The taxation of American businesses operating overseas is a controversial topic. The officers of a corporation, or the managers of a limited liability company (LLC), have a fiduciary duty to the owners of the business to maximize profits. With small businesses, the managers and owners are often the same people, but the duty remains. Minimizing a company’s tax burden is one way to do this. Some companies have developed a variety of schemes for keeping money offshore to avoid U.S. taxes. To the extent that these schemes do not violate U.S. tax laws, it is often because of loopholes in existing laws. A recent ruling from the European Commission (EC), the executive body of the European Union (EU), could have a significant impact on how American companies do business—and pay taxes—overseas.
According to some estimates, large U.S. corporations are holding over $2.1 trillion in profits in other countries, allegedly to avoid paying roughly $620 billion in income tax in the U.S. Unlike most countries, the U.S. requires both its citizens and its businesses to pay federal income tax on income derived outside U.S. territory. Why does the U.S. do this? One possible answer, albeit a rather cynical one, is that the U.S. projects its power and influence around the world, and both citizens living overseas and businesses operating abroad expect the protection of the U.S. government—and occasionally its armed forces—should they need it.
The EC is responsible for monitoring the compliance of EU member nations with EU laws and treaties. In the summer of 2014, the EC announced investigations into three companies either based in or closely tied to the United States, and their business practices in three European countries: Apple in Ireland, Starbucks in the Netherlands, and Fiat Chrysler Automobiles in Luxembourg. In October 2014, it also announced an investigation of Luxembourg’s tax treatment of Amazon. The investigations are targeted more towards the countries than the companies, but the EC’s rulings will substantially affect the companies. The EC announced rulings in the investigations of Starbucks and Fiat in October 2015.
EU member states are subject to “state aid rules” that prohibit tax policies that reduce a company’s tax burden and therefore increase its profits, “unless it is justified by reasons of general economic development.” This is considered an anti-competitive practice under EU law. The EC’s ruling found that the Netherlands subsidiary of Starbucks, a Seattle-based company, was receiving unfair tax treatment through a scheme by which it paid “a very substantial royalty” to another Starbucks subsidiary in the United Kingdom, as well as purchasing coffee beans at above-market rates from a Swiss subsidiary.
Neither of these types of payments by Starbucks’ Netherlands subsidiary reflected market value, the EC found. Both payments appeared to have the purpose of shifting taxable income from the Netherlands to countries with more favorable tax rates, reducing the company’s overall tax burden. The EC reached similar findings regarding Fiat’s operations in Luxembourg. It found that each country had unlawfully reduced its tax burden by € 20 to 30 million (approximately $22 to 33 million), and it ordered the Netherlands and Luxembourg to recover those amounts from the companies.
Business law attorney Samuel C. Berger offers fixed-fee legal-service packages to businesses, business owners, and entrepreneurs in Northern New Jersey and New York City. We represent our clients in a wide range of legal matters, from business formation to dissolution. To schedule a confidential consultation with an experienced and skilled business advocate, contact us today online or at (212) 380-8117.
More Blog Posts:
New Reporting Requirements Take Effect for U.S. Businesses with Foreign Investors, and Businesses that Invest Abroad, New York & New Jersey Business Lawyer Blog, March 5, 2015
Export Businesses Receive Compliance Assistance from U.S. Commerce Department Software, New York & New Jersey Business Lawyer Blog, January 1, 2015
Federal Appellate Court Pierces Corporate Veil, Holds Shareholder Liable for Customs Violations, New York & New Jersey Business Lawyer Blog, October 23, 2014