. tech firms at least a temporary break. Charging one European carmaker and one U.S. coffee shop chain avoids the accusations of only bashing Silicon Valley.

She could, however, be testing the waters. Apple is the big one.

A report by the U.S. Congress in May 2013 concluded that Apple paid “a corporate tax rate of 2 percent or less” in Ireland, through which it channeled its non-U.S. global sales. According to company reports, Apple’s 2013 global profits were around €20 billion, with around a fifth of all revenues generated in Europe.

Lawyers suggest the Commission has more cases in the pipeline.

How bad will it hurt?

A recovery in the region of €100 million would have sting, but wouldn’t have brought a company the size of Fiat, officially known as Fiat Chrysler Automobiles since 2014, to a standstill. The owner of luxury brands such as Ferrari and Maserati earned €87 billion in revenue in 2012. Company records suggest it paid less than €100 million in tax that year.

Starbucks claimed €11 billion in global revenues last year, but found itself in the public eye after it was revealed it paid European taxes on only a tiny fraction of that money.

Luxembourg, in particular, may appeal the decision for fear that it undermines years of hard work to attract multinationals and investors to the Grand Duchy.

Is Juncker in the clear?

Probably. Vestager is examining two tax deals that were dished out when her boss was Luxembourg’s prime minister (including one when he was also the country’s finance minister).

The Lux Leaks revelations in November 2014 confirmed what many suspected: that during Juncker’s 20 years at the helm, Luxembourg cut sweetheart tax deals with all and sundry. The scandal broke during Juncker’s first week in office. He responded by promising not to interfere in Vestager’s cases and to push tax reforms at the European level — reforms he had vetoed when prime minister.

That promise has bought him the support of MEPs.

“If they [MEPs] play the man and not the ball by going for Juncker, there is a risk they will lose the entire reform agenda,” said Fredrik Erixon, directer of the European Center for International Political Economy, a think-tank in Brussels.

How are the EU’s tax reforms going?

At full speed. Just eight months after Juncker’s Lux Leaks fightback, he convinced member countries to automatically exchange certain information about the tax deals they strike with multinationals. Juncker is also working on controversial plans to harmonize corporate tax rules across Europe.
“To a certain extent the excesses of the past have been resolved,” said one lawyer involved in the probes.

The European reforms come as part of a global push to clamp down on aggressive tax “minimalization,” in the wake of the financial crisis. Long-mooted reforms are suddenly making progress. Earlier this month, the world’s largest economies committed themselves to reforms that would make it more difficult for companies to bend international tax rules.

“This is probably the biggest change in the system of global taxation since I started working in tax,” says Marvin Rust, a senior tax partner at FTI Consulting.

What does the U.S. say?

It has been a challenging year for EU-U.S. economic relations. An antitrust probe into Google, coupled with talk of regulating big Internet players like Google, Facebook and Twitter, has raised eyebrows across the Atlantic.

Then came Maximilian Schrems, the Austrian law student who challenged U.S. snooping practices before the EU courts and won. That left U.S. companies in Europe scrambling to comply and complaining about legal uncertainty. Making U.S. firms top-up their European tax contributions retroactively will only stoke those complaints.

U.S. officials have also warned that any extra taxes paid in Europe may be deducted from U.S. taxes, leaving American citizens to foot the bill. They will be carefully watching for any case against Apple.

These decisions will inevitably raise suspicions voiced by U.S. politicians that Europe is using regulation to level the playing field, protecting local businesses against stronger U.S. rivals.

This story was updated to include news of the announcement.