Nike is in the hot seat with the European Commission over whether it received preferential tax treatment in the Netherlands.
The Commission has launched an in-depth investigation into whether Nike unfairly benefitted from tax rulings in the Netherlands it says offered an unfair advantage.
“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,” Margrethe Vestager, the commissioner in charge of competition policy, said. “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.”
The “complex structure” in question is a system in which two Nike group companies, Nike European Operations Netherlands BV and Converse Netherlands BV, “license” out the right to sell Nike products by agreeing to royalty payments sent to a non-taxable Nike group entity. The favorable rulings came into effect when it came time to calculate the royalty payments.
The Dutch government determined, over five rulings made from 2006 to 2015, that the royalty would be calculated based on a limited operating margin that was based on sales in the country. The Commission said those rulings “may not reflect economic reality” and that the tax breaks Nike receives in the Netherlands are higher than what independent companies would normally negotiate based on market terms in harmony with the arm’s length principle.
“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,” the Commission explained when it announced the investigation. “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.”
Responding to the investigation, Nike told Reuters it believes the move is “without merit.”
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The Netherlands, however, has already agreed to an update of its tax code. The Commission revealed that the Dutch government has announced plans to reform and tighten requirements for tax rulings on international structures—especially if the ruling is meant to allow that structure to avoid EU or Dutch taxes.
“To be clear: this does not mean that the commission has already reached a verdict, but merely that they have doubts whether or not there was state aid,” the Finance Ministry said in a statement also released by Reuters. “We will collaborate with the Commission in their investigation.”
The Commission has made a number of high-profile rulings on tax codes in recent years, often going after American companies like Apple, Starbucks and McDonalds. In 2017, for one, the Commission found that Amazon had skirted Irish tax laws, and, in turn, it recovered 282.7 million euros ($325.25 million) from the company.