Tax rulings by EU member states that allowed two multinational companies to pay much less than they should have, have been declared illegal state aid by the EU Commission.

As a result, Starbucks and Fiat Finance & Trade will each have to pay an additional €20-30m in tax to the Netherlands and Luxembourg respectively. The Commission is looking at further cases also involving Belgium and Ireland.

The rulings challenged took the form of comfort letters issued by the national tax authorities to give the companies clarity on how their corporate tax would be calculated, or on the use of special tax provisions. While such letters are perfectly legal, the decisions under investigation endorsed artificial and complex methods to establish taxable profits which do not reflect economic reality. Under the schemes, most of the profits of Starbucks' coffee roasting company are shifted abroad, where they are also not taxed, and Fiat's financing company only paid taxes on underestimated profits.

In its decisions the Commission has applied the principle that tax rulings cannot use methodologies, no matter how complex, to establish transfer prices with no economic justification and which unduly shift profits to reduce the taxes paid by a company. Such moves give that company an unfair competitive advantage over other companies (typically SMEs) that are taxed on their actual profits because they pay market prices for the goods and services they use.

It has therefore ordered Luxembourg and the Netherlands to recover the unpaid tax from Fiat and Starbucks, respectively, in order to remove the unfair competitive advantage they have enjoyed and to restore equal treatment with other companies in similar situations. The companies will also no longer be able to benefit from the advantageous tax treatment granted.

The Commission continues to pursue its inquiry into tax rulings practices in all EU member states. Formal investigations have been opened concerning Apple in Ireland, Amazon in Luxembourg, and a Belgian tax scheme, though the Commission emphasised that today's announcement does not prejudge any of these cases.

Marc Sanders, partner at international business advisers Taxand, said the rulings would "rock the corporate world to its very core, as what were thought to be legitimate agreements created by the Governments of European countries are retrospectively declared illegal state aid".

He commented: "The Commission has to make a compelling case that the arm’s length principle in these individual cases was sufficiently selective to constitute state aid. This is likely to be hugely problematic as, in addition to member states being the ultimate arbiter in transfer pricing matters, all taxpayer agreements, rulings, APAs, settlements of litigation with every international business could potentially be seen as state aid."

Mr Sanders predicted that lengthy legal proceedings would follow, resulting either in contrary outcomes or, if governments have to recoup additional tax, "a severe eroding effect on their relationships with businesses and significant consequences for the US Government if it is then backed into a corner of issuing tax credits". "Regardless of the technical merits of the approach, the decision creates massive instability and increases the cost of doing business for multinationals in the EU", he added.