Earlier this month, the General Court of the European Union ruled that an Advanced Pricing Agreement between the Dutch government and Starbucks did not amount to illegal state support.
Sara Luder, a Partner and Head of Tax at law firm Slaughter and May, said the EU Commission had been unable to demonstrate that the advance pricing agreement or ‘APA’ between Starbucks and the Dutch tax authority amounted to illegal aid.
Starbucks’ Dutch company was responsible for buying and roasting coffee and supplying it, and other consumables, to EMEA Starbucks companies. In order to do this, it paid a royalty, deductible for Dutch tax purposes, to another Starbucks group company.
The Court held that, although tax was a ‘national competency’ for member states, the application of the arm’s length principle, which underlies the transfer pricing rules, was still something that the Commission was entitled to investigate.
“This did not, however, mean that the Commission could challenge the methodology just because it thought it was incorrect,” said Luder.
“It had to show that the APA terms agreed were not arm’s length and that the APA amounted to a selective advantage over other companies such that it was State aid.”
The Court held that the Commission had not been able to demonstrate this, and so Starbucks won its appeal. The Commission expressly accepted that member states have a margin of appreciation in applying their transfer pricing rules – and so, implicitly, that the state aid process should be used to police only the more extreme divergences from an arm’s length result.
Tax specialist Taxand said the dispute concerned an APA issued in 2008 to Starbucks Manufacturing BV, a Dutch subsidiary of Starbucks involved in the processing of coffee beans and performing related functions such as distribution activities.
The BV obtained its coffee beans from a Swiss central procurement entity of the group. The BV also pays a royalty (licence) to a UK group company regarding the production process and for the delivery of coffee to shop operators.
“The Commission claimed that no sufficient evidence was provided to the Dutch authorities to substantiate the claim that the entity was indeed a limited-risk toll manufacturer. The use and method of application of the transactional net margin method (TNMM) for the remuneration of the BV was according to the Commission erroneous,” Taxand explained.
“The Court decided that the at arm’s length principle is a tool that falls within the exercise of the Commission powers to assess the occurrence of illegal state aid (article 107 TFEU) even if the member state’s national law apply the arm’s length principle differently or do not contain such principle at all. It seems that on this point the Court did not rule in the Netherlands’ favour.”
“According to the Court, the Commission did not manage to demonstrate the existence of an economic advantage within the framework of the EU treaty.
“The Commission believes that the choice for the TNMM led to a substantially lower taxable profit than would have been if the Comparable Uncontrolled Price Method (CUP) was chosen. The Commission failed to demonstrate that the use of TNMM as such resulted in an unreliable outcome and a lower tax burden.”