European Commission is investigating whether royalties paid to Nike's offshore units were higher than the market value of the intellectual property. Photo: AP

INTERNATIONAL – European authorities are investigating whether the Dutch government illegally allowed the American sportswear maker Nike to avoid paying taxes on profits from sales in the region, potentially exposing the company to huge penalties similar to those imposed on Apple and Amazon.

The inquiry, announced this week, is part of a broader European Commission crackdown on countries like Ireland, Luxembourg and the Netherlands over accusations that they gave questionable tax breaks to multinational companies, many of them based in the US, as a way of attracting corporate headquarters and white-collar jobs.

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

The Dutch finance ministry said it was co-operating with the investigation. “We fully support the work of the commission,” the ministry said in a statement.

Nike said 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, Oregon, said in a 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 minimised their tax bills by funnelling profits to offshore tax havens with little or no corporate taxes. 

About €22bn 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 favours 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 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 from 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.

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 US and cut its worldwide tax rate to as little as 13 percent in 2017 from 35 percent in 2006, saving billions of dollars, according to the consortium.

The European Commission is investigating whether the Dutch government violated EU rules by approving the tax avoidance scheme and giving Nike and its Converse unit an unfair advantage over competitors.

From 2005 to 2015, the commission said in a statement, the Dutch authorities endorsed Nike’s method for calculating the tax-deductible royalties paid to offshore subsidiaries. 

The commission said it was examining whether the royalties paid to the offshore units, which had no employees, were higher than the market value of the intellectual property.

By paying an inflated price for the royalties, Nike could claim a larger tax deduction.  

The New York Times