The EU’s executive body launched an inquiry last Thursday (10 January) following concerns that two of Nike’s Netherlands-based companies—Nike European Operations Netherlands BV and Converse Netherlands BV, which develop, market, and record the sales of Nike and Converse products in Europe, the Middle East, and Africa (EMEA)—have been effectively receiving illegal state aid over the way the Dutch government treated them for tax purposes.

These two companies received licences to use intellectual property rights of Nike and Converse products throughout EMEA in return for tax-deductible royalty payments to two other Nike entities also based in the Netherlands, but not taxable there.

Between 2006 and 2015, the Dutch government issued five tax rulings to Nike—two of which are still in operation. These endorsed the company’s method for calculating tax-deductible royalties paid to offshore subsidiaries.

The Commission is examining whether the royalties paid to Nike’s offshore units, which had no employees and carried out no economic activity, were higher than the market value of the intellectual property. By paying an inflated price for the royalties, Nike could claim a larger tax deduction. And by allowing the Nike companies to pay a lower amount of tax, the Netherlands may have awarded the company illegal state aid—providing an unfair advantage over its competitors.

While the European Union may be a single market, it is not always a fair market, and the European Commission is trying to address how member states provide large companies with favourable tax treatment as a way of enticing investment and employment.

Alongside the Netherlands, several EU countries—Luxembourg and Ireland in particular—have been criticised for providing tax breaks to large companies, as well as trying their hardest to push back on any attempt to recoup lost tax revenue. For example, about €22 billion (U.S. $25.2 billion) a year flows through the Netherlands to low-tax countries, according to the Dutch Foreign Ministry, often via rules that allow companies to camouflage profits as “royalties” and protect them from taxes.

“Nike is subject to and rigorously ensures that it complies with all the same tax laws as other companies operating in the Netherlands. We believe the European Commission’s investigation is without merit.”

Anonymous spokesperson, Nike

The Dutch government has recently said it will no longer approve corporate structures that allow companies to steer profits to low-tax countries, adding that royalties will be subject to taxation starting in 2021. The Netherlands is also moving to eliminate inconsistencies in international tax laws corporations can exploit to avoid taxes.

While Margrethe Vestager, Commissioner in charge of competition policy, welcomed the actions taken by the Netherlands to reform its corporate taxation rules and to help ensure companies will operate on a level playing field in the European Union, she said in a statement: “Member States should not allow companies to set up complex structures that unduly reduce their taxable profits and give them an unfair advantage over competitors.”

In a written statement, Nike said the investigation was “without merit.”

A company spokesperson said: “Nike is subject to and rigorously ensures that it complies with all the same tax laws as other companies operating in the Netherlands. We believe the European Commission’s investigation is without merit.”

Tax rulings are perfectly legal. They are comfort letters issued by tax authorities to give a company clarity on how its corporate tax will be calculated or how special tax provisions can be used. Furthermore, such rulings are not a problem under EU state aid rules if they simply confirm tax arrangements between companies within the same group comply with the relevant tax legislation.

Recent EC tax filings

  • In October 2015, the Commission concluded Luxembourg and the Netherlands had granted selective tax advantages to Fiat and Starbucks, respectively. As a result of these decisions, Luxembourg recovered €23.1 million (U.S. $25.5 million) from Fiat, and the Netherlands recovered €25.7 million (U.S. $29.5 million) from Starbucks.
  • In January 2016, the Commission concluded selective tax advantages granted by Belgium to at least 35 multinationals, mainly from the European Union, under its “excess profit” tax scheme are illegal under EU state aid rules. The total amount of aid to be recovered from 35 companies is estimated at approximately €900 million (U.S. $1.03 billion), including interest. Belgium has already recovered over 90 percent of the aid.
  • In August 2016, the Commission concluded Ireland granted undue tax benefits to Apple, which led to a recovery of €14.3 billion (U.S. $16.4 billion) by Ireland.
  • In October 2017, the Commission concluded Luxembourg granted undue tax benefits to Amazon, which led to a recovery by Luxembourg of €282.7 million (U.S. $324 million).
  • In June 2018, the Commission concluded Luxembourg granted undue tax benefits to Engie of around €120 million (U.S. $137.5 million). The recovery procedure is still ongoing.
  • In December 2018, the Commission concluded Gibraltar granted undue tax benefits of around €100 million (U.S. $114.6 million) to several multinational companies through a corporate tax exemption scheme and through five tax rulings. The recovery procedure is ongoing.

Source: European Commission

There has been widespread criticism, however, that EU governments can use them to entice large corporates to set up their European headquarters or subsidiaries on their soil in exchange for favourable tax treatment. But despite the obvious problems tax rulings can cause, the Commission does not intend to put an end to them.

Companies have fallen foul of tax rulings in the recent past. Tech giant Apple had been issued two tax rulings but was forced to pay €14.3 billion (U.S. $16.4 billion) to the Irish government in 2016 after the Commission queried the company’s generous 2014 corporate tax rate of 0.005 percent—some 2,500 times less than the usual 12.5 percent rate that other companies were paying. Similarly, Amazon was forced to pay €283 million (U.S. $324 million) to Luxembourg in 2017, while coffee chain Starbucks repaid €25.7 million (U.S. $29.5 million) to the Netherlands in 2015. Belgium has been forced to recoup €900m (U.S. $1.03 billion) from 35 companies that it gave “selective” tax advantages to in 2016.

Some high-profile cases are still ongoing. An investigation into the Dutch government’s alleged favourable tax treatment of Swedish flat-pack furniture company IKEA is currently underway, as is an investigation concerning a tax scheme for multinationals in the United Kingdom.