Last Tuesday, the General Court of the European Union (Court) decided in the Starbucks case, one of the State Aid cases ruled by the European Commission. The Court ruled that the Advanced Pricing Agreement (APA) between the Dutch government and Starbucks did not amount to illegal state support for the American coffee brewer, as opposed to the European Commission’s view. In its decision on the appeal, the Court said that the Commission "was unable to demonstrate the existence of an advantage in favor of Starbucks."
The dispute with the Dutch government concerns 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 (license) 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 ever 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.
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’ favor.
Nevertheless, according to the Court, the Commission has not managed to demonstrate the existence of an economic advantage within the framework of the EU treaty. As alluded to above, 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. To this point the Commission failed to demonstrate that the use of TNMM as such resulted in an unreliable outcome and a lower tax burden. This further confirms the argument of the Dutch government that under the Dutch Transfer Pricing Decree, the Dutch tax authority does not need to apply “a best method rule”. This rule implies that the best method should be used for tax base calculation purposes rather than choosing a method that is practical given the available data
An appeal may be brought against the decision of the Court within 70 days of the notification of the decision. At the same day the Court did uphold the Commission’s decision to force Fiat to pay back taxes to Luxembourg. Further analysis will follow regarding both cases and the cases pending.