EC Fiat Tax Probe Warning Shot to Multinationals

BRUSSELS – A European Commission investigation into Fiat’s tax arrangements in Luxembourg puts the spotlight on alleged backdoor subsidies received by Europe’s automakers and comes at a difficult time for the sector.

At the heart of the probe is the suggestion that Luxembourg authorities gave Fiat finance and trade an unfair advantage over other companies in a 2012 ruling that calculated the Italian automaker’s taxable profits.

Announcing the inquiry on June 11, Joaquin Almunia, the European Union’s competition commissioner and key antitrust regulator, warned that the net was closing on companies who receive national government subsidies in the form of special tax deals.

“Selective tax advantages to the benefit of multinational corporations seriously distort competition in our single market,” he tells reporters in Brussels. “When public budgets are tight and citizens are asked to make efforts to deal with the consequences of the crisis, it cannot be accepted that large multinational corporations do not pay their fair share of taxes.”

The EU, with its borderless market of 28 countries, has rules designed to prevent national governments giving certain companies an illicit leg-up over their competitors through subsidies and tax breaks.

And while Fiat is headquartered in Italy, it has established a finance unit in Luxembourg which provides financial services, funds subsidiaries and invests surplus cash. The grand duchy is a popular destination for multinational companies who register finance subsidiaries there to reduce their taxable profits.

The EC investigation relates to transfer pricing, the means by which multinational corporations shift global profits to subsidiaries in low-tax jurisdictions. While transfer pricing in itself is not illegal, Almunia suspects Luxembourg’s authorities gave selective advantage to Fiat in rulings on its corporate tax bill in 2012. If the EC finds these rulings were a form of state aid, the Italian automaker may be forced to make substantial payments in back taxes.

Given sluggish car sales in Europe, transfer pricing is not a surprising response by manufacturers, says Peter Wells, an expert on the global automotive industry at the University of Cardiff in Wales.

“The financial pressure on the automotive sector in Europe that has built up since 2009 remains intense, with only modest market recovery and tax arrangements like Fiat’s in Luxembourg appear to reflect that pressure,” he says.

Corporate tax avoidance has become a hot political issue in Europe in recent years, following revelations about aggressive tax planning by large consumer brands.

For instance, Wells says, “Serious concerns have been expressed in the U.K. about the way in which Amazon, Starbucks and others channel their turnover through Luxembourg and hence pay very little if any tax here in the U.K.”

Although the EC cannot force EU member states to change their taxation rates, it can use antitrust rules to target countries that give favorable treatment to certain companies. Almunia says his office also is investigating tax guidance given by Ireland to software giant Apple and rulings given by the Netherlands to Starbucks.

Almunia also has launched infringement procedures against Luxembourg’s government for failing to cooperate fully with his office’s preliminary inquiries into Fiat’s tax arrangements.

Rules Loosened for Automakers

Analysts call the regulator’s announcement a warning shot to multinational corporations in general and probably is not part of a clampdown on car makers specifically.

Laura Grigolon of Canada’s McMaster University, an expert on EU state aid to the automotive sector, says European authorities actually have loosened the rules for explicit state subsidies to the automotive sector.

“The European Commission’s Temporary Framework to tackle the last financial and economic crisis (introduced from 2010) de facto implied a relaxation of the state aid rules and foresaw no formal control of individual state aids,” she says.

“This shows that the Commission is very well aware of the economic realities related to state aid (in the automotive sector) but at the same time, the issue is highly political,” Grigolon adds.

While the EC may be taking a softer line on state aid in times of hardship, as shown by the multi-billion euro subsidies received in 2009 by German automaker Opel, the Fiat probe suggests Brussels is determined to stamp out backdoor tax subsidies.

Fiat denies it has received any special treatment and says in a statement it is surprised by the investigation. The EC does not say how long the investigation would take or indicate the amount of money involved, but it warns other companies may soon come under scrutiny.

“This is the beginning, not the end, of our work regarding how to enforce state aid rules regarding how taxes are applied, particularly regarding multinationals,” Almunia says.