On 21 October 2015, the European Commission (“EC“) decided that a tax ruling between Starbucks and the Netherlands should be considered as illegal state aid (“Starbucks-decision“). As a consequence, the EC has ordered the Dutch State to recover the aid granted to the Dutch Starbucks group company (Starbucks Manufacturing EMEA BV), which is estimated to be between € 20 – 30 million.
The Starbucks-decision has been widely reported in the national and international press. The case may become an important reference point in future discussions on the tax treatment of cross-border transactions by companies in EU member states.
Background: tax rulings and state aid investigations
The EC has been investigating tax rulings from a state aid perspective since 2013. This followed allegations in the media that some companies had received significant tax reductions by way of tax rulings issued by national tax authorities. Tax rulings aim to provide certainty to (corporate) taxpayers on the application of tax law with respect to business activities, including cross-border and intra-group transactions. The EC recognizes that tax rulings as such are not in breach of state aid rules.
However, if a tax ruling gives a company or a group of companies a selective advantage, then it may fall within the ambit of state aid rules. State aid rules dictate that a selective advantage cannot be legally granted without prior approval of the EC.
Tax rulings are used to confirm transfer pricing arrangements, which refers to the prices charged for commercial transactions between various parts of the same group of companies, in particular prices set for goods sold or services provided by one subsidiary of a corporate group to another subsidiary of the same group. Transfer pricing influences the allocation of taxable profit between subsidiaries of a group located in different countries.
If tax authorities, when accepting the calculation of the taxable basis proposed by a company, insist on a remuneration from a subsidiary or a branch on market terms, reflecting normal conditions of competition, this would exclude the presence of state aid. However, if the calculation is not based on remuneration on market terms, it could amount to favourable treatment of the company compared to the treatment other taxpayers would normally receive under the member states' tax rules. This may constitute state aid.
In the case of Starbucks the EC launched a formal investigation after its decision dated 11 June 2014 ("Formal Investigation Decision"). In this decision the EC reached the preliminary conclusion that the tax ruling in question constituted state aid. The EC has also started formal state aid investigations against Apple, Amazon and Fiat for tax rulings issued in Ireland and Luxembourg. On 21 October 2015, the EC also ruled that illegal state aid has been granted by Luxembourg in the Fiat case.
When publishing its Formal Investigation Decision in June 2014, the EC noted that its preliminary inquiries had shown that the quality and the consistency of the scrutiny by the tax authorities differed substantively across member states specifically with regard to tax rulings. In particular, the EC noted that in general the Netherlands seemed to proceed with a thorough assessment based on comprehensive information required from the taxpayer. The EC therefore did not expect to encounter systematic irregularities in Dutch tax rulings. The EC's specific concerns pertained to the tax ruling for Starbucks Manufacturing EMEA BV. In hisresponse to the Formal Investigation Decision, the Dutch State Secretary of Finance declared that the ruling issued to Starbucks had only come about after a proper assessment and was in line with internationally accepted OECD transfer pricing guidelines, which apply indiscriminately to all Dutch taxpayers, and that the Starbucks ruling should thus not amount to state aid.
The EC has expressed its intention to continue its wider inquiry into tax rulings, which covers more member states.
In its press release dated 21 October last, the EC announced its decision that the tax ruling with Starbucks amounted to illegal state aid. It held that the transfer pricing methods endorsed by the tax ruling did not reflect the economic reality and unduly reduced Starbucks Manufacturing EMEA BV's Dutch tax liability. Indeed, the EC found that the ruling artificially lowered taxes paid by Starbucks Manufacturing EMEA BV in two ways:
1.Starbucks Manufacturing pays a royalty to Alki (a UK-based company in the Starbucks group) for coffee-roasting know-how, which is very substantial according to the EC.
2. It also pays a price for green coffee beans to Switzerland-based Starbucks Coffee Trading SARL, which the EC deems to be inflated.
In response to the EC's decision, the Dutch State Secretary of Finance explained how the Dutch government was surprised by the outcome because it was convinced that actual international standards recognized by the OECD had been applied by the Netherlands, and that the same prices used between independent parties had also been used within the Starbucks corporation. The Dutch government intends to analyse the EC's criticism carefully before making a decision on further steps.
Comments and legal questions
Since the non-confidential version of the final decision has not been published yet, it is difficult to fully assess the EC's reasoning.
A pivotal legal question to be answered is whether the application of internationally accepted transfer pricing rules in fact results in a selective advantage and thus possibly amounts to illegal state aid. The Starbucks tax ruling can only be deemed to constitute a selective advantage if other companies in a similar factual and legal situation as Starbucks were not able to get a similar deal. Following the Formal Investigation Decision several commentators have said that it is far from clear how the EC arrived at the conclusion that the tax ruling gives Starbucks a selective advantage in this respect, as the Netherlands appears to have acted in line with commonly applied OECD standards. Should the EC pursue a different interpretation of transfer pricing rules when applying state aid rules, and should this interpretation hold up before the European Courts, then this may have a significant impact on international tax policy for all member states.
The Starbuck-decision in part confirms longstanding case law: taxation of multinational companies must be within the compounds of state aid law. However, the EC seems to be willing to test the limits of the state aid law in order to put an end to certain transfer pricing rulings. Further developments in this area must be closely monitored.