Commission’s Tax Drive Unsettles Multinationals

Europe’s antitrust regulator is encroaching on what has been the preserve of national governments.

There’s a new tax sheriff in town.

Europe’s top antitrust regulator, the Brussels-based European Commission, has launched an unexpected assault on what it suspects are sweetheart tax deals for multinational companies, plowing into an area traditionally regarded as the sovereign preserve of national governments.

The political appeal is clear: to ensure major companies such as Apple Inc. AAPL +1.46%  and Amazon.com Inc. make a fair contribution to Europe’s cash-strapped government treasuries, and to enforce a level playing field for smaller companies without the clout to negotiate special treatment.

So far, the inquiry has targeted deals made by Ireland, Luxembourg and the Netherlands—small countries whose corporate-tax regimes have previously been criticized by other European Union governments. All three have bristled at the challenge from Brussels.

But tax experts are also criticizing what they describe as a land grab by the commission, the EU’s executive arm. They argue that Brussels is ill-qualified to judge technical tax matters, and risks creating huge uncertainty for companies, which had assumed that deals set with national authorities were legally watertight.

“The European Commission is really overstepping the mark,” said Keith O’Donnell, a partner with tax advisory firm Taxand Luxembourg. “Is that really the commission’s role? Do they want to make themselves the tax police across Europe?”

For its part, the commission argues that the tax investigations fall squarely within its remit. It has the right to intervene when governments distort competition in the bloc’s single market by subsidizing favored companies. Intervention is therefore justified when governments reduce taxes to select businesses, the EU’s departing antitrust chief, Joaquín Almunia, said in an interview this week.

“I think it is potentially very distortive state aid,” Mr. Almunia said.

The commission has opened investigations into four tax deals granted to Amazon and Fiat FCAU +4.12%  SpA in Luxembourg, Apple in Ireland and Starbucks Corp. SBUX +1.24%  in the Netherlands.

More are almost certain to follow. Mr. Almunia carved out a task force within his agency three years ago to focus on tax matters, he said. It is sifting through reams of information from at least nine governments on potentially unfair tax deals and so-called patent box schemes, which offer tax relief on intellectual-property earnings.

Luxembourg handed over data on a number of cases besides Amazon and Fiat over the summer, while more than 150 individual tax deals in Gibraltar, an overseas U.K. territory, are also being examined, the commission said this month. Mr. Almunia’s successor, Margrethe Vestager of Denmark, has said she considers the tax investigations a priority.

Yet, what has most raised eyebrows is the selective nature of the inquiries, and the choice of high-profile targets.

“I do agree that it seems a little bit like a witch hunt,” said Ben Jones, a tax lawyer with Eversheds in London. “It feels unfair that these companies have had their names and affairs pored over in such a way. But this type of investigation was always going to pick out certain companies because tax rulings are bespoke.”

Multinational companies—which frequently use so-called tax rulings negotiated with national authorities to confirm their tax bills in advance—are worried. Discussions around the public-relations aspects of tax planning “have now moved up to board level,” Mr. O’Donnell said.

If the commission finds problems with any of the deals under investigation, it could call into question swaths of similar deals in Luxembourg or the Netherlands, where tax rulings are common, experts said. They question the commission’s qualification to weigh in on an area that has been looked at in detail by groups such as the Organization for Economic Cooperation and Development, a rich-country think tank.

“One of the significant complaints from practitioners is: What qualifies the EU to opine on transfer-pricing agreements between a national jurisdiction and a company?” Mr. Jones said, referring to the setting of prices for goods or services sold between different units of an organization. “They don’t really have the expertise to sign off on these arrangements.”

Late last month, the commission published letters it had sent to the Irish and Luxembourg governments to explain its concerns regarding their tax deals with Apple and Fiat. The language was blunt. Costs attributed to one of Apple’s Irish subsidiaries appeared to have been “reverse engineered” to arrive at a specific taxable income, one letter said, and the company’s tax rate may have been reduced after a certain amount has been paid due to “employment considerations.”

“It’s highly technical and judgmental…something that tax advisers on two sides of a deal would argue,” Mr. O’Donnell said.

But the commission’s campaign may already have started to bear fruit. Irish Finance Minister Michael Noonan pledged this week to eliminate the controversial “double Irish” tax-avoidance measure that Apple had used.

The upshot of all this could be that the commission becomes the final arbiter for all EU tax deals, a role for which it appears to lack both qualifications and resources, experts said. While there is a clear appeal to having a central EU agency, its task could be endless.

“Does every advanced-pricing agreement need to be submitted to the commission for approval beforehand?” Mr. O’Donnell said. “That would be crazy.”