European Commission probes whether Netherlands let Nike avoid taxes

by Ike Obudulu Posted on January 12th, 2019

Brussels, Belgium: The European Commission launched an investigation on Thursday into whether the Netherlands violated EU rules by allegedly giving Nike unfair tax advantages.

Two Nike operating companies based in the Netherlands, the Netherlands of Nike European Operations Netherlands BV and Converse Netherlands BV, were able to claim a tax deduction for royalty payments to two other non-taxable Dutch Nike companies.

According to the press release, “The Commission investigation will focus on whether the Netherlands’ tax rulings endorsing these royalty payments may have unduly reduced the taxable base in the Netherlands of Nike European Operations Netherlands BV and Converse Netherlands BV since 2006.” This could have given the two operating companies an unfair advantage over other corporations.

If Nike is found to have violated EU laws, the company might have to pay back taxes.

Nike claimed that the investigation was “without merit.”

The Netherlands has come under pressure from the European Commission and Dutch citizens disgruntled about special favors for big companies.

Similar investigations resulted in an order that Apple pay 14.3 billion euros, or $16.5 billion, to the Irish government in 2016 and a requirement that Amazon pay €283 million to Luxembourg in 2017. Starbucks paid €25.7 million to the Netherlands in 2015, and an investigation into Ikea is underway.

The Dutch Finance Ministry said Thursday that it was cooperating with the investigation. “We fully support the work of the commission,” the ministry said in a statement.

Nike said in its own statement that the investigation was “without merit.”

“Nike is subject to and rigorously ensures that it complies with all the same tax laws as other companies operating in the Netherlands,” the company, which is based in Beaverton, Ore., said in the statement.

The Netherlands has long been a magnet for multinational corporations, attracting more foreign investment than Germany or France because of its business-friendly tax laws and its accommodating officials.

Big companies have typically worked out arrangements with the Dutch Finance Ministry under which they minimized their tax bills by funneling profits to offshore tax havens with little or no corporate taxes. About €22 billion a year flows through the Netherlands to low-tax countries, according to the ministry, which did not provide an estimate of how much Nike might have saved.

Airbus, Fiat Chrysler, Google, IBM and the Renault-Nissan alliance are among the corporations that have headquarters in the Netherlands. Nike’s European headquarters are in Hilversum, just south of Amsterdam.

The Netherlands has come under pressure from the European Commission and Dutch citizens disgruntled about special favors for big companies. Officials in Amsterdam have responded by vowing to tighten rules that allow companies to camouflage profits as “royalties” and protect them from taxes.

Dutch officials have also said that they would no longer approve corporate structures that allowed companies to steer profits to low-tax countries and that royalties would be subject to taxation starting in 2021. The Netherlands is also moving to eliminate inconsistencies in international tax laws that corporations can exploit to avoid taxes.

Nike’s tax practices in the Netherlands have drawn scrutiny before. It used a common method of shifting profits to a tax haven, according to research published in 2017 by the International Consortium of Investigative Journalists based on leaked documents known as the Paradise Papers. (The New York Times is a member of the consortium.)

First, Nike allocated ownership of its “swoosh” trademark and other intellectual property to a subsidiary in Bermuda, which has no corporate income tax. The subsidiary in Hilversum then paid royalties for the use of the trademarks to the Bermuda unit. The royalties counted as business expenses and therefore were not taxed in the Netherlands.

The company’s strategies also lowered its tax bill in the United States and cut its worldwide tax rate to as low as 13 percent in 2017 from 35 percent in 2006, saving billions of dollars, according to the consortium.

European Commission – Nike Statement

State aid: Commission opens in-depth investigation into tax treatment of Nike in the Netherlands
Brussels, 10 January 2019

The European Commission has opened an in-depth investigation to examine whether tax rulings granted by the Netherlands to Nike may have given the company an unfair advantage over its competitors, in breach of EU State aid rules.

Margrethe Vestager, Commissioner in charge of competition policy, said: “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. The Commission will investigate carefully the tax treatment of Nike in the Netherlands, to assess whether it is in line with EU State aid rules. At the same time, I welcome the actions taken by the Netherlands to reform their corporate taxation rules and to help ensure that companies will operate on a level playing field in the EU.”

The Commission’s formal investigation concerns the tax treatment in the Netherlands of two Nike group companies based in the Netherlands, Nike European Operations Netherlands BV and Converse Netherlands BV. These two operating companies develop, market and record the sales of Nike and Converse products in Europe, the Middle East and Africa (the EMEA region).

Nike European Operations Netherlands BV and Converse Netherlands BV obtained licenses to use intellectual property rights relating to, respectively, Nike and Converse products in the EMEA region. The two companies obtained the licenses, in return for a tax-deductible royalty payment, from two Nike group entities, which are currently Dutch entities that are “transparent” for tax purposes (i.e., not taxable in the Netherlands).The Nike group’s corporate structure itself is outside the remit of EU State aid rules.

From 2006 to 2015, the Dutch tax authorities issued five tax rulings, two of which are still in force, endorsing a method to calculate the royalty to be paid by Nike European Operations Netherlands and Converse Netherlands for the use of the intellectual property.

As a result of the rulings, Nike European Operations Netherlands BV and Converse Netherlands BV are only taxed in the Netherlands on a limited operating margin based on sales. At this stage, the Commission is concerned that the royalty payments endorsed by the rulings may not reflect economic reality. They appear to be higher than what independent companies negotiating on market terms would have agreed between themselves in accordancewith the arm’s length principle.

In particular, a preliminary analysis of the companies’ activities found that:

Nike European Operations Netherlands BV and Converse Netherlands BV have more than 1,000 employees and are involved in the development, management and exploitation of the intellectual property. For example, Nike European Operations Netherlands BV actively advertises and promotes Nike products in the EMEA region, and bears its own costs for the associated marketing and sales activities.
In contrast, the recipients of the royalty are Nike group entities that have no employees and do not carry out any economic activity.

The Commission investigation will focus on whether the Netherlands’ tax rulings endorsing these royalty payments may have unduly reduced the taxable base in the Netherlands of Nike European Operations Netherlands BV and Converse Netherlands BV since 2006. As a result, the Netherlands may have granted a selective advantage to the Nike group by allowing it to pay less tax than other stand-alone or group companies whose transactions are priced in accordance with market terms. If confirmed, this would amount to illegal State aid.

The opening of an in-depth investigation gives the Netherlands and interested third parties an opportunity to submit comments. It does not prejudge the outcome of the investigation.

Background

Nike is a US based company involved worldwide in the design, marketing and manufacturing of footwear, clothing, equipment and accessories, in particular in the sports area.

Tax rulings as such are not a problem under EU State aid rules if they simply confirm that tax arrangements between companies within the same group comply with the relevant tax legislation. However, tax rulings that confer a selective advantage to specific companies can distort competition within the EU’s Single Market, in breach of EU State aid rules.

Since June 2013, the Commission has been investigating individual tax rulings of Member States under EU State aid rules. It extended this information inquiry to all Member States in December 2014.

The following investigations concerning tax rulings have already been concluded by the Commission:

  • In October 2015, the Commission concluded that 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 from Fiat and the Netherlands recovered €25.7 million from Starbucks.
  • In January 2016, the Commission concluded that selective tax advantages granted by Belgium to at least 35 multinationals, mainly from the EU, 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, including interest. Belgium has already recovered over 90% of the aid.
  • In August 2016, the Commission concluded that Ireland granted undue tax benefits to Apple, which led to a recovery of €14.3 billion by Ireland.
  • In October 2017, the Commission concluded that Luxembourg granted undue tax benefits to Amazon, which led to a recovery by Luxembourg of €282.7 million.
  • In June 2018, the Commission concluded that Luxembourg granted undue tax benefits to Engie of around €120 million. The recovery procedure is still ongoing.
  • In September 2018, the Commission found that the non-taxation of certain McDonald’s profits in Luxembourg did not lead to illegal State aid, as it is in line with national tax laws and the Luxembourg-US Double Taxation Treaty.
  • In December 2018, the Commission concluded thatGibraltar granted undue tax benefits of around €100 million to several multinational companies, through a corporate tax exemption scheme and through five tax rulings. The recovery procedure is ongoing.
  • The Commission also has an ongoing in-depth investigation concerning tax rulings issued by the Netherlands in favour of Inter IKEA and an investigation concerning a tax scheme for multinationals in the United Kingdom.

In addition to implementing comprehensively the Anti-Tax Avoidance Directives (ATAD I and ATAD II), the Netherlands have announced plans for a broad reform tightening the requirements for tax rulings concerning international structures. For example, no rulings will be granted if a tax structure involves a tax haven or if the purpose of the ruling is essentially to avoid Dutch or foreign taxes. Moreover, to enhance transparency and consistency, all Dutch tax rulings involving international structures will be centrally managed and monitored, and the tax authorities will publish an anonymous summary of all these rulings. Finally, the Netherlands have also announced plans to introduce a withholding tax on interest and royalty payments made to companies in tax havens.

The non-confidential version of the decision will be made available under the case number SA.51284 in the State aid register on the Commission’s Competition website once any confidentiality issues have been resolved. New publications of State aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News.

Author

Ike Obudulu

Ike Obudulu

Versatile Certified Fraud Examiner, Chartered Accountant, Certified Internal Auditor with an MBA in Finance And Investments who has both worked for and consulted with some of the world's largest companies on main street and wall street in over 20 countries, Ike brings his extensive reporting and investigations experience to bear on his role as Chief Editor.
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