EU probes Nike over Dutch tax arrangements

Nike is the latest multinational to find its tax affairs under scrutiny from Brussels, with the European Commission launching an investigation into whether five Dutch tax rulings in favour of Nike may have given the US trainer behemoth an unfair advantage

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

Both companies obtained licenses to use intellectual property rights relating to Nike and Converse products in the EMEA region, 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 Commission said. 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 NEON and Converse Netherlands for the use of the intellectual property.

As a result of the rulings, both companies are only taxed in the Netherlands on a limited operating margin based on sales. At this stage, the Commission says it 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 accordance with the arm's length principle.

In particular, a preliminary analysis of the companies' activities found that NEON and Converse Netherlands have more than 1,000 employees and are involved in the development, management and exploitation of the intellectual property.

For example, NEON 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’s investigation will focus on whether the Netherlands' tax rulings endorsing these royalty payments may have unduly reduced the taxable base in the Netherlands of NEON and Converse Netherlands 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.

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.’

In a statement, Nike said the company was ‘subject to and rigorously ensures that it complies with all the same tax laws as other companies operating in the Netherlands’ and said the Commission’s investigation was ‘without merit’.

The Commission has been investigating individual tax rulings of member states under EU state aid rules since June 2013. Over that period, it has found that a number of countries have granted selective tax advantages to multinationals, which has resulted in repayments from Starbucks, Fiat, Amazon, Engie and others.

The largest recovery so far is the €14.3bn (£12.9bn) repaid by Apple to Ireland. The sole investigation which did not find evidence of unfair advantage was one into non-taxation of certain of McDonald’s profits in Luxembourg, which was judged to be in line with the national tax laws and the Luxembourg-US double taxation treaty.

Report by Pat Sweet

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