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Starbucks' Dutch Tax Ruling Vindicated By EU General Court

by Ulrika Lomas,, Brussels

27 September 2019

On the same day the Court ruled against Fiat's appeal, the EU General Court has decided that Starbucks was not in fact granted a selective tax advantage in a Dutch tax ruling, contrary to a European Commission conclusion.


In 2008, the Netherlands tax authorities concluded an advance pricing arrangement (APA) with Starbucks Manufacturing EMEA BV (SMBV), part of the Starbucks group. The objective of that arrangement was to determine SMBV's remuneration for its production and distribution activities within the group.

Thereafter, SMBV's remuneration served to determine annually its taxable profit on the basis of Netherlands corporate income tax. In addition, the APA endorsed the amount of the royalty paid by SMBV to Alki, another entity of the same group, for the use of Starbucks' roasting IP.

More specifically, the APA provided that the amount of the royalty to be paid to Alki corresponded to SMBV's residual profit. The amount was determined by deducting SMBV's remuneration, calculated in accordance with the APA, from SMBV's operating profit.

In 2015, the Commission found that the APA constituted aid incompatible with the internal market and ordered the recovery of that aid.

The Commission concluded: "The Commission's investigation established that the royalty paid by Starbucks Manufacturing to Alki cannot be justified as it does not adequately reflect market value. In fact, only Starbucks Manufacturing is required to pay for using this know-how – no other Starbucks group company nor independent roasters to which roasting is outsourced are required to pay a royalty for using the same know-how in essentially the same situation ... the existence and level of the royalty means that a large part of its taxable profits are unduly shifted to Alki, which is neither liable to pay corporate tax in the UK, nor in the Netherlands."

In a letter submitted to the Commission in November 2015, the Dutch Ministry of Finance said that, in accordance with the OECD framework for transfer pricing, it had applied the Transactional Net Margin Method to the APA in question. The Commission, on the other hand, had used "its own interpretation and application of the OECD guidelines about the transfer pricing methods, with the result that, according the Commission, the so-called Comparable Uncontrolled Price method should have been applied," the Government said.

Legal arguments

The Netherlands and Starbucks brought an action before the General Court for annulment of the Commission's decision. They principally dispute the finding that the APA conferred a selective advantage on SMBV.

More specifically, they criticized the Commission for:

  • having used an erroneous reference system for the examination of the selectivity of the APA;
  • having erroneously examined whether there was an advantage in relation to an arm's length principle particular to EU law and thereby violated the member states' fiscal autonomy;
  • having erroneously considered the choice of the transactional net margin method (TNMM) for determining SMBV's remuneration to constitute an advantage; and
  • having erroneously considered the detailed rules for the application of that method as validated in the APA to confer an advantage on SMBV.

Court's ruling in cases Netherlands v. Commission (T-760/15) and Starbucks and Starbucks Manufacturing Emea v. Commission (T-636/16)

In its September 24, 2019, judgment, the General Court annulled the Commission's decision.

First, the Court examined whether, for a finding of an advantage, the Commission was entitled to analyze the tax ruling at issue in the light of the arm's length principle as described by the Commission in the contested decision, finding that it was.

As in its Fiat ruling, it made clear that the arm's length principle is a tool that allows the Commission to check that intra-group transactions are remunerated as if they had been negotiated between independent companies. To determine the existence of an advantage, the Commission must compare the terms applied in the ruling to "normal" taxation, with reference to the terms that would be agreed in a comparable factual situation between similarly situated entities.

The Court therefore rejected the claim that the Commission erred in identifying an arm's length principle as a criterion for assessing the existence of State aid.

Second, the Court reviewed the merits of the various lines of reasoning set out in the contested decision to demonstrate that, by endorsing a method for determining transfer pricing that did not result in an arm's length outcome, the APA conferred an advantage on SMBV.

The Court began by examining the dispute as to the Commission's principal reasoning. It notes that, in the context of its principal reasoning, the Commission found that the APA had erroneously endorsed the use of the TNMM. The Commission first stated that the transfer pricing report on the basis of which the APA had been concluded did not contain an analysis of the royalty which SMBV paid to Alki or of the price of coffee beans purchased by SMBV from SCTC, another entity of the group.

Next, in examining the arm's length nature of the royalty, the Commission applied the comparable uncontrolled price method (CUP method). As a result of that analysis, the Commission considered that the amount of the royalty should have been zero. Last, the Commission considered, on the basis of SCTC's financial data, that SMBV had overpaid for the coffee beans in the period between 2011 and 2014.

The Court held that mere non-compliance with methodological requirements does not necessarily lead to a reduction of the tax burden and that the Commission would have had to demonstrate that the methodological errors identified in the APA did not allow a reliable approximation of an arm's length outcome to be reached and that they led to a reduction of the tax burden.

As regards the error identified by the Commission in respect of the choice of the TNMM and not of the CUP method, the Court found that the Commission did not invoke any element to support as such the conclusion that that choice had necessarily led to a result that was too low, without a comparison being carried out with the result that would have been obtained using the CUP method. The Court said, therefore, that the Commission wrongly found that the mere choice of the TNMM, in the present case, conferred an advantage on SMBV.

Likewise, the Court stated that the mere finding by the Commission that the APA did not analyze the royalty does not suffice to demonstrate that that royalty was not actually in conformity with the arm's length principle.

As regards the amount of the royalty paid by SMBV to Alki, according to an analysis of SMBV's functions in relation to the royalty and an analysis of comparable roasting agreements considered by the Commission in the contested decision, the Court found that the Commission failed to demonstrate that the level of the royalty should have been zero or that it resulted in an advantage within the meaning of the Treaty on the Functioning of the EU.

TAGS: compliance | Finance | tax | European Commission | Netherlands | mining | Manufacturing | law | fees | agreements | transfer pricing | Europe

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