Corporate Tax Loopholes Ruled Illegal in European Union

The European Commission recently ruled against Starbucks and Fiat in a case that drastically curtails the legality of tax loopholes in Europe. On October 20, the Commission determined that the two corporations utilized tax loopholes in Luxembourg and the Netherlands to save more than €30 million ($34 million) in taxes. These tax loopholes are so great that, if taxes had been calculated at market conditions rather than at rates set by the national governments of Luxembourg and the Netherlands, Fiat would have paid a tax rate twenty times higher than the rate it actually paid. The European Commission has ruled that it is illegal to use these tax loopholes, citing state aid rules which state that governments can’t give help—such as tax benefits—to private companies if doing so infringes upon or damages the European market or economy.

Weak tax policies coupled with state assistance is often perceived as characteristic of many Western European nations, including the Netherlands and Luxembourg. In addition to having loopholes in their tax codes, these countries, especially Switzerland, are well-known tax havens for wealthy citizens or corporations that wish to reduce their tax rates. Tax havens hold their corporate tax rate (for corporations) close to zero, making it very attractive to store savings in that country’s banks. Storing money in a tax haven allows individuals and companies to effectively increase their monetary capital and subsequently use it globally for investment, loans, and financial transactions. This practice becomes illegal and exploitative when individuals and corporations make money domestically but then shift it overseas to take advantage of tax breaks.

Proponents of tax loopholes have argued, however, that many countries offer tax loopholes for infant industries, or those too weak and new to expand without government assistance. Once infant industries are able to expand, they are equipped to contribute to an economy through the valuable goods and services produced, as well as providing employment opportunities for citizens. In the case of non-infant industries such as Starbucks and Fiat, however, tax loopholes only serve to reduce the tax base from which a government can collect.

This European Commission’s ruling is part of a wider shift towards reducing such unfair and unequal taxation policies. As the official European Commission statement explains, there have been recent steps towards achieving tax fairness and equitable enforcement. Two weeks ago, the G20 - which includes the European Union and eighteen other member states, including Argentina, the US, China, Mexico, and Saudi Arabia - agreed to endorse the Organization for Economic Cooperation and Development’s Base Erosion and Profit Shifting project, which provides governments with solutions for modernizing international tax rules to eliminate loopholes and tax havens.

Despite an Action Plan that was released by the European Commission in June and designed to  strengthen the European economy and to make taxes both efficient and fair, Commission rulings are not always effective. Often times, governments actually want private corporations to profit and support business development within their borders. At the moment, it is unclear as to what ramifications these recent rulings may have for tax havens and tax loopholes, but it is very obvious that the Commission intends to crack down on the sorts of corporate evasions that it views as harmful for the economy.