Fiat’s Financing Arm Bending Tax Rules, EC Alleges

BRUSSELS – European automakers will be carefully monitoring the Luxembourg government’s appeal of a European Commission order that it revoke up to €30 million ($32 million) in tax breaks granted to Fiat’s finance arm Fiat Finance and Trade.

The automaker’s subsidiary is registered as a company in the Grand Duchy, a European financial center.

The EC, the European Union executive, says tax breaks issued in 2012 by the Luxembourg government “gave a selective advantage” to Fiat Finance and Trade, which “unduly reduced its tax burden” over the past three years by between €20 million ($22 million) and €30 million.

“If the estimations of capital and remuneration applied had corresponded to market conditions, (Fiat Finance and Trade’s) taxable profits declared in Luxembourg would have been 20 times higher,” the EC said in a communiqué at the time.

The case has shone a light on a problem area within the EU’s supposedly border-free and united market, where there is free movement of capital between its 28 member states. The EU does have some regulatory power over how taxes are applied, for instance sales taxes, but generally member states levy whatever taxes they want.

But while the EC concedes member states’ rulings on interpreting these tax rates “are perfectly legal,” it claims member countries cannot bend their own rules to benefit certain companies to give them an unfair advantage in the EU market.

By applying artificial and complex methods to bring down taxable profits, which the EC argues Luxembourg allowed for Fiat, EU rules that outlaw unfair government subsidies may be broken. And if the EU executive can prove that is the case here, it could order Fiat Finance and Trade to pay hefty back taxes to the Grand Duchy treasury.

Luxembourg’s appeal will be heard in the European Court of Justice’s General Court.

The 2012 ruling allowed Fiat to use so-called “transfer pricing” whereby it billed for goods and services sold between companies in the group at below-market rates, meaning its finance arm was taxed only on underestimated profits. The EC says this gives Fiat an unfair competitive advantage over other firms, particularly small businesses taxed on actual profits and that pay and charge market prices.

The EC contends Fiat Finance and Trade functions like a bank, so taxes should be calculated on capital deployed for financing auto loans. But due to the allegedly “economically unjustifiable assumptions and downward adjustments,” the EC says the capital base in the tax ruling is much lower than the company’s actual capital.

Additionally, estimated remuneration applied to this already-low capital is well below market rates, the EC contends. “As a result, Fiat Finance and Trade has only paid taxes on a small portion of its actual accounting capital at a very low remuneration.”

Fiat Teams With Grand Duchy for Court Fight

In a communiqué EU Competition Commissioner Margrethe Vestager says: “Tax rulings that artificially reduce a company’s tax burden are not in line with EU state-aid rules. They are illegal.”

Vestager says she hopes both governments and companies will get the message from the case against Fiat Finance and Trade. “All companies, big or small, multinational or not, should pay their fair share of tax.”

EU state-aid rules require the EC to recover any illegal subsidies, so it has ordered Luxembourg to reclaim up to €30 million from Fiat Finance and Trade, a demand the Grand Duchy is challenging through the EU courts.

In a Dec. 4 communiqué, the Luxembourg government says it is appealing the EC’s decision in the Fiat case “in order to seek legal clarity and previsibility on the practice of tax rulings. The vast majority of EU member states use tax rulings to provide legal certainty for the taxpayer.”

The statement accuses the EC of using “unprecedented criteria in establishing the alleged state aid, thus putting into jeopardy the principle of legal certainty.”

For Luxembourg, “the Commission has not established in any way that Fiat received selective advantages.”

A Luxembourg finance ministry spokesman tells WardsAuto: “Every company is treated in the same way. They all could approach the ministry for a tax ruling.”

Alfonso Lamadrid de Pablo, senior associate at the Brussels office of international law firm Garrigues, agrees with Luxembourg’s assessment.

“The Commission’s reasoning is in some regards debatable,” he says. “The Commission does not compare the tax rulings granted by Luxembourg to Fiat (or the Netherlands to Starbucks) with the tax rulings granted by these member states to other comparable multinationals (and) corporate groups which undertake intra-group transfers. Without this exercise it is not easy to conclude that the rulings are selective.”

Asked to rate Luxembourg’s chances of winning the case and not having to recover €30 million from Fiat, Lamadrid de Pablo says: “There are numerous examples of cases where companies and member states have prevailed in their challenges of Commission state-aid decisions, and there have been some very recent precedents of this happening with regard to tax-related cases.

“By adopting these decisions the Commission is entering uncharted waters in terms of state aid law and is therefore assuming certain legal risks.”

Lamadrid de Pablo adds, “In practice, these judgments, if confirmed by the courts, could lead to a backdoor harmonization of the tax rulings granted by any member state in the EU.”

Asked whether the EC stands by its Oct. 21 order in light of Luxembourg’s legal challenge, a spokesperson says, “All Commission decisions are subject to the scrutiny of the EU courts and we will defend our decision in court.”

A Fiat spokesman says it is company policy to decline comment on either the EC’s decision or on the Luxembourg appeal.