Today, the European Commission announced its final decisions in the formal state aid investigations into advance pricing agreements (APAs) concluded by Starbucks (The Netherlands) and Fiat (Luxembourg). It is the European Commission’s view that the APAs concluded with Starbucks and Fiat constitute state aid. In both cases, the European Commission states that the tax burden was unduly reduced by EUR 20 to 30 million over the period under investigation. The European Commission requires The Netherlands and Luxembourg to recover such state aid from Starbucks and Fiat respectively.
According to Article 107(1) of the Treaty on the Functioning of the European Union (TFEU), state aid which affects trade between Member States and distorts, or threatens to distort, competition by favouring certain undertakings, is incompatible with the EU Single Market. The European Commission considers that APAs should not have the effect of granting taxpayers lower taxation than other taxpayers in a similar legal and factual situation.
The final decisions can be challenged before the Court of Justice of the European Union under Article 263 of the TFEU, by the Member State involved, other Member States, beneficiaries and other parties who are directly and individually concerned.
The European Commission finds that a royalty paid by Starbucks Manufacturing EMEA BV (Starbucks Manufacturing) for the use of know-how cannot be justified as it does not adequately reflect market value. Only Starbucks Manufacturing is required to pay for using this know-how whereas 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 European Commission finds that in the case of Starbucks Manufacturing the existence and level of the royalty means that a large part of its taxable profits is unduly shifted.
Furthermore, the European Commission finds that Starbucks Manufacturing’s tax base is unduly reduced by an inflated price it pays for green coffee beans to a Swiss group company, Starbucks Coffee Trading Sarl. Due to this high key cost factor in coffee roasting, Starbucks Manufacturing's coffee roasting activities alone would not actually generate sufficient profits to pay the royalty for coffee roasting know-how. The European Commission finds that the royalty mainly shifts profits generated from sales of other products sold to the Starbucks outlets, which represent most of the turnover of Starbucks Manufacturing.
The Dutch State Secretary of Finance (State Secretary) today informed the Dutch parliament that he is surprised about the contents of the decision, that he is convinced that the Netherlands has adhered to international standards (i.e. set by the OECD), that he will review the final decision and then decide on further action.
The European Commission finds that the APA concluded by Fiat Finance and Trade Sarl (FFT) endorses a methodology that is not appropriate for the calculation of taxable profits reflecting market conditions. In particular, the European Commission finds it artificially lowers taxes paid in Luxembourg by FFT.
According to the European Commission due to a number of economically unjustifiable assumptions and down-ward adjustments, the capital base approximated by the tax ruling is much lower than the company's actual capital. In addition, the estimated remuneration applied to this already lower capital for tax purposes is also lower compared to market rates.
The Luxembourg government issued a press release today stating that they disagree with the European Commission that state aid was granted, and further that they will review the final decision and then decide on further action.
The two final decisions confirm that the European Commission is determined to challenge potential state aid elements embedded in APAs, examining in a very detailed manner the transfer pricing methods agreed to by tax authorities. Although the non-confidential versions of the final decisions will not be published until confidentiality issues have been resolved, today’s announcement of the European Commission already gives sufficient guidance to warrant a renewed look at existing APAs.
The announcement by the European Commission in relation to the Starbucks and Fiat final decisions can be found here. The press release of the State Secretary can be found here. The press release of the Luxembourg government can be found here.
Two other formal state aid investigations into individual tax rulings are still ongoing involving Apple (Ireland) (Tax Flash of 30 September 2014) and Amazon (Luxembourg) (Tax Flash of 16 January 2015). The European Commission has also opened a formal state aid investigation into the Belgian excess profit ruling system (opening decision of 5 June 2015). On 8 June 2015, the European Commission requested a substantial number of individual tax rulings from 15 Member States (Tax Flash of 9 June 2015). More formal state aid investigations in relation to tax rulings can be expected to follow.