EC Releases Early Finding On Starbucks APA Probe
The European Commission, in an “Opening Decision” published on November 14, 2014, said that an advance tax ruling provided by the Netherlands to coffee group Starbucks appears to constitute state aid, in violation of European Union (EU) rules.
In a 40-page letter to the Dutch authorities, the Commission detailed the preliminary findings of its investigation into whether a tax ruling in favor of Starbucks BV (comprising Starbucks Coffee EMEA BV and Starbucks Manufacturing EMEA BV) constituted new aid. It focuses on a ruling concluded with Starbucks Manufacturing BV in April 2008.
The advance pricing agreement (APA) in question was used by Starbucks Manufacturing BV to calculate its corporate income tax basis in the Netherlands.
The Commission said that, at this stage, it considers that the measure “appears to constitute a reduction of charges that should normally be borne by the entities concerned in the course of their business, and should therefore be considered as operating aid. According to the Commission practice, such aid cannot be considered compatible with the internal market in that it does not facilitate the development of certain activities or of certain economic areas, nor are the incentives in question limited in time, digressive, or proportionate to what is necessary to remedy to a specific economic handicap of the areas concerned.”
Article 107(1) of the Treaty on the Functioning of the European Union (TFEU) stipulates that any aid granted by an EU member state or through state resources that distorts, or threatens to distort, competition by favoring certain undertakings or the provision of certain goods shall be deemed incompatible with the common market.
According to the Opening Decision from the Commission, which comprehensively sets out details of the group’s structure and the allocation of functions, assets, and risks among related parties, concern is being raised about three areas of the ruling. The Commission said it will examine whether the APA concluded with Starbucks Manufacturing BV complies with the principles aforementioned with a focus on three areas:
Whether the Dutch tax authorities correctly accepted Starbucks Manufacturing BV’s classification as a low-risk toll manufacturer when it concluded the APA with that undertaking. Toll manufacturing is an arrangement by which a company, usually by means of specialized equipment or production processes, processes raw materials, or semi-finished goods for another company;
Whether the Dutch tax authorities were right to accept the first and second adjustments made by Starbucks Manufacturing BV’s tax advisor when it concluded the APA with that undertaking. The Commission said, even if the Dutch authorities were right to accept the classification of Starbucks Manufacturing BV’s classification as a low-risk toll or contract manufacturer and that adjustments to its cost base to apply the mark-up were therefore necessary, quod non, the Commission has doubts on the appropriateness of those adjustments; and
Whether the Dutch authorities were right to accept Starbucks Manufacturing BV’s interpretation of the APA as regards the calculation of royalties in its profit and loss, insofar as the level of those royalties is not linked to the value of the Intellectual Property in question.
The Dutch State Secretary for Finance, Eric Wiebes, responded to the Opinion stating that he is confident that the investigation “will ultimately show that no state aid has been provided.”
“The Dutch tax authorities fully apply the recognized arm’s length principle, as further explained in the OECD Guidelines and further elaborated in the Transfer Pricing Decree.”
Noting the Commission’s three doubts, he said: “On the basis of these doubts, the Commission feels that the Starbucks APA might not comply with the arm’s length principle. It therefore believes that the Dutch Government may have granted Starbucks Manufacturing BV a selective advantage which qualifies as state aid. The Commission now intends to investigate further whether state aid has actually been provided.”
“I can inform your House that the arm’s length principle has been carefully implemented in Dutch legislation that is, section 8b of the Corporation Tax Act 1969) and that the Transfer Pricing Decree is fully in line with the international standard laid down in Article 9 of the OECD Model Tax Convention.”
“The Dutch tax authorities fully apply the recognised arm’s length principle, as further explained in the OECD Guidelines and further elaborated in the Transfer Pricing Decree.”
“Based on all the information available, I am convinced that the approved method (the transactional net margin method) and remuneration comply with the arm’s length principle. Since the transfer prices used by Starbucks Manufacturing BV were determined in accordance with the OECD Guidelines and national legislation based on them, Starbucks Manufacturing BV does not enjoy a selective advantage. In my view, the Commission can only conclude that state aid exists in relation to transfer pricing in a specific case if it can demonstrate that the OECD Guidelines and the arm’s length principle have clearly been departed from. The Starbucks APA has been carefully and sufficiently substantiated.”
He concluded: “My conviction that the APA with Starbucks Manufacturing BV is fully in line with international transfer pricing standards is consistent with the policy framework applied by the Government in its efforts to create an attractive business climate. It is essential to respect internationally agreed standards and to give sufficient and targeted consideration to combating misuse, because only then will the policy pursued be truly sustainable.”
The Commission has asked the Netherlands to submit comments and provide all such information as may help to assess the measure. The Dutch authorities have until December 14 to comply.
