Out-Law News 4 min. read

Commission may have 'gone too far' in saying that Starbucks' Netherlands tax arrangements constitute state aid, says expert

The preliminary view published by the European Commission that an agreement between the  Dutch tax authorities and coffee shop operator Starbucks amounts to unlawful state aid, may have "gone too far", according to Caroline Ramsay, a state aid expert at Pinsent Masons, the law firm behind Out-Law.com.

The European Commission said that an advance pricing agreement (APA) in which 'arm’s length' remuneration was agreed by the Dutch tax authorities for the coffee roasting activities performed in the Netherlands by Starbucks Manufacturing BV for the Starbucks group may constitute unlawful state aid. The Dutch State Secretary for Finance refuted the Commission's allegations.

Ramsay said that even though the Commission has not formally determined the issue, Starbucks may be able to challenge the fact that the Commission has launched the investigation in the first place. She said that in two recently published decisions the General Court has overruled the Commission on state aid challenges relating to tax.

Starbucks Manufacturing BV is supplied with coffee beans by a Swiss group company, which buys coffee beans for the benefit of the entire Starbucks corporate group worldwide. The beans for the European market are roasted and packaged in the Netherlands by Starbucks Manufacturing BV, which licenses intellectual property from an associated limited partnership in return for a royalty payment.

The Dutch tax authorities entered into an APA with Starbucks in relation to the prices charged between Starbucks Manufacturing BV and other group companies for the services it performed. APAs are tax rulings used to confirm transfer pricing arrangements, which are the prices charged for commercial transactions between various parts of the same group of companies.

The internationally agreed standard for setting transfer prices is the 'arm’s length principle' which requires that the commercial and financial arrangements between associated enterprises should not differ from the arrangements which would be made between independent companies. The Organisation for Economic Cooperation and Development's (OECD's) transfer pricing guidelines set out methods for calculating the arm's length price.

The Commission said that it had doubts as to whether, in applying the OECD guidelines, the Dutch tax authorities should have accepted that Starbucks Manufacturing BV was a low risk 'toll' or 'contract' manufacturer, a term used to describe an arrangement whereby a company processes raw materials or semi-finished goods for another company but does not negotiate commercial arrangements for the sale of the products and does not take other commercial risks in relation to the products. The Commission also expressed doubts about the way the supply of other materials such as paper cups had been treated for transfer pricing purposes and also the way the royalty payments had been calculated.

In a letter to the Netherlands House of Representatives, the Netherlands State Secretary for Finance, Eric Wiebes, stated that method of calcuting prices in the APA with Starbucks Manufacturing BV conformed to the  OECD Guidelines. He stated that the Starbucks APA had been carefully and sufficiently substantiated and that Starbucks Manufacturing BV did not enjoy a 'selective advantage'.

Caroline Ramsay said that in two recently released decisions, the EU General Court has challenged decisions of the European Commission that a Spanish tax scheme breached state aid rules. The General Court overturned the Commission's decisions on the basis that the Spanish scheme was not selective as it was simply a corporate tax relief to all companies which satisfied the conditions of the relief. She said that these cases "show that the General Court is not going to blithely follow the Commission on state aid challenges relating to tax".

In the Starbucks case Eric Wiebes stressed that the Netherlands was merely applying the OECD guidelines and Dutch domestic law and therefore Starbucks did not enjoy a selective advantage.

Heather Self, a tax expert at Pinsent Masons, said that the response from the Netherlands was "very robust" in pointing out that a proper transfer pricing study had been done, the APA was in accordance with OECD principles and the  resulting price was arm's length. The response also points out that OECD guidelines allow taxpayers to choose the transfer pricing method, provided it results in an arm’s length outcome for the transaction in question and the OECD guidelines do not prescribe a specific method for a specific situation.

"The Commission are putting forward a very detailed and technical challenge to a company which has done a full transfer pricing study," Self said. "If upheld, this approach will make it difficult for any company to be confident that its ruling is safe from attack."

Self also pointed out that it appeared that the flow of information between the Netherlands and the Commission appeared to have been rapid and full, in contrast to the position with Luxembourg, where the Commission has taken a more critical tone.

Earlier this month leaked documents obtained by journalists showed some companies paying an effective 1% rate of tax on profits moved from higher tax jurisdictions to Luxembourg through the use of "complicated accounting and legal structures".

In-depth investigations into whether tax arrangements adopted by Starbucks in the Netherlands, Apple in Ireland and Fiat Finance and Trade in Luxembourg amounted to "unjustifiable" state aid were announced by the Commission in June. This was followed by an announcement in October that the Commission was to conduct an "in-depth investigation" into whether corporation tax arrangements agreed between Amazon and the tax authorities in Luxembourg in 2003 were illegal state aid.

The European Commission does not have direct authority over national direct tax systems. However, it can investigate whether certain advantageous fiscal regimes would be prohibited under its state aid rules, which are intended to prevent the distortion of competition when national governments grant advantages or incentives to particular companies. If the Commission rules that member states have given unlawful state aid, any company found to have benefited has to pay back any illegal reliefs granted over a period usually covering up to 10 years.

All stakeholders, including Starbucks itself, now have one month to respond to the  Commission's initial view. The Commission will then conduct a further investigation. It generally seeks to reach a final decision within 18 months of initiating an investigation procedure, so the case should be concluded by mid-2016.

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