The EU Commission today published a non-confidential version of its decision concluding that an advance pricing agreement (APA) granted to a Starbucks subsidiary by the Netherlands is illegal State aid and ordering recovery of the aid by the Netherlands.
The Commission’s decision was previously announced in an October 21, 2015, press release along with a summary of the Commission’s arguments. The decision is being challenged by the Netherlands in the European Court of Justice in a suit that was brought in December 2015.
At issue is a 2008 APA issued by the Netherlands to Starbucks Manufacturing BV (SMBV), which roasts, packages, and stores coffee beans, and performs related functions, such as acting as an intermediary distribution company for non-coffee items like Starbucks cups and napkins.
The Commission disputes multiple aspects of the Netherlands APA, which is is based on a transfer pricing report that uses the transactional net margin method (TNMM).
The APA applied a mark-up of 9–12 percent of SMBV’s operating expense to determine SMBV’s arm’s length remuneration for provision of roasting services and associated supply chain activities. Profits generated by SMBV in excess of that were transferred to Alki LP, a related UK limited partnership, as a tax deductible royalty for the license of intellectual property needed to roast coffee beans.
The Commission, determined, however, that the license to use the intellectual property should have been valued at zero because SMBV did not derive benefit from it. By accepting the incorrect methodology in the APA, the Netherlands conferred a selective advantage on SMBV, the Commission said.
The Commission also said the price paid by SMBV for green coffee beans to a related Swiss company was inflated.
The Commission also found that SMBV was wrongly considered as having the “least complex function” for purposes of the application of the TNMM. The Netherlands should not have accepted Starbuck’s assertion that SMBV only performed routine functions; the subsidiary performed important resale functions, the Commission said.
The Commission has previously estimated recovery due on account of the aid as between EUR 20 million and 30 million.
The decision is one of a three negative of decisions with recovery adopted by the Commission that challenge tax rulings issued by EU Members State to multinationals, all of which are being contested in the EU Court of Justice. In addition to the Starbucks APA, the Commission has challenged a ruling granted by Luxembourg to a Fiat subsidiary and rulings that apply the excess profit scheme in Belgium.
The Commission is also currently investigating tax rulings issued to Apple by Ireland and to Amazon and McDonald’s by Luxembourg.
The Commission actions follow allegations that EU Member States have been issuing overly generous tax rulings contrary to EU law to lure foreign investment.
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