On February 2 2016, the Dutch State Secretary for Finance (the DSSF) published a briefing in which he clarifies the main counter arguments of the Dutch Government in the Starbucks state aid case1. This publication is in response to questions from members of the Dutch Parliament regarding the decision of the European Commission (the Commission) in the Starbucks case. Aim of the briefing is to clarify the Dutch Government’s position, but also to emphasise that the Starbucks Manufacturing EMEA BV (SMBV) tax ruling, and the Dutch ruling practice in general, is valid and backed by a vast majority of the Dutch Government. We will discuss the main counter arguments below in more detail.
On October 21 2015, the Commission decided that the Netherlands granted selective tax advantages to SMBV, illegal under EU state aid rules. Based on the Commission’s decision, the Netherlands should reclaim €20 – €30 million from SMBV. Following questions about this decision from the Dutch Parliament, the DSSF provided the members of Parliament with answers on 2 February 2016. These answers further describe the position taken by the Dutch Government in its appeal against the decision of the Commission, lodged with the European Court of Justice (ECJ). In this publication, we summarise the answers provided by the DSSF on the SMBV state aid case.
General counter argument
The first counter argument brought forward concerns the use of a “new” arm’s length test by the Commission.
The DSSF rejects the arm’s length principle as applied to the state aid test by the Commission, which, according to the Commission, flows from the general principle of equal tax treatment in the Treaty on the Functioning of the European Union (i.e., Article 107). He feels that the arm’s length principle of Article 9 of the OECD Model Tax Convention, which is also implemented and further developed in Dutch tax law, is the one that should be applied in tax matters. Applying a different arm’s length principle would create uncertainties for taxpayers and tax authorities everywhere, according to the DSSF.
The Commission and the DSSF also have dissenting opinions as regards the reference system against which the SMBV Advance Pricing Agreement (APA) should be tested. The Commission applies the general Dutch system of corporate taxation as reference system, whilst the DSSF believes this should be group entities only. In order to correctly perform the state aid test on SMBV’s APA and determine whether it is illegal state aid, the reference system should be determined. Without the right reference system, it cannot be correctly determined whether SMBV received an advantage compared to other taxpayers in the reference system.
Further elaboration on the matter is not possible at this time, because the DSSF does not want to harm the Dutch interests of trial while the case is still pending with the ECJ.
Two key aspects
The Commission brought two case-specific key arguments forward in its decision:
- the royalties paid for coffee-roasting know-how to a UK based affiliate Alki LP are unusually high; and
- SMBV pays inflated prices for green coffee beans to its Swiss group company, Starbucks Coffee Trading SARL (SCTS).
The DSSF opposes these arguments on the following bases:
- Royalties to Alki LP:
The Commission states that the royalties paid by SMBV to its UK-based principal, Alki LP, do not adequately reflect market value. Its decision is largely based on the fact that no other Starbucks roasters or independent roasters are required to pay a royalty to Alki LP for use of the coffee-roasting know-how. Therefore, the Commission determines that a so-called comparable uncontrolled price was available and this price should have been used to determine an arm’s length royalty payment to Alki LP; i.e., zero.
The DSSF parries this argument by stating that the position of SMBV and other roasters is materially different. Where other roasters sell roasted beans back to their principal on a cost plus basis (and thus do not need to pay a separate royalty), SMBV sells its roasted beans directly to the Starbucks shops. The contracts with other Starbucks or independent roasters differ on (at least) this crucial point. This means that in the case at hand SMBV is responsible to collect the remuneration for, inter alia, the know-how from the Starbucks shops on behalf of Alki LP.
Since the know-how is owned by Alki LP, SMBV is then required to pay the portion of the remuneration that relates to the know-how to Alki LP in form of a royalty. In addition, the DSSF states that Alki LP would be in a permanent loss-making position if no royalties were paid to it by SMBV, as is dictated by the Commission, which would not reflect a third party situation.
- Green bean prices:
The second key aspect focuses on the potentially inflated prices for green coffee beans paid by SMBV to SCTS. The Commission states that the margin on green beans has more than tripled since 2011, substantially lowering SMBV’s profitability. Accordingly, SMBV would not even be able to generate sufficient profits to pay its royalties to Alki LP, if not for the profits generated by sales of other products such as tea, pastries and cups.
The DSSF, however, states that the purchase price of green beans is irrelevant for the levy of Dutch taxes. SMBV’s remuneration is based on the so-called Transactional Net Margin Method and therefore SMBV is entitled to a margin on it operational costs and the purchase price of green beans is not part of these operational costs. The price of green beans is therefore irrelevant for the levy of Dutch taxes.
Determining the arm’s length profit of other value adding group companies is the responsibility of the tax authorities in the country of domicile of those companies (e.g. Switzerland).
Ruling practice fully supported
In its press release dated 11 June 2014, the Commission stated that the Dutch ruling practice is generally based on a thorough assessment of comprehensive information required from the taxpayer. The Commission therefore does not consider the ruling practice systematically incorrect, but considers the SMBV case as an individual case.
Following the Commissions’s press release, the Netherlands strengthened its ruling practice even further, to align it yet more with the international developments. The Netherlands is a forerunner when it comes to adoption and implementation of anti-base erosion and profit shifting measures. In such a rapidly developing climate, certainty in advance by tax authorities is very important for both taxpayers and tax authorities.
Consequently, the DSSF repeatedly supports the SMBV ruling and the Dutch ruling practice in general and is backed by a vast majority of the Dutch Parliament in its decision to lodge an appeal with the ECJ. During this multi-year process, the Commission will continue to investigate the ruling practices of all its Member States.