By Slaughter and May
The European Court ruled yesterday that the EU Commission had not been able to demonstrate that the advance pricing agreement between Starbucks and the Dutch tax authority amounted to illegal State aid.
The Starbucks Dutch company concerned was responsible for buying and roasting coffee beans and supplying these, and other consumables, to EMEA Starbucks companies. In order to do this, it paid a royalty, deductible for Dutch tax purposes, to another Starbucks group company.
The Court held that, although tax was a “national competency” for member states, the application of the arm’s length principle, which underlies the transfer pricing rules, was still something that the Commission was entitled to investigate. This did not, however, mean that the Commission could challenge the methodology just because it thought it was incorrect – it had to show that the APA terms agreed were not arm’s length AND that the APA amounted to a selective advantage over other companies such that it was State aid.
The Court held that the Commission had not been able to demonstrate this, and so Starbucks won its appeal. The Commission expressly accepted that Member States have a margin of appreciation in applying their transfer pricing rules – and so, implicitly, that the State aid process should be used to police only the more extreme divergences from an arm’s length result.
In another case, Fiat, the Court found that a tax ruling given by the Luxembourg tax authorities relating to certain intra-group financing arrangements did, on its facts, amount to State aid.
These decisions are potentially a significant development in the Commission’s recent expansion of its activities into using State aid to investigate tax arrangements between Member States and individual taxpayers, as it demonstrates the problems for the Commission in winning these cases – every case depends on its own facts. This may explain the difference between the two decisions – is it easier for the Commission to find comparables for financing transactions than for other more bespoke commercial arrangements?
In any event, some may well question whether cases such as this are a useful use of the Commission’s time. Certainly in the UK, transfer pricing cases are rarely litigated in the domestic courts, because the cases are so fact dependent and evidence intensive. It is one thing for the Commission to spend time and resources investigating legislative provisions in tax regimes – such as the UK CFC rules and the Belgium excess profits regime – but surely, as a general matter, member states need to be trusted to implement their tax regimes properly?
As for Starbucks, some might argue that the real tax issue here is how the royalty income was taxed. Few would doubt that there is real value in the Starbucks name and its “way of doing business”, but where is this IP owned and developed? And if the answer to this is the US, then why was the US not taxing this income?