Commission Decision (EU) 2017/502
of 21 October 2015
on State aid SA.38374 (2014/C ex 2014/NN) implemented by the Netherlands to Starbucks
(notified under document C(2015) 7143)
(Only the Dutch text is authentic)
(Text with EEA relevance)
THE EUROPEAN COMMISSION,
Having regard to the Treaty on the Functioning of the European Union, and in particular the first subparagraph of Article 108(2) thereof,
Having regard to the Agreement on the European Economic Area, and in particular Article 62(1)(a) thereof,
Whereas:
By letter dated 30 July 2013, the Commission requested the Dutch authorities to provide information on the tax ruling practice in the Netherlands as well as all rulings related to Starbucks Coffee EMEA BV (hereinafter: ‘Starbucks Coffee BV’) and Starbucks Manufacturing EMEA BV (hereinafter: ‘SMBV’), both companies indirectly controlled by Starbucks Corporation. Starbucks Corporation and all the companies controlled by that corporation are referred to hereinafter collectively as ‘Starbucks’ or the ‘Starbucks group’.
On 9 January 2014, in preparation of a meeting to be held on 15 January 2014, the Commission sent an email to the Dutch authorities listing a number of questions concerning, among others, the transfer pricing arrangement agreed upon in the Starbucks Coffee BV APA and the SMBV APA concluded by the Dutch tax administration.
On 15 January 2014, a meeting was held between the Commission services and representatives of the Dutch tax administration in which the Commission services sought, among others, further clarifications on the adjustments made to the cost base in the transfer pricing report as regards the SMBV APA and the fluctuating royalty payments made by SMBV.
By letter dated 28 January 2014, in response to the questions posed in the meeting of 15 January 2014, the Dutch authorities provided information on the comparability adjustments, the choice of the comparable companies and the fluctuating royalty. Further information on the documents provided is described in recitals 59 to 62 of the Opening Decision as mentioned in recital 9.
By letter dated 21 March 2014, the Dutch authorities responded to the letter of 7 March 2014 and provided the requested tax returns. The Dutch authorities also confirmed that all relevant documents regarding the APAs submitted previously to the Commission had already been provided to the Commission.
On 6 May 2014, a meeting was held between the Commission services and representatives of the Dutch tax administration.
By letter dated 16 July 2014, the Dutch authorities submitted their comments on the Opening Decision. The submission included, among others, the Roasting Agreement between Alki Limited Partnership (hereinafter: ‘Alki LP’) and SMBV and the Green Coffee Purchase Agreement between SMBV and Starbucks Coffee Trading Company SARL (hereinafter: ‘SCTC’).
By letter dated 25 November 2014, the Commission requested the Dutch authorities to provide the information asked for in the Opening Decision which was only partly submitted by the Dutch authorities on 16 July 2014 and to provide additional information necessary to analyse the SMBV APA.
By letter dated 19 December 2014, the Dutch authorities replied to the letter of 25 November 2014, indicating that part of the requested information is not in the possession of the Dutch authorities.
On 19 December 2014, the Opening Decision was published in the Official Journal of the European Union. The Commission invited interested parties to submit their comments on the measure.
By letter dated 16 January 2015, Starbucks submitted its observations on the Opening Decision. Comments on the Opening Decision were also submitted by the Dutch Association of Tax Advisors (De Nederlandse Orde van Belastingadviseurs, hereinafter: ‘NOB’), the Confederation of Netherlands Employers and Industry (Verbond van Nederlandse Ondernemingen & Nederlands Christelijk Werkgeversverbond, hereinafter: ‘VNO-NCW’), ATOZ Tax Advisers Luxembourg, Oxfam International and the Austrian Chamber of Commerce (the Bundesarbeitskammer Österreich, hereinafter: ‘BAK’).
By letter dated 8 January 2015, in response to the Commission's letter of 25 November 2014, the Dutch authorities provided the limited partnership deed constituting Alki LP.
By letter dated 18 February 2015, the Commission informed the Dutch authorities that it had received observations by a competitor on the value added of the roasting process to green coffee beans and invited the Dutch authorities to comment on this observation. The Dutch authorities submitted their comments on those observations by letter dated 11 March 2015.
By letter dated 12 March 2015, the Netherlands provided its permission to contact Starbucks directly in response to the Commission's letter of 6 February 2015. Following that permission, by letter dated 16 March 2015, the Commission requested Starbucks, based on Article 6(a)(6) of Regulation (EC) No 659/1999, to provide information on the legal structure, the business model with regard to the Starbucks shops, and the raw material used by SMBV, i.e. the green coffee beans (hereinafter: the ‘Starbucks MIT request’).
By letters dated 20 and 26 March 2015, the Dutch authorities submitted their observations on the comments of third parties to the Opening Decision.
On 7 April 2015, following the adoption of the decision of 12 February 2015 and in accordance with Article 6a(6) of Regulation (EC) No 659/1999, the Commission contacted four competitors of Starbucks to provide market information on their business model and their value creating activities so as to enable the Commission to complete its assessment of the case (hereinafter: the ‘competitor MIT request’). Those four competitors included Company Y, Alois Dallmayr Kaffee oHG (hereinafter: ‘Dallmayr’), Nestlé SA (hereinafter: ‘Nestlé’) and Melitta Europa GmbH & Co. KG (hereinafter: ‘Melitta’). The Commission simultaneously informed the Dutch authorities that it had sent requests for information to competitors of Starbucks.
On 13 April 2015, Starbucks submitted the information requested in the Commission's letter of 16 March 2015.
By letters dated 27 April 2015, Dallmayr and Company Y replied to the Commission's request for market information of 7 April 2015.
On 29 April 2015, a meeting was held between the Commission services and Starbucks at which the Commission services provided clarifications on how certain questions in the Starbucks MIT request should be understood in the context of the investigation.
By letter dated 6 May 2015, following the reply of Starbucks of 13 April 2015, the Commission requested Starbucks to provide additional information.
By letter dated 11 May 2015, the Commission requested Company Y to provide further clarifications on the submitted market information. Those clarifications were provided by Company Y by letter dated 21 May 2015.
By letters dated 20 May 2015 and 26 May 2015, Nestlé and Melitta replied to the Commission's competitor MIT request of 7 April 2015.
By letter dated 27 May 2015, the Dutch authorities submitted their comments on the information provided by Company Y and Dallmayr.
By letter dated 29 May 2015, Starbucks submitted their replies to the Commission's request of 6 May 2015.
By letter dated 19 June 2015, the Dutch authorities provided their comments on the information submitted by Starbucks on 13 April 2015 and 29 May 2015.
By letter dated 26 June 2015, the Dutch authorities submitted their comments on the market information provided by Nestlé, Melitta and the clarifications provided by Company Y.
On 29 June 2015, in addition to its submissions of 13 April 2015 and 29 May 2015, Starbucks provided a further substantiation of the supposed arm's-length nature of the transfer prices applied by SCTC for the supply of green coffee beans.
By letter dated 5 August 2015, the Commission requested Starbucks to provide clarifications and other documents with regard to its submission of 24 July 2015 to be able to fully analyse the new information.
By letter dated 24 August 2015 and email sent on 26 August 2015, Starbucks partially submitted the information requested by the Commission in its letter of 5 August 2015. The Commission forwarded this information to the Dutch authorities on 28 August 2015.
By letter dated 10 September 2015 and email sent on 11 September 2015, Starbucks submitted the remaining information to the Commission. By letter dated 23 September 2015, Starbucks complemented the information submitted to the Commission on 10 and 11 September 2015.
By letters dated 25 September 2015 and 7 October 2015, the Dutch authorities provided their comments on the information submitted by Starbucks on 10, 11 and 23 September 2015.
The beneficiary of the measure is SMBV. SMBV is a subsidiary incorporated in the Netherlands of the Starbucks group. The Starbucks group is composed of the Starbucks Corporation and all the companies controlled by that corporation. The Starbucks Corporation is headquartered in Seattle, United States of America (hereinafter ‘US’). The corporate structure of the Starbucks group is explained in more detail in recital 27 and Figure 1 of the Opening Decision.
SMBV is the only wholly controlled Starbucks group entity outside of the US which roasts coffee.
An APA is an agreement between a tax administration and a taxpayer on the application of tax law regarding (future) transactions, i.e. it determines the amount of profit that the taxpayer generates from its activities that are taken into account in that tax jurisdiction. An APA determines, in advance of intra-group transactions, an appropriate set of criteria (e.g. method, comparables and appropriate adjustments thereto, critical assumptions as to future events) for the determination of an arm's-length pricing for those transactions over a fixed period of time. An APA is formally initiated by a taxpayer.
That remuneration consists of a mark-up of [9-12] % of the relevant cost base. The relevant cost base used to calculate that remuneration includes all personnel costs engaged in both manufacturing and supply chain activities, the cost of production equipment (i.e. depreciation) and plant overheads. It does not include the costs of the Starbucks cups, paper napkins, etc., the costs of green coffee beans (cost of raw materials), the logistics and distribution cost for services provided by third parties, the remuneration for activities provided by third parties under so-called ‘consignment manufacturing contracts’ and the royalty payments to Alki LP.
The SMBV APA thus endorses a profit allocation to SMBV within the Starbucks group that enables it to determine its corporate income tax liability to the Netherlands on a yearly basis for 10 years. Since the APA entered into force on 1 October 2007, this Decision analyses the SMBV APA under the State aid rules as from that date.
The remuneration accepted by the Dutch tax administration in the SMBV APA is based on the transfer pricing analysis prepared by Starbucks' tax advisor in the transfer pricing report, which forms an integral part of that APA.
The net profit indicator calculated for each company was a mark-up on total costs, which is defined as operating profit divided by total operating costs. The median of the unadjusted mark-up on total costs for those companies from 2001 to 2005 was estimated at 7,8 %.
However, according to the tax advisor, this set of comparable companies includes full-fledged manufacturers that typically perform more functions and incur risk relating to their raw materials. To correct for this difference and to allegedly increase the reliability of the comparison, the tax advisor performed a first adjustment to account for the fact that the proposed application of the mark-up to SMBV's cost-base does not include a cost component for green coffee beans.
The Organisation for Economic Cooperation and Development (hereinafter the ‘OECD’) OECD provides guidance on taxation for its member countries. The OECD's guidance on transfer pricing can be found in its Transfer Pricing Guidelines (hereinafter the ‘OECD TP Guidelines’), which is a non-binding legal instrument providing guidance on transfer prices.
The authoritative statement of the arm's-length principle is found in paragraph 1 of Article 9 of the OECD Model Tax Convention, which forms the basis of bilateral tax treaties involving OECD member countries and an increasing number of non-member countries. Article 9 provides: ‘[Where] conditions are made or imposed between the two [associated] enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly’.
Given their non-binding nature, the tax administrations of the OECD member countries are simply encouraged to follow the Guidelines. However, in general, the OECD TP Guidelines serve as a focal point and exert a clear influence on the tax practices of OECD member (and even non-member) countries. Moreover, in numerous OECD member countries those Guidelines have been given the force of law or serve as a reference for the purpose of interpreting domestic tax law. To the extent the Commission cites the OECD TP Guidelines in the present Decision, it does so because those guidelines are an existing manual in the area of transfer pricing that are the result of expert discussions in the context of the OECD and elaborate on techniques aimed to address common challenges of the application of the arm's-length principle to concrete situations. The OECD TP Guidelines therefore provide useful guidance to tax administrations and multinational enterprises on the application of the arm's-length principle. They also capture the international consensus on transfer pricing.
Both the 1995 and the 2010 OECD TP Guidelines describe five methods to approximate an arm's-length pricing of transactions and profit allocation between companies of the same corporate group: (i) the comparable uncontrolled price method (hereinafter ‘CUP’); (ii) the cost plus method; (iii) the resale minus method; (iv) the TNMM and (v) the transactional profit split method. Both Guidelines also draw a distinction between traditional transaction methods (the first three methods) and transactional profit methods (the last two methods). Both Guidelines further explain that multinational corporations retain the freedom to apply methods not described in those Guidelines to establish transfer prices, provided those prices satisfy the arm's-length principle.
The 1995 OECD TP Guidelines declare an express preference for traditional transaction methods, such as the CUP, over transactional methods, such as the TNMM, as a means to establish whether transfer pricing is at arm's length. Paragraph 3.49 of the 1995 OECD TP Guidelines provides: ‘Traditional transaction methods are to be preferred over transactional profit methods as a means of establishing whether a transfer price is at arm's length, i.e. whether there is a special condition affecting the level of profits between associated enterprises. To date, practical experience has shown that in the majority of cases, it is possible to apply traditional transaction methods.’
In this regard, paragraph 2.3 of the 2010 OECD TP Guidelines provides: ‘As a result, where, taking account of the criteria described at paragraph 2.2, a traditional transaction method and a transactional profit method can be applied in an equally reliable manner, the traditional transaction method is preferable to the transactional profit method.’
The CUP and the TNMM are relevant for the present Decision and are therefore described in more detail in recitals 71 to 75.
The CUP method compares the price charged for the transfer of property or services in a controlled transaction (i.e. a transaction between two enterprises that are associated enterprises with respect to each other) to the price charged for the transfer of property or services in a comparable uncontrolled transaction (i.e. a transaction between enterprises that are independent enterprises with respect to each other), conducted under comparable circumstances.
The TNMM is one of the ‘indirect methods’ to approximate an arm's-length pricing of transactions and profit allocation between companies of the same corporate group. It approximates what would be an arm's-length profit for an entire activity, rather than for identified transactions. It does not seek to establish the price of goods sold, but estimates the profits independent companies could be expected to make on an activity, such as the activity of selling goods. It does this by taking an appropriate base (‘a profit level indicator’), such as costs, turnover or fixed investment, and applying a profit ratio reflecting that observed in comparable uncontrolled transactions to that base.
Because the TNMM does not set a price for individual transactions, the taxable profit of an entity estimated using the TNMM might not have a direct effect on the taxable profit of another entity of the same corporate group. The method is therefore different to using, for example, the CUP method, where transfer pricing establishes the price of a specific good or service which is then recorded in the taxable profit for the same amount by the group company selling and the group company buying the particular good or service.
That paragraph of the 2010 OECD TP Guidelines is often interpreted by tax advisors in situations of transactions between two related companies as allowing to estimate the arm's-length profitability of only one of them, i.e. the less complex one, and attributing any other profit observed in the accounts to the second company, which is considered more complex. This is done regardless of whether the company considered as more complex earns an arm's-length remuneration as a result of the transactions between it and the less complex company, and regardless of the fact that the 2010 OECD TP Guidelines themselves do not seem to lift the requirement for resulting transactions to be priced at arm's length when paragraph 3.18 of the 2010 OECD TP Guidelines is relied upon.
The transfer pricing analysis in the transfer pricing report included in the SMBV APA request contains a number of accounting concepts and financial profit indicators. A brief overview of financial indicators and accounting concepts frequently used in transfer pricing assessment and relevant for the present case are explained below.
A typical profit and loss account first records the income that a company receives from its normal business activities, usually from the sale of goods and services to customers. This accounting item is referred to as ‘Sales’ or ‘Turnover’ or ‘Revenue’.
Cost of goods sold (hereinafter: ‘COGS’) represents mainly the value of material used for the production of goods (raw materials) or the purchase price of goods that have been resold if the company does not process the goods sold. COGS is deducted from sales to calculate gross profit.
Cost of goods sold (COGS)
Operating Expense (OpEx)
Interest and depreciation
Tax
Performance and profitability is often measured using ratios presented as ‘margins’ or ‘mark-ups’. Margins are also used in peer comparisons in transfer pricing.
Some margins are conventionally defined. This is the case for gross margins, which are in principle defined as gross profits divided by sales, and for net margins defined in principle as the net profits divided by sales. Net profit margins used in transfer pricing analyses will often use as a starting point (nominator) the taxable income, rather than the net profits, in particular when using the TNMM, which serves to approximate the taxable income of a tested party.
The SMBV APA was concluded on the basis of Article 8b(1) of the Dutch Corporation Tax Act 1969 (Wet op de Vennootschapsbelasting 1969) (hereinafter ‘CIT’).
Article 8b(1) CIT, which was inserted in the CIT in 2002, lays down the arm's-length principle in the domestic tax law of the Netherlands and reads as follow: ‘Where an entity participates, directly or indirectly, in the management, control or capital of another entity, and conditions are made or imposed between these entities in their commercial and financial relations (transfer prices) which differ from conditions which would be made between independent parties, the profit of these entities will be determined as if the last mentioned conditions were made’.
With regard to the use of a range, the Decree determines under Chapter 1.2: ‘In some cases it will be possible to apply the arm's-length principle and arrive at one single figure that is the most reliable to determine the arm's-length character of the transfer prices. Because, however, transfer pricing is not an exact science, a particular transfer pricing method will often generate a range of figures all of which are equally reliable’.
In accordance with Paragraph 4.9 of the OECD Guidelines, whenever the Netherlands' tax administration undertakes a transfer pricing audit, it should start from the perspective of the method adopted by the taxpayer at the time of the transaction. This complies with Paragraph 1.68 of the OECD Guidelines. The implication is that taxpayers are in principle free to choose a transfer pricing method, provided that the method adopted leads to an arm's-length outcome for the transaction in question. In certain situations, however, some methods will generate better results than others. Although taxpayers may be expected to base their choice of a transfer pricing method on the reliability of the method for the particular situation, taxpayers are definitely not expected to weigh up the advantages and disadvantages of all of the various methods and then explain why the method that was ultimately adopted generates the best results in the prevailing conditions (i.e. the best method rule). Certain situations are also suited for a combination of methods. At the same time, taxpayers are not obliged to use more than one method. The only obligation resting on the taxpayer is to explain why the decision was taken to adopt the particular method that was adopted.’
Under Chapter 2.1 of the Decree, the CUP method is described. With regard to the preference for the use of this method, the Decree states: ‘(…) If a comparable price is available, the comparable uncontrolled price method (commonly known as the CUP method) will, in general, be the most direct and the most reliable method in determining the transfer price, so that this method is to be preferred over other methods’.
The Netherlands and Starbucks provided complementary information and figures regarding SMBV, Alki LP, the Starbucks Shops and SCTC.
In the transfer pricing report, SMBV is presented as a low risk manufacturer. The Commission requested information to verify whether the main activity of SMBV was indeed low-risk manufacturing, which in this case would be the roasting of coffee. The Commission also requested information about the structure of SMBV's costs to verify whether the underlying activities generating those costs confirm that the tasks performed by SMBV are indeed routine execution tasks and do not present any degree of complexity, in line with the assumptions in the transfer pricing report. Information on the degree of business risk assumed by SMBV is presented in different sections, where contracts are described.
Description | FY07 | FY08 | FY09 | FY10 | FY11 | FY12 | FY13 | FY14 |
|---|---|---|---|---|---|---|---|---|
REV PASTRY/BAKERY | — | — | [700-800 thousand] | [1-10 million] | [1-10 million] | [20-30 million] | [20-30 million] | [20-30 million] |
REV PREPARED FOOD | — | — | — | — | [1-10 million] | [10-20 million] | [10-20 million] | [20-30 million] |
REV READY TO DRINK | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] | [10-20 million] | [10-20 million] |
REV PKGD FOOD | [10-20 million] | [10-20 million] | [1-10 million] | [1-10 million] | [1-10 million] | [20-30 million] | [20-30 million] | [20-30 million] |
REV PACKAGED COFFEE | [20-30 million] | [20-30 million] | [20-30 million] | [20-30 million] | [40-50 million] | [50-60 million] | [50-60 million] | [60-70 million] |
REV SINGLE SERVE PODS-COFFEE | — | — | — | — | — | [1-10 million] | — | ([1-10 thousand]) |
REV SINGLE SERVE PODS-VERISMO | — | — | — | — | — | [1-10 million] | [10-20 million] | [10-20 million] |
REV SOLUBLE COFFEE | — | — | [200-300 thousand] | [1-10 million] | [1-10 million] | [1-10 million] | [10-20 million] | [10-20 million] |
REV PACKAGED TEA | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] |
REV SERVEWARE | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] | [10-20 million] | [10-20 million] |
REV BREWING EQUIPMENT | [900 thousand-1 mln] | [1-10 million] | [700-800 thousand] | [500-600 thousand] | [600-700 thousand] | [700-800 thousand] | [800-900 thousand] | [600-700 thousand] |
REV BREWING EQUIPMENT-VERISMO | — | — | — | — | — | [20-30 thousand] | [1-10 million] | [800-900 thousand] |
REV TANGIBLE MEDIA | ([1-10 thousand]) | [300-400 thousand] | [200-300 thousand] | [80-90 thousand] | [100-200 thousand] | [100-200 thousand] | [1-10 thousand] | — |
REV GIFTPACKS | [100-200 thousand] | [100-200 thousand] | [50-60 thousand] | [1-10 thousand] | — | — | — | — |
REV GAMES & TOYS | — | — | [200-300 thousand] | [300-400 thousand] | [100-200 thousand] | [100-200 thousand] | [100-200 thousand] | [30-40 thousand] |
REV MISC MERCHANDISE | — | — | ([100-200]) | [400-500] | [1-10 thousand] | [30-40 thousand] | [500-600 thousand] | [500-600 thousand] |
REV RAW MATERIALS | — | — | [100-200 thousand] | [1-10 million] | [100-200 thousand] | [200-300 thousand] | [1-10 thousand] | [30-40 thousand] |
REV PAPER PACKAGING | [10-20 million] | [10-20 million] | [10-20 million] | [10-20 million] | [20-30 million] | [20-30 million] | [20-30 million] | [20-30 million] |
REV BLENDED BEVG MIX | [40-50 million] | [40-50 million] | [50-60 million] | [50-60 million] | [40-50 million] | [50-60 million] | [50-60 million] | [60-70 million] |
REV FRAP COFFEE BASE | — | — | — | — | [20-30 million] | [30-40 million] | [20-30 million] | [20-30 million] |
REV EXTRACT | — | — | — | — | [1-10 million] | [10-20 million] | [10-20 million] | [10-20 million] |
REV EQUIPMENT | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] | [10-20 million] | [20-30 million] |
REV SHIPPING | [40-50 thousand] | [30-40 thousand] | [70-80 thousand] | [300-400 thousand] | [300-400 thousand] | [200-300 thousand] | [1-10 million] | [1-10 million] |
REV ROYALTIES | — | — | — | — | — | — | — | — |
REV MANAGEMENT SERVICE FEE | [1-10 million] | [1-10 million] | [1-10 million] | [800-900 thousand] | [900 thousand-1 mln] | [600-700 thousand] | — | — |
REV OTHER REV | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] |
SALES DISC | ([100-200 thousand]) | [80-90 thousand] | ([1-10 thousand]) | ([200-300 thousand]) | ([500-600 thousand]) | ([600-700 thousand]) | ([1-10 million]) | ([100-200 thousand]) |
TRADE DISCOUNTS-DIRECT TO MARKET | — | — | — | — | — | ([30-40 thousand]) | ([10-20 thousand]) | ([1-10 million]) |
DIRECT TO MARKET COUPON DISCOUNTS | — | — | — | — | — | — | — | ([20-30 thousand]) |
DIRECT TO MARKET SLOTTING COSTS | — | — | — | — | — | — | ([20-30 thousand]) | ([200-300 thousand]) |
UNSALABLE RETURNS AND ALLOWANCE | — | — | — | — | — | — | — | ([20-30 thousand]) |
SALES RETURNS/ALLOWANCES | — | — | — | — | — | ([1-10 thousand]) | ([10-20 thousand]) | ([90-100 thousand]) |
Rounding | 0 | (0) | (0) | 0 | (0) | 0 | (0) | (0) |
Revenues as per Statutory Accounts | [100-200 million] | [100-200 million] | [100-200 million] | [100-200 million] | [100-200 million] | [200-300 million] | [300-400 million] | [300-400 million] |
Starbucks indicated that the revenues under the description ‘REV PACKAGED COFFEE’ in Table 2 relate to SMBV's roasting and packaging function. The remainder of the revenues relate, according to Starbucks, to SMBV's administrative and logistics support function. A small portion of the coffee roasted in the Netherlands is further processed by third-party manufacturers. It concerns: ‘REV SINGLE SERVE PODS-COFFEE’, ‘REV SINGLE SERVE PODS-VERISMO’, ‘REV SOLUBLE COFFEE’, ‘REV FRAP COFFEE BASE’ and ‘REV EXTRACT’. Those revenues should also be classified as administrative and logistics support revenue, as the underlying revenue invoiced to Developers represents the value created by third parties rather than SMBV. In any case, according to Starbucks, those revenues represent only a small portion of the total roasting output of SMBV.
Regarding the pricing of products, Starbucks provided […] price list examples for different quarters in 2013 and 2014 that provide prices for coffee and non-coffee products sold by Starbucks. According to Starbucks, […].
Regarding the prices of non-coffee products sold to Shops by SMBV, Starbucks indicated that the prices of the non-coffee products delivered by SMBV to Shops are determined by adding a so-called [cost recovery margin] to the purchase price of the non-coffee products. That [cost recovery margin] is charged by SMBV to recover the […] expenses. However, it covers not only the […] expenses of SMBV, but also all the relevant […]costs of the […]. In fact, as the final prices for non-coffee products charged by SMBV to Shops are calculated by applying the [cost recovery margin] to the product costs, the profit on non-coffee products that SMBV records corresponds to this [cost recovery margin].
The most important expense item of SBMV is salary expense, which amounted to EUR [1-10 million] in 2014 out of a total operating expense of EUR 16 124 000 that year. Other large operating expense items of SMBV in 2014 were wage related expenses, payroll tax, property rents and lease payments, equipment depreciation and intangibles amortisation. Although prior to 2013 SBMV did not have intangibles amortisation expenses, it was one of the largest operating expense items in 2014, amounting to EUR 628 000, which was a larger expense in that year than equipment repair and maintenance, electricity, bad debt, office and computer supplies and others (for example software licence expenses, which are recorded as a separate item). The intangible amortisation expense seems to relate to an IP right first recorded in the financial accounts in 2012, which would have been acquired for more than EUR 4 million. Additionally, in 2014, a large operating expense item was represented by ‘Market research’ amounting to EUR [100-200 thousand] that year.
The taxable profits of SMBV in the Netherlands, which are determined based on the SMBV APA in reference to the operating expense of the company, are reduced by a royalty paid to Alki LP. The Commission requested further information from the Netherlands and Starbucks on the amount of the royalty payment and the exact calculation of the tax base.
(EUR) | |||||||||||||
2001/2002 | 2002/2003 | 2003/2004 | 2004/2005 | 2005/2006 | 2006/2007 | 2007/2008 | 2008/2009 | 2009/2010 | 2010/2011 | 2011/2012 | 2012/2013 | 2013/2014 | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sales | 14 067 934 | 51 700 060 | 63 950 312 | 83 240 391 | 108 855 325 | 118 663 171 | 128 784 681 | 135 677 607 | 142 627 243 | 184 159 097 | 286 217 379 | 327 632 453 | 350 538 852 |
Direct Cost of sales | (15 398 686) | (41 799 345) | (50 148 768) | (68 349 376) | (85 467 406) | (98 615 765) | (108 107 101) | (115 352 332) | (120 020 824) | (153 275 834) | (252 500 829) | (286 969 488) | (305 831 016) |
thereof green beans51 | [0-10 million] | [10-20 million] | [10-20 million] | [10-20 million] | [10-20 million] | [20-30 million] | [20-30 million] | [20-30 million] | [30-40 million] | [40-50 million] | [60-70 million] | [60-70 million] | [60-70 million] |
Gross Margin | (1 330 752) | 9 900 715 | 13 801 544 | 14 891 015 | 23 387 919 | 20 047 406 | 20 677 580 | 20 325 275 | 22 606 419 | 30 883 263 | 33 716 550 | 40 662 965 | 44 707 836 |
General and administrative expenses | (3 150 256) | (8 474 279) | (8 997 548) | (5 086 145) | (7 303 608) | (10 158 687) | (15 221 123) | (16 742 108) | (16 835 153) | (14 303 059) | (17 469 758) | (16 626 967) | (16 124 052) |
Foreign currency exchange | 219 905 | 33 743 | 5 102 | 24 784 | (388 855) | (166 915) | (467 072) | 1 849 067 | (2 266 492) | (2 089 448) | (8 162 650) | 709 539 | (2 272 582) |
Other expenses (see Note) | 4 744 084 | 526 555 | (2 165 152) | (6 336 360) | (11 594 191) | (4 699 336) | (1 698 150) | (2 470 449) | (1 079 817) | (12 352 838) | (5 786 211) | (22 812 962) | (24 285 088) |
EBIT | 482 981 | 1 986 734 | 2 643 946 | 3 493 294 | 4 101 265 | 5 022 468 | 3 291 235 | 2 961 785 | 2 424 957 | 2 137 918 | 2 297 931 | 1 932 575 | 2 026 114 |
Interest income | 17 328 | 34 576 | 27 668 | 51 766 | 167 195 | 248 997 | 304 939 | 86 995 | 45 402 | 30 073 | 18 763 | 14 200 | 76 209 |
Interest expense | 0 | (803 856) | (1 263 915) | (1 272 114) | (817 041) | (2 356 989) | (2 097 056) | (1 345 779) | (817 041) | (737 371) | (735 233) | (411 315) | (434 454) |
Result before taxation | 500 309 | 1 217 454 | 1 407 699 | 2 272 946 | 2 763 349 | 2 914 476 | 1 499 118 | 1 703 001 | 1 653 318 | 1 430 620 | 1 581 461 | 1 535 460 | 1 667 869 |
Corporate income tax | (171 805) | (418 774) | (484 408) | (733 370) | (783 194) | (844 309) | (383 909) | (427 159) | (428 611) | (337 599) | (395 365) | (391 220) | (575 812) |
Net result for the year | 328 504 | 798 680 | 923 291 | 1 539 576 | 1 980 155 | 2 070 167 | 1 115 209 | 1 275 842 | 1 224 707 | 1 093 021 | 1 186 096 | 1 144 240 | 1 092 057 |
Under the notes to the financial statements, the position ‘Other expenses’ in Table 3 is defined as follows: ‘Other expenses relate to a royalty agreement held with the affiliated company [CV 1], which was assigned to Alki LP on December 13, 2006 and is based on a tax ruling with the Dutch tax authorities’. The APA to which this footnote relates is the SMBV APA and thus indicates that SMBV's auditor interpreted the SMBV APA to determine the royalty payments by SMBV to Alki LP.
Starbucks clarified that Alki LP was added to the group structure in December 2006 as part of the expansion of the CSA to cover the entire EMEA region by including the UK market. By adding Alki LP to the structure, Starbucks avoided that the royalty income received by Alki LP would be directly integrated in the income of the partners of Alki LP under US tax law.
Under the CSA, Alki LP makes royalty payments to Starbucks US for the three categories of IP that Starbucks US licenses to Alki LP. Those royalty payments consist of (i) a buy-in royalty allocated to the brand/trademark rights; (ii) a buy-in royalty allocated to the business format rights; and (iii) a permanent royalty allocated to the coffee knowledge.
The beneficial ownership of the business format related intangibles and the trademark/brand for the EMEA region was transferred from Starbucks Corporation in 2002 to [CV 1] and assigned to Alki LP since 2006. For the beneficial ownership, [CV 1] and Alki LP made buy-in royalty payments, where the percentage of the US share of the cost which Alki LP needed to pay to Starbucks US digressively reduced from [65-70] % in 2002 to [0,5-1] % in 2010 and onwards for the trademark, and [70-75] % in 2002 to [0-0,5] % in 2010 and onwards for the business format IP. With those buy-in payments, the beneficial ownership rights for these two categories of IP for the EMEA region are deemed to be paid off by Alki LP. With regard to the coffee knowledge IP, Alki LP pays a permanent royalty of [70-75] % of the residual profit allocated to this IP category to Starbucks US.
Given that green coffee beans are procured by SMBV through a group transaction, more precisely they are purchased from SCTC, the Commission requested information about how the prices for this intra-group transaction are set and about the price set for each year throughout the application of the SMBV APA.
Starbucks submitted the balance sheet and profit and loss accounts for SCTC since 2005. Table 4 reproduces information contained in those accounts. The calculation of the mark-up on the costs of green coffee beans (COGS) applied by SCTC was added by the Commission for the purpose of this Decision. Based on the accounting information available, which starts at 2005, the average mark-up on the costs of green coffee beans stood at [around 3 %] for the period 2005 to 2010, compared to an average mark-up of [around 18 %] over the period 2011 to 2014.
Starbucks submitted that from 2011 onwards, Starbucks adjusted the transfer pricing policy applicable to the sale of green coffee beans to increase the mark-up on product costs given the growing importance of SCTC's operations, especially its increasing expertise in coffee procurement and, more importantly, its ownership and operation of the evolving C.A.F.E. Practices Programme.
The C.A.F.E. Practices Programme was launched in 2004 in conjunction with the opening of SCTC's farmer support centre in Costa Rica to provide an evolving programme where farmers, exporters, and buyers could have an ongoing conversation to (i) improve coffee quality; (ii) provide economic accountability for payments along all levels of the supply chain; (iii) encourage social responsibility in working conditions, protection of workers' rights, and adequate living conditions; and (iv) inspire environmental leadership for growing and processing green coffee beans.
In order to verify whether the growing operations, which Starbucks invokes to explain the increased mark-up, are confirmed in the accounts, Table 4 also presents the assets of SCTC. Although the total assets have indeed grown significantly since 2010, this is mainly due to increased cash holding. Operating assets net of cash have increased by less than a third over the four years from 2010 to 2014.
(CHF) | ||||||||||
2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | |
|---|---|---|---|---|---|---|---|---|---|---|
SCTC Sales | [500-600 million] | [600-700 million] | [600-700 million] | [600-700 million] | [600-700 million] | [500-600 million] | [900-1 000 million] | [1,5-2 billion] | [1-1,5 billion] | [900-1 000 million] |
SCTC COGS | [500-600 million] | [500-600 million] | [600-700 million] | [600-700 million] | [600-700 million] | [400-500 million] | [800-900 million] | [1-1,5 billion] | [800-900 million] | [700-800 million] |
gross margin (Sales — COGS) | [20-30 million] | [30-40 million] | [40-50 million] | [30-40 million] | [40-50 million] | [30-40 million] | [100-200 million] | [200-300 million] | [100-200 million] | [100-200 million] |
gross margin on COGS | [4,5-7,5] % | [4,5-7,5] % | [4,5-7,5] % | [4,5-7,5] % | [4,5-7,5] % | [4,5-7,5] % | [16,5-19,5] % | [16,5-19,5] % | [19,5-22,5] % | [16,5-19,5] % |
OpEx (excl. provisions) | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] |
profit before tax | [10-20 million] | [20-30 million] | [20-30 million] | [20-30 million] | [30-40 million] | [20-30 million] | [100-200 million] | [200-300 million] | [100-200 million] | [100-200 million] |
Tax | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] | [1-10 million] | [10-20 million] | [10-20 million] | [10-20 million] | [10-20 million] |
net profit | [10-20 million] | [20-30 million]71 | [20-30 million]71 | [20-30 million] | [20-30 million] | [10-20 million] | [100-200 million] | [100-200 million] | [100-200 million] | [100-200 million] |
Total assets | [200-300 million] | [200-300 million] | [200-300 million] | [200-300 million] | [200-300 million] | [100-200 million] | [300-400 million] | [500-600 million] | [600-700 million] | [700-800 million] |
Total assets net of cash and cash equivalent (incl. marketable securities) | [100-200 million] | [100-200 million] | [100-200 million] | [100-200 million] | [100-200 million] | [100-200 million] | [300-400 million] | [100-200 million] | [100-200 million] | [100-200 million] |
(%) | ||||||||||
2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | |
|---|---|---|---|---|---|---|---|---|---|---|
mark-up on COGS | [1,5-4,5] | [1,5-4,5] | [1,5-4,5] | [1,5-4,5] | [4,5-7,5] | [1,5-4,5] | [16,5-19,5] | [13,5-16,5] | [19,5-22,5] | [16,5-19,5] |
(USD) | |||||||||||
FY04 | FY05 | FY06 | FY07 | FY08 | FY09 | FY10 | FY11 | FY12 | FY13 | FY14 | |
|---|---|---|---|---|---|---|---|---|---|---|---|
(1) Allocated C.A.F.E. Practices Expenses | N/A | N/A | N/A | N/A | N/A | N/A | [500 000-600 000] | [100 000-200 000] | [1 000 000-10 000 000] | [1 000 000-10 000 000] | [1 000 000-10 000 000] |
(2) Farmer Support Centers costs | [800 000-900 000] | [1 000 000-10 000 000] | [1 000 000-10 000 000] | [1 000 000-10 000 000] | [1 000 000-10 000 000] | [1 000 000-10 000 000] | [1 000 000-10 000 000] | [1 000 000-10 000 000] | [1 000 000-10 000 000] | [1 000 000-10 000 000] | [1 000 000-10 000 000] |
(3) Other C.A.F.E. Practices related costs | N/A | N/A | [60 000-70 000] | [1 000 000-10 000 000] | [1 000 000-10 000 000] | [200 000-300 000] | [700 000-800 000] | [400 000-500 000] | [60 000-70 000] | [200 000-300 000] | [1 000 000-10 000 000] |
Total | [800 000-900 000] | [1 000 000-10 000 000] | [1 000 000-10 000 000] | [1 000 000-10 000 000] | [1 000 000-10 000 000] | [1 000 000-10 000 000] | [1 000 000-10 000 000] | [1 000 000-10 000 000] | [1 000 000-10 000 000] | [1 000 000-10 000 000] | [1 000 000-10 000 000] |
In response, Starbucks indicated that the C.A.F.E. Practices Programme should be considered IP of which the value is unrelated to underlying costs.
The Commission requested Starbucks to provide the transfer pricing report covering the pricing of green coffee beans sold by SCTC to SMBV. According to Starbucks, historically, no transfer pricing documentation has been prepared that covers the relationship between SCTC and SMBV. For the purpose of responding to the Commission's request, Starbucks provided an ad hoc report on the SCTC transfer prices to the Commission on 13 April 2015.
According to the ad-hoc transfer pricing report provided, SCTC determines the prices to its affiliates by applying a mark-up to the product costs associated with the green coffee beans sourced by it.
Intellectual Property — C.A.F.E. Practices Programme: SCTC manages the C.A.F.E. Practices Programme and uses valuable know-how that, when incorporated into Starbucks' business operations, ensures consistent supply and supports the Starbucks brand for sustainability. Starbucks analysed this transaction using comparable licensing agreements relating to food and agricultural technologies.
Procurement: SCTC provides procurement functions for green coffee beans. Starbucks analysed this transaction using comparable sourcing agreements between third parties.
Financing: SCTC should generate a return for financing costs it incurs when holding unsold inventory and net receivables for green coffee beans. Starbucks analysed an appropriate return for financing that should be returned to SCTC.
(%) | |||
Component | Markup on product costsLower Quartile | Markup on product costsMedian | Markup on product costsUpper Quartile |
|---|---|---|---|
Intellectual Property – C.A.F.E. Practices Program | 1,4 | 4,2 | 9,9 |
Procurement | 4,7 | 6,0 | 8,0 |
Financing | [1,5-4,5] | [1,5-4,5] | [1,5-4,5] |
Total % markup on product costs | [7,5-10,5] | [10,5-13,5] | [19,5-22,5] |
The combined arm's-length range for the total mark-up on product costs charged by SCTC for the coffee sold to SMBV is according to the ad hoc transfer pricing report between a lower quartile of [around 9 %] and an upper quartile of [around 21 %], with a median of [around 12 %], for the overall period 2005 through 2014.
The Commission requested Starbucks to provide the data and the components of the mark-up used to establish the quartile and median figures for the period 2005 through 2014, submitted to the Commission. Starbucks indicated that this data is not available.
Starbucks submitted information on 29 June 2015 to substantiate the pricing of green coffee beans in the ad hoc transfer pricing report provided and in particular the figures presented in Table 6 for which the Commission requested the underlying data.
Average Observation | Percentage Markup on Product Cost | |
|---|---|---|
Highest Observed Value | 9,0 % | 9,9 % |
Upper Quartile | 6,0 % | 6,4 % |
Median | 4,0 % | 4,2 % |
Lower Quartile | 2,7 % | 2,8 % |
Lowest Observed Value | 1,4 % | 1,4 % |
Observations | 11 | 11 |
In its submission of 29 June 2015, Starbucks also provided a pricing of the procurement function of SCTC estimated by using comparable transactions identified by Starbucks using the PowerK database and LIVEDGAR database. Thirteen agreements whereby buying agency services are provided by a third-party buying agent are considered consistent with the procurement services that SCTC provided to SMBV.
The results of the analysis are presented as percentages of ‘Free on Board’ product costs, which is the costs charged to the client for delivered products. The median of the observations presented is 6 %. Starbucks presents the result in terms of an interquartile range of product costs from 4,7 % to 8,0 %.
Finally, Starbucks calculates the pricing of what is presented as a financing function and which SCTC should earn as a return according to Starbucks for ‘holding green coffee and financing of net receivables for its own risk and account’. This return is calculated by Starbucks by applying a weighted average cost of capital (‘WACC’) to the account receivables and inventory stock of SCTC for 2014 and is on this basis set at [around 3 %].
Purchases from SCTC | |||
FY | Purchase value in EUR | Purchase volume in Pounds | Unit price in EUR/lbs |
|---|---|---|---|
2002 | — | — | |
2003 | [10 000 000 — 20 000 000] | [10 000 000 — 20 000 000] | [1,0000 — 1,5000] |
2004 | [10 000 000 — 20 000 000] | [10 000 000 — 20 000 000] | [1,0000 — 1,5000] |
2005 | [10 000 000 — 20 000 000] | [1 000 000 — 10 000 000] | [1,0000 — 1,5000] |
2006 | [10 000 000 — 20 000 000] | [10 000 000 — 20 000 000] | [1,0000 — 1,5000] |
2007 | [20 000 000 — 30 000 000] | [20 000 000 — 30 000 000] | [1,0000 — 1,5000] |
2008 | [20 000 000 — 30 000 000] | [10 000 000 — 20 000 000] | [1,0000 — 1,5000] |
2009 | [20 000 000 — 30 000 000] | [10 000 000 — 20 000 000] | [1,0000 — 1,5000] |
2010 | [30 000 000 — 40 000 000] | [20 000 000 — 30 000 000] | [1,0000 — 1,5000] |
2011 | [40 000 000 — 50 000 000] | [20 000 000 — 30 000 000] | [2,0000 — 2,5000] |
2012 | [60 000 000 — 70 000 000] | [20 000 000 — 30 000 000] | [2,0000 — 2,5000] |
2013 | [60 000 000 — 70 000 000] | [30 000 000 — 40 000 000] | [1,5000 — 2,0000] |
2014 | [60 000 000 — 70 000 000] | [40 000 000 — 50 000 000] | [1,5000 — 2,0000] |
The products distributed by SMBV, either produced by SMBV or bought by SMBV from other suppliers, are sold to Shops. Some of the Shops are independent and some are owned by Starbucks. The Commission requested information to verify whether there is a difference in the commercial conditions applied to Shops owned by the group and independent Shops.
With regard to the Starbucks Shops, Starbucks provided information on the different licensee programmes and eligibility criteria to develop Starbucks Shops in the EMEA region, an overview of the stores in the EMEA region, and figures regarding the turnover of the Shops and the licence fees paid in 2012 by those Shops to Starbucks Coffee BV. According to this information, the licence fees percentage over turnover paid by the three different types of licence programmes (independent geographic licensees, company-owned geographic licensees and channel licensees –the three different types of licence programmes) varies across countries with percentage ranges from [5 to 10] %.
2011 | 2012 | 2013 | 2014 | |
|---|---|---|---|---|
Sales of Starbucks Manufacturing Corporation | [700 000 000 – 800 000 000] | [1 000 000 000 – 1 500 000 000] | [1 000 000 000 – 1 500 000 000] | [1 000 000 000 – 1 500 000 000] |
Cost of Goods Sold | [(500 000 000) – (600 000 000)] | [(800 000 000) – (900 000 000)] | [(800 000 000) – (900 000 000)] | [(700 000 000) – (800 000 000)] |
Other income and gain | [100 000 – 200 000] | [600 000 – 700 000] | [300 000 – 400 000] | [1 000 000 – 10 000 000] |
Deductions | [(40 000 000) – (50 000 000)] | [(60 000 000) – (70 000 000)] | [(70 000 000) – (80 000 000)] | [(80 000 000) – (90 000 000)] |
Thereof salaries and wages | [(10 000 000) – (20 000 000)] | [(20 000 000) – (30 000 000)] | [(20 000 000) – (30 000 000)] | [(30 000 000) – (40 000 000)] |
Thereof depreciation | [(10 000 000) – (20 000 000)] | [(10 000 000) – (20 000 000)] | [(10 000 000) – (20 000 000)] | [(10 000 000) – (20 000 000)] |
Total Income | [100 000 000 – 200 000 000] | [400 000 000 – 500 000 000] | [300 000 000 – 400 000 000] | [500 000 000 – 600 000 000] |
Profit margin (income/sales) | [20 % – 25 %] | [30 % – 35 %] | [30 % – 35 %] | [35 % – 40 %] |
Profit on Operating Expense (income/deductions) | [400 % – 450 %] | [650 % – 700 %] | [500 % – 550 %] | [550 % – 600 %] |
When SMBV was set up in the Netherlands, it entered into various agreements that set out the contractual divisions of the roles and responsibilities of SMBV and its counterparties. The three agreements relevant for this Decision are the Roasting Agreement between SMBV and Alki LP, the Green Coffee Purchase Agreement between SMBV and SCTC, and the Supply Agreement between SMBV and the Shops.
The Green Coffee Purchase Agreement entered into force on 22 April 2002 and stipulates the conditions for the sale of green whole-bean coffee from SCTC to SMBV. SCTC will sell the beans to SMBV at prices set forth on price lists issued by SCTC. SMBV will issues a purchase order for coffee on the basis of purchasing forecasts. SCTC will deliver the beans […].
The CSA between Alki LP and Starbucks Corporation of 1 August 2006 determines the direct rights of Alki LP to license and sublicense to third parties the right to: (i) […] operate Starbucks stores […], (ii) […] operate ‘[…]’ and (iii) manufacture and/or distribute products using the Trademarks and Technology and Know-How.
Under the CSA, Alki LP is to pay Starbucks Corporation a royalty, service fees for services provided by Starbucks Corporation, and cost sharing payments for the development of certain intangible assets. The royalty payments consist of: (i) a buy-in royalty allocated to the trademark and business format IP and a (ii) permanent royalty allocated to the coffee knowledge IP. Payments under this agreement are detailed in recitals 112 and 113.
In order to compare the commercial conditions fixed between SMBV and the Starbucks group and in particular the royalty payment for the roasting IP, on the one hand, with commercial conditions fixed between the Starbucks group and third parties, on the other, the Commission requested from Starbucks all contracts whereby Starbucks licenced IP and all contracts where Starbucks outsourced the roasting of coffee. The Commission also requested information about the commercial conditions applied between Starbucks Corporation and its group roasting company located in the US.
- [Unaffiliated manufacturing company 2], (‘[unaffiliated manufacturing company 2]’), […].Starbucks entered into two types of agreements with [unaffiliated manufacturing company 2] to subcontract the roasting of coffee, which have been amended at several instances. In a technology licence agreement of [before 2008], an affiliate of Starbucks, […], grants a non-exclusive licence to [unaffiliated manufacturing company 2] to use, amongst others, the technology and know-how of Starbucks to produce and sell roasted coffee to selected third parties with which Starbucks has entered into supply agreements, such as [unaffiliated manufacturing company 5] […]. [Unaffiliated manufacturing company 2] has to perform the services so that the Roasted Coffee is of high quality, for which [unaffiliated manufacturing company 2], among others, has to comply with certain quality assurance standards established by Starbucks. The technology licence agreement stipulates that [unaffiliated manufacturing company 2] does not have to pay any fees for the licence80. A green coffee supply agreement stipulates that [unaffiliated manufacturing company 2] has the obligation to buy green coffee beans exclusively from Starbucks for a fixed fee [per a certain quantity].
[Unaffiliated manufacturing company 3], (‘[unaffiliated manufacturing company 3]’), […]. Under a roasting licence agreement of [after 2008], [unaffiliated manufacturing company 3] provides coffee roasting services which it sells to Starbucks and a joint-venture between [unaffiliated manufacturing company 3] and Starbucks called [unaffiliated manufacturing company 3-Starbucks joint-venture] that operates the Starbucks coffee stores in [a certain country]. [Unaffiliated manufacturing company 3] pays a roasting fee to Starbucks […] of USD […] [per a certain quantity] of green coffee produced and sold to the [unaffiliated manufacturing company 3-Starbucks joint-venture].
[Unaffiliated manufacturing company 4], (‘[unaffiliated manufacturing company 4]’), […]. In order to subcontract the roasting of coffee [unaffiliated manufacturing company 4] entered into three types of agreements, of which only the […] purchase agreement of [after 2008] was submitted. Accordingly Starbucks appoints [unaffiliated manufacturing company 4] to manufacture, package, produce and supply coffee product. The agreements do not provide for any fee or royalty to be paid to Starbucks. The manufacturing has to take place under certain product specifications and standards provided by Starbucks. The agreement stipulates that [unaffiliated manufacturing company 4] shall sell the products to Starbucks and its affiliates for a price set at the level of the green coffee beans (according to Starbucks, the green coffee beans are therefore just a pass-through cost for [unaffiliated manufacturing company 4]) and supply cost to which a conversion fee is added. This conversion fee includes fees for roasting […]. The pricing formula is then translated into a sales price [per a certain quantity] of roasted coffee. Starbucks claims that this results in a margin of [5-10] % on total conversion costs, without further indications on how this alleged mark-up was arrived to.
- [Unaffiliated manufacturing company 5] (‘[unaffiliated manufacturing company 5]’), […]. Starbucks entered into three types of agreements with [unaffiliated manufacturing company 5] on [before 2008]. In a supply agreement, Starbucks takes the obligation to supply to [unaffiliated manufacturing company 5] roasted coffee beans, concentrate and other coffee ingredients for a price based on a formula used to develop coffee ingredient pricing for [Starbucks'] retail coffee shop business, […]. The […]agreement, which is a manufacturing and distribution agreement, grants [unaffiliated manufacturing company 5] the right to exclusively distribute certain pre-packed, ready-to-drink beverages under the Starbucks Trademark in a specific territory. The manufacturing has to take place under certain product specifications and standards provided by Starbucks. The […]agreement does not provide for any fee or royalty to be paid by [unaffiliated manufacturing company 5] to Starbucks. The trademark and technology licence agreement allows [unaffiliated manufacturing company 5] to use the trademark of Starbucks as well as its technology and know-how for the purpose of manufacturing the agreed products. [Unaffiliated manufacturing company 5] pays a licence fee of [10-15] % of net sales subject to an adjustment mechanism, which according to Starbucks results in a fee of approximately [10-15] % on net sales of ready-to-make drinks81.
- [Unaffiliated manufacturing company 6] (‘[unaffiliated manufacturing company 6]’), […]. Starbucks entered into three types of agreements with [unaffiliated manufacturing company 6] on [before 2008], which have subsequently been amended. In a supply agreement, Starbucks takes the obligation to supply to [unaffiliated manufacturing company 6] roasted coffee beans, concentrate and other coffee ingredients for a price based on a formula used to develop coffee ingredient pricing for Starbucks' […] retail coffee shop business, […]. The manufacturing and distribution agreement grants [unaffiliated manufacturing company 6] the right to exclusively distribute certain pre-packed, ready-to-drink beverages under the Starbucks Trademark in [a certain country]. The manufacturing has to take place under certain product specifications and standards provided by Starbucks. The manufacturing and distribution agreement does not provide for any fee or royalty to be paid by [unaffiliated manufacturing company 6] to Starbucks. The trademark and technology licence agreement allows [unaffiliated manufacturing company 6] to use the trademark of Starbucks as well as its technology and know-how for the purpose of manufacturing the agreed products. [Unaffiliated manufacturing company 6] pays a licence fee depending on the product. According to Starbucks, this fee amounts to between [5 and 10] % of net sales of ready-to-make drinks82.
[Unaffiliated manufacturing company 7] (‘[unaffiliated manufacturing company 7]’), […]. Starbucks entered into three types of agreements with [unaffiliated manufacturing company 7] on [after 2008], which have subsequently been amended. In a supply agreement, Starbucks takes the obligation to supply to [unaffiliated manufacturing company 7] coffee ingredients, […], for a price set [per a certain quantity]. The manufacturing and distribution agreement grants [unaffiliated manufacturing company 7] the right to exclusively distribute certain pre-packed, ready-to-drink beverages under the Starbucks Trademark in a specific territory. The manufacturing has to take place under certain product specifications and standards provided by Starbucks. The manufacturing and distribution agreement does not provide for any fee or royalty to be paid by [unaffiliated manufacturing company 7] to Starbucks. The trademark and technology licence agreement allows [unaffiliated manufacturing company 7] to use the trademark of Starbucks as well as its technology and know-how for the purpose of manufacturing the agreed products. [Unaffiliated manufacturing company 7] pays a licence fee depending on the territory of between [10 and 20] % of net sales.
The contracts that Starbucks has with [unaffiliated manufacturing company 5], [unaffiliated manufacturing company 6] and [unaffiliated manufacturing company 7] listed above were classified in three categories: (i) supply agreements, similar to the Supply Agreement between SMBV and Developers described at recital 144; (ii) manufacturing and distribution agreements, similar to the agreement between SMBV and Alki LP; and (iii) trademark and technology licence agreements, similar to the ADOA between Starbucks Coffee BV and the Shops described at recital 48. Of the three types of agreement between Starbucks and [unaffiliated manufacturing company 5], [unaffiliated manufacturing company 6] and [unaffiliated manufacturing company 7], only the last category of agreements requires Starbucks' counterparties to pay a royalty.
- The [unaffiliated manufacturing company 8] manufacturing and supply agreement dates from [after 2008] and stipulates that [unaffiliated manufacturing company 8] is to produce flavoured coffee for Starbucks for a specified price83. […] stipulates that [unaffiliated manufacturing company 8] must strictly comply with a technical manual regarding, among others, the manufacturing of the products. […] stipulates that Starbucks grants [unaffiliated manufacturing company 8] a royalty-free licence for the use of the know-how in connection with the manufacturing process.
- The [unaffiliated manufacturing company 1] manufacturing and supply agreement is dated [after 2008] and provides that [unaffiliated manufacturing company 1] shall produce certain coffee products for Starbucks for a specified price84. […] stipulates that [unaffiliated manufacturing company 1] must strictly comply with a technical manual regarding, among others, the manufacturing of the products. The agreement does not provide for any fee or royalty to be paid by [unaffiliated manufacturing company 1] to Starbucks.
- The [unaffiliated manufacturing company 9] manufacturing and supply agreement is dated [after 2008] and provides that [unaffiliated manufacturing company 9] shall produce flavoured coffee for Starbucks for a specified price85. […] stipulates that [unaffiliated manufacturing company 9] must strictly comply with a technical manual regarding, among others, the manufacturing of the products. The [manufacturing and supply agreement] does not provide for any fee or royalty to be paid by [unaffiliated manufacturing company 9] to Starbucks. The agreement also refers to a technology and trademark licence agreement, which was however not submitted.
The [unaffiliated manufacturing company 10] manufacturing agreement is dated [after 2008] and concerns the manufacturing and roasting of green coffee beans for Starbucks by a […] roaster who sources its coffee beans directly. The agreement does not provide for any fee or royalty to be paid by [unaffiliated manufacturing company 10] to Starbucks. […] of the agreement clarifies that Starbuck owns the IP rights in the coffee blend, the time temperature curve of the roast progression and the roaster end point, etc. Starbucks pays a fee to [unaffiliated manufacturing company 10] for the coffee [per a certain quantity], following a specific formula which charges less for roasting than for packaging.
In addition to the contracts listed in recital 148, Starbucks supplied an analysis of the comparability of those contracts with the royalty payments made by SMBV to Alki LP.
- (1)
Agreements whereby third parties exploit Starbucks intangibles (coffee related intangibles and trademarks) on the market:
The roasting licence agreements with [unaffiliated manufacturing company 2] and [unaffiliated manufacturing company 3].
The trademark and technology licence agreements with [unaffiliated manufacturing company 7], [unaffiliated manufacturing company 6] and [unaffiliated manufacturing company 5] for the exploitation of the Starbucks trademark and certain specific coffee related know-how.
- (2)
Various agreements which grant third parties access to Starbucks intangibles (technology, know-how and trademarks) under a royalty-free licence due to the specific nature of these agreements:
Various co-manufacturing and co-packaging agreements where the IP licence merely serves to enable the third party to produce in accordance with Starbucks' specifications and to protect Starbucks' IP rights. Starbucks' co-manufacturing or co-packaging partners typically supply the products back to Starbucks and do not exploit the intangibles on the market.
Various distribution agreements where the IP licence merely serves to allow the distributor to resell Starbucks branded products and to protect Starbucks' IP rights. The distributor does not exploit the Starbucks intangibles on the market.
- (3)
Licence agreements with Developers to enable them to exploit the Starbucks system and operate Starbucks coffee stores.
The Commission decided to initiate the formal investigation procedure because it took the preliminary view that the SMBV APA, which accepts the remuneration proposed by Starbucks' tax advisor for the functions performed by SMBV in the Netherlands, concluded by the Dutch tax administration in 2008 appeared to constitute State aid within the meaning of Article 107(1) of the Treaty that is incompatible with the internal market.
In particular, the Commission expressed doubts that the remuneration agreed for the functions performed by SMBV complied with the arm's-length principle.
- (1)
Whether the Dutch tax administration correctly accepted SMBV's classification as a low-risk toll manufacturer when it concluded the SMBV APA;
- (2)
Whether the Dutch tax administration was right to accept adjustments made by Starbucks' tax advisor when it concluded the SMBV APA; and
- (3)
Whether the Dutch tax administration was right to accept SMBV's interpretation as regards the calculation of royalties in its profit and loss accounts, insofar as the level of those royalties is not linked to the value of the IP in question.
In more detail, under first doubt the Commission questioned the tax advisor's assumption in the transfer pricing report that SMBV does not bear any risk and that it should therefore be classified as a toll or contract manufacturer. In particular, the Commission referred to the evidence of inventory risk recorded in the financial accounts of SMBV that would call this assumption into question.
Under the second doubt, the Commission questioned two consecutive adjustments by the tax advisor, which seem both to have the same purpose of addressing one comparability concern. The first adjustment consists in reducing the cost base retained to calculate SMBV's taxable base to operating expense. The tax advisor considered this appropriate because SMBV would be a toll or contract manufacturer. A second adjustment, designated a ‘Conversion Mark-up Adjustment’ in the transfer pricing report, deducts a multiple of COGS from the profit of companies used as comparables for transfer pricing purposes. That second adjustment, presented by the Netherlands as a ‘working capital adjustment’, reduces SMBV's taxable base in the Netherlands, but neither the adjustment nor the methodology used by the tax advisor seemed justified.
Finally, under its third doubt, the Commission questioned the arm's-length nature of the royalty paid by SMBV to Alki LP, since the amount of the royalty did not seem related to the value of the IP it is meant to remunerate. Due to the use of the TNMM in the transfer pricing analysis, the royalty corresponds in reality to the residual profit of SMBV, i.e. any profit recorded by SMBV above [9-12] % of operating expense is transformed into a tax deductible royalty (see Figure 2).
The Netherlands submitted its comments to the Opening Decision on 16 July 2014. They focus, first, on why the remuneration agreed upon in the SMBV APA is at arm's length and why the method chosen by the tax advisor is the appropriate method to determine that remuneration. Second, they focus on why the SMBV APA does not confer a selective advantage to SMBV.
According to the Netherlands, the remuneration agreed upon in the SMBV APA is at arm's length and the TNMM is the appropriate method to reach an arm's-length outcome in this case. The Netherlands argues that transfer pricing is not an exact science and that there is therefore a range of figures within which the transfer price can lie.
The Netherlands submits that, according to the OECD TP Guidelines, compensation for transactions between two independent companies will usually reflect the functions that each company performs and that therefore the functional analysis should be at the centre of the assessment of the arm's-length nature of the remuneration of SMBV. Pursuant to the OECD TP Guidelines, the contractual conditions are the starting point when it comes to determining whether the arm's-length principle has been applied correctly.
According to the Netherlands, the IP assigned by Starbucks to Alki LP in respect of the knowledge and information relating to coffee includes the use of technology and knowhow regarding the recipe for blending coffee beans, the process of roasting coffee and the production of other derived coffee products.
The Netherlands notes that the Roasting Agreement between Alki LP and SMBV cannot be considered a simple IP licence agreement. That agreement, a fifty-year manufacturing agreement, relates to the roasting of green coffee beans by SMBV. The Roasting Agreement is a contract between a client and a contractor, which also governs the provision of an IP right.
- (1)
Manufacture/coffee roaster activities: these activities are performed by production staff, coffee roasting technicians, maintenance staff, quality control staff and warehousing staff.
- (2)
Logistics and administrative support activities.
The Netherlands states that Starbucks intention has always been to set up an operating, low-risk coffee roasting plant and that the facts and circumstances have not changed significantly over the years. They argue that as SMBV was not involved in any business restructuring, the Commission cannot cite passages from Chapter 9 of the 2010 OECD TP Guidelines, as the 2010 OECD TP Guidelines were not yet available when the SMBV APA was agreed upon. The use of hindsight should be avoided under the OECD TP Guidelines.
According to the Netherlands, SCTC is responsible for purchasing the green coffee beans. It further argues that SMBV is not involved in the sourcing of raw materials as, according to the Roasting Agreement, SMBV can only source raw materials from parties which have been designated by Alki LP. SMBV only performs an administrative role in the management of stocks and does not bear the ultimate stock risk.
More specifically with regard to the administrative role, the Netherlands states that although under the Green Coffee Purchase Agreement it is SMBV that has to provide the information required with regard to the green coffee beans to be bought, this information is obtained by SMBV from Alki LP and, in a manner prescribed by Alki LP, from the Developers. The specifications are therefore only passed on by SMBV once it has obtained the information required for this purpose. According to the Netherlands, this combination results in a situation in which the role of the raw materials is comparable with that of providing goods on a consignment basis.
With regard to the ultimate stock risk, the Netherlands adds that, although SMBV retains the legal title to all products and materials used for the production activities, and it has put in place provisions for losses in the value of stock, the costs for which those provisions have been put in place are ultimately not born by SMBV. Given the way the royalty payment is determined under the Roasting Agreement, those costs are ultimately borne by Alki LP.
According to the Netherlands, no employees of SMBV are involved in business negotiations with Starbucks's developers/buyers. Regarding the price-setting, the Netherlands argues that Starbucks […] determines the global pricing formulae. The accounting team at Starbucks […] provides SMBV with the price list (‘[…] Price List’) by way of Alki LP and those prices are calculated using the globally adopted pricing formulae on which the Supply Agreements between SMBV and the Developers are based. The purchase price for green coffee beans paid by SMBV is derived from a pricing formula which includes aspects such as […]. If the underlying costs rise or fall, the cost base applied to set the prices between SMBV and its Developers is also amended. Moreover, Developers are obliged to purchase coffee and essential goods under the ADOA concluded between Starbucks Coffee BV and Developers.
According to the Netherlands, SMBV does not operate under a toll manufacturer contract. The contractual relationship results in a situation where the green coffee beans are being purchased legally, but without a functional contribution, from SCTC and invoiced to the buyers. Despite the lack of functionality as regards the purchase and sale, the stocks need to appear on SMBV's balance sheet in line with accounting standards.
The contractual relationships between SMBV, Alki LP, SCTC and the Developers described above lead, according to the Netherlands, to the conclusion that SMBV is a manufacturer with a low-risk profile and that conclusion is further supported by the functional analysis. SMBV is therefore to be regarded by the Netherlands as the ‘least complex entity’ (tested party) whose arm's-length remuneration must be determined using a benchmarking study.
According to the Netherlands, the databases used to carry out a benchmarking study do not provide any details such as the transaction prices or terms and conditions. The information available is limited to a comparison of operational results for the entity as a whole. The TNMM is the most commonly used method internationally. According to the Netherlands, this is confirmed in the 2010 OECD TP Guidelines as well as the 1995 OECD TP Guidelines, which applied when the SMBV APA was concluded.
In view of SMBV's role as a toll manufacturer, the relevant costs to determine the cost basis used to calculate the profit mark-up are the costs which have resulted in added value. In the case of SMBV, the operational costs are, according to the Netherlands, the relevant costs with added value to which a profit mark-up is applied. Thus, based on the benchmark, the profit mark-up is [9-12] % of the operational costs. SMBV has a low risk profile and no added value with regard to the raw materials and plays a supporting role for the non-coffee-related products. The operational costs associated with these limited support activities are included in the cost base. As a result, these activities are also paid with a [9-12] % profit mark-up.
With regard to the comparability adjustments, the Netherlands argues that at the time that the transfer pricing report was drawn up on which the SMBV APA is based, there was no indication on how to deal with manufacturers with a low risk profile. It acknowledges that the 2010 OECD TP Guidelines do contain more instructions on comparability adjustments, including working capital adjustments, but argue that those examples are only guidelines and that this means that other positions can also result in an arm's-length result. Moreover, the Netherlands argues that the assessment of whether the SMBV APA is in line with the arm's-length principle must be based on the knowledge and existing OECD TP Guidelines that were available at the time, i.e. the 1995 OECD TP Guidelines. Therefore, also the Annex to Chapter III of the 2010 OECD TP Guidelines, which shows a working example of a comparability adjustment, could not be applied.
The Netherlands has also performed a sensitivity analysis on the arm's-length range, calculated according to the methodology in the transfer pricing report, if some of the parameters are modified. The Netherlands modified the time period of the comparison and recalculated ranges considered as arm's length for periods 2008-2012 and 2003-2012, compared to the range of 2001-2005 in the transfer pricing report. Additionally the Netherlands recalculated the range if the percentage of COGS deducted from the remuneration under the second adjustments would not be EURIBOR plus 50 basis points, but rather EURIBOR minus 50 basis points and finally if it would be what the Netherlands designate as ‘current account rate’. The Netherlands also calculated the margin achieved by SMBV as a percentage of operating cost and raw material costs (excluding the cost associated with tea and other COGS with an intermediary nature) for the periods 2008-2012 and 2003-2012 and compared this with the mark-up on the total cost for the comparable companies on both EBT and EBIT level for the same time periods. On the basis of those simulations, the Netherlands' conclusion is that if any of the doubts raised by the Commission were to be accepted, this would still result in a remuneration within the arm's-length range. In accordance with the OECD TP Guidelines, no corrections are permitted to be made when the remuneration falls within the arm's-length range.
The Netherlands further submits that no selective advantage is being conferred on SMBV and that no State aid is involved within the meaning of Article 107(1) of the Treaty.
The Netherlands explains that the arm's-length principle has been incorporated into Article 8b(1) CIT and elaborated further in the Decree, which is fully in line with Article 9 of the OECD Model Tax Convention. The Netherlands reiterates what is also stated in the Decree itself, that the Decree is specifically aimed at aspects which the OECD TP Guidelines leave open to interpretation or where there is a lack of clarity.
In particular, the Netherlands argues that, in situations relating to transfer pricing, a selective advantage can only be involved if it is demonstrated that the OECD TP Guidelines and Decree are expressly deviated from and that obvious errors of judgment are made in the application of the arm's-length principle or if an established national policy is being deviated from. The tax authorities' discretion in assessing and approving methods and results in individual cases does however not imply any selectivity in any way or arbitrary treatment. Given that the Netherlands considers the result of the SMBV APA as an acceptable approximation of a market price, they do not consider it to confer an advantage to SMBV.
The Netherlands further argues that the reference system applied by the Commission, which is the ordinary tax system based on the difference between profits and losses of an undertaking carrying on its activities under normal market conditions, is not correctly identified. According to the Netherlands, the correct reference system should be the corporate income tax law which includes the arm's-length principle under Article 8b(1) CIT and the Decree that provides further guidance on the application of the arm's-length principle. The Netherlands argues that as long as the SMBV APA does not deviate from Article 8b(1) CIT and the Decree, there cannot be a selective advantage.
With regard to the TNMM method used, the Netherlands argues that on the basis of the Decree every taxpayer is in principle free to choose a transfer pricing method, provided the method chosen leads to an arm's-length outcome for the specific transaction. Therefore, the doubts about the use of the TNMM which were raised by the Commission go beyond the doubts that the Dutch tax administration could have expressed under the Decree with regard to this transfer pricing method. Further, the Netherlands insists that the Decree requires only that a transfer pricing analysis results in a range of arm's-length results and not in a precise arm's-length price.
Finally, the Netherlands observes that if the Commission were to impose its own interpretation of tax principles of the Member States, it would encroach on the sovereignty of the Netherlands.
Starbucks sent its comments to the Opening Decision on 16 January 2015. In addition, Starbucks sent market information to the Commission by letters dated 13 April 2015, 29 May 2015, 10 September 2015 and 23 September 2015. Starbucks's comments largely resemble those of the Netherlands, in as much as both argue that the remuneration in the SMBV APA was at arm's length and did not confer a selective advantage to SMBV.
First, Starbucks argues that SMBV only performs limited, low-risk functions in support of the worldwide Starbucks organisation serving the EMEA region. In support of that argument, […]. According to Starbucks, the primary responsibility of SMBV consists in the roasting and packaging of coffee, as well as logistic and administrative activities to ensure a smooth and efficient delivery of the various goods to the Developers.
With regard to the structure chosen, Starbucks argues that a roasting arrangement on a consignment basis was considered, but that this would have been unpractical and would have resulted in administrative complexities and too many inter-company transactions. To align the administrative and legal structure with the physical flow of the goods and for efficiency reasons, Starbucks decided to use SMBV as the contracting and invoicing entity. A consequence of that structure is that the inventories (for green coffee beans, non-coffee products and non-strategic goods) appear on the balance sheet of SMBV, since accounting standards and practice follow the legal product flow. However, Starbucks argues that SMBV's role as contracting and invoicing entity is just of an administrative nature and does not result in any transfer of risks or commercial responsibilities to it as under the Roasting Agreement it is rather Alki LP, supported by Starbucks US, that bears all the economic risk of SMBV, including the inventory risk. Moreover, even though SMBV is the contracting party with the Developers, this is done on the basis of standardised agreements and underlying terms and conditions that are determined by Starbucks US. Finally, as SMBV acquires the legal ownership, the inventory would also have to appear in its balance sheet, which according to Starbucks also explains why SMBV took provisions for inventory obsolesce, which it is compensated for under the SMBV APA.
As regards the transfer pricing method chosen, although not present in the transfer pricing report, Starbucks sets out the role of Alki LP against the role of SMBV. Starbucks argues that since SMBV is only engaged in routine execution activities in the areas of roasting, packaging and supporting logistic and administrative services, while Alki LP licenses the valuable intellectual property and bears the entrepreneurial risk, SMBV is the least complex entity. Therefore, the TNMM constitutes the most appropriate transfer pricing method. Starbucks argues that, because there are no comparable transactions similar to the arrangement between Alki LP and SMBV, the CUP method would not have been suitable for transfer pricing purposes. In any event, the Dutch tax administration has to start the transfer pricing examination on the basis of the methodology selected by the taxpayer.
Starbucks recalls that the application of any transfer pricing method typically produces a range of figures, which could be equally defensible, since transfer pricing is not an exact science and that any transfer pricing analysis will inherently result in a range of arm's-length outcomes and a conclusion on an arm's-length price and not the arm's-length price.
As regards the adjustments, the purpose of the adjustments is to account for important differences in the functional profiles of SMBV and the comparable companies included in the sample to arrive at an appropriate arm's-length remuneration. According to Starbucks, those adjustments were appropriate, in certain respects conservative, and certainly did not understate SMBV's remuneration for the functions performed. To further substantiate the reasonableness of the [9-12] % mark-up, Starbucks asked [the tax advisor] to make a comparison between the actual results realised by SMBV with the actual results realised by the comparable companies in the period 2008–2012. This backward looking analysis demonstrates that the [9-12] % mark-up has remained comfortably within the appropriate ranges. That further confirms the arm's-length nature of the applied transfer pricing methodology for SMBV as agreed upon in the APA concluded with the Dutch tax authorities. Starbucks also requested [a law firm] to provide a second opinion on whether the 2007 transfer pricing report properly applied the arm's-length principle. [The law firm] did not conducted an own factual investigation but reviewed the transfer pricing report and the documents available to the tax advisor. It concluded that the arm's-length principle had been reasonably applied to SMBV's intragroup transactions.
In its submissions in response to the Commission's Starbucks MIT request, Starbucks expressed views presented in recitals 151 to 154. Starbucks further indicated that the Commission cannot use information which post-dates the SMBV APA for its assessment.
The NOB argues that the determination whether a particular tax treatment of a taxpayer under an APA constitutes State aid should be based on Dutch legislation, administrative practice and application of the arm's-length principle at the time that that APA was entered into. It also argues that under the Decree, the Dutch tax administration does not apply ‘a best-method rule’ (that is, it does not require that the best method is used for tax base calculation) and that the application of the arm's-length principle usually results in an arm's-length range instead of a single arm's-length price. The NOB notes that the reference to the prudent independent market operator in the Opening Decision seems to introduce a new sort of EU standard above and beyond the OECD TP Guidelines for assessing the arm's-length nature of the underlying arrangement. It asks for a confirmation that the Commission will use the domestic legal system as a reference framework and no other standard. It further argues that taxpayers should have legitimate expectations that APAs that are concluded on the basis of a national interpretation of the domestic laws do not constitute State aid.
VNO-NCW expresses its worries on the application of the prudent independent market operator test and urges for the use of the nationally applied transfer pricing rules as the benchmark for assessing selectivity. It argues that the application of the arm's-length principle usually results in an arm's-length range instead of a single arm's-length price.
ATOZ's main argument relates to the legal basis for the Opening Decision. According to ATOZ, the decision does not distinguish whether the pricing agreement in the SMBV APA diverges from Dutch administrative practice, from any other tax authorities' habitual practice or from OECD standards, but merely concludes that it does not respect the arm's-length principle. ATOZ argues that it seems that the Commission takes the view that there is an objective arms-length standard, based on OECD principles and somehow enshrined in EU law, which transcends Member States' national law and practice. However, according to ATOZ, the Commission should consider whether the SMBV APA is consistent with Dutch law. ATOZ argues that the Commission's approach creates, amongst others, legal uncertainty among multinationals.
Oxfam in its comments expressed support for the Commission's investigation, encouraging the Commission to increase its investigation capacity also in view of the fact that it may be better placed than national bodies to structurally assess the tax ruling practices of the Member States. It calls on the Commission to ensure that adequate sanctions are adopted in cases where selective advantages are confirmed and that harmful tax practices are phased out quickly.
The BAK supports the Commissions arguments from the Opening Decision and argues that, in general, those sorts of agreements and legal structures lower the worldwide taxes paid, which has negative consequences for consumers and employees.
Company X, which does not want its identity to be disclosed, presented observations to the Commission in response to the Opening Decision. According to that company, based on its evaluation as a competitor of Starbucks, the value added by the roasting process (roasting and packing, not considering the cost for packaging materials) to green coffee would be on average equal to 13-17 % of the green coffee cost, in case of roast and ground coffee or coffee in beans. According to that company, those levels would be applicable to all distribution channels.
As explained in recital 20, the Commission contacted four competitors of Starbucks to provide market information on their business model and their value creating activities so as to enable the Commission to complete its assessment of the SMBV APA. The four competitors concerned are Company Y, Dallmayr, Nestlé and Melitta. The choice of the four companies was based on the consideration that all companies are active in the coffee roasting segment and, being group companies, could provide insight into the organisation of coffee roasting activities within an integrated company.
By letter of 27 April 2015, Dallmayr replied to the request for market information by the Commission.
Dallmayr informed the Commission that coffee roasting is either performed as a stand-alone business or vertically integrated within a company. Larger companies usually perform roasting in-house. The sourcing function is typically integrated with the roasting function. Dallmayr does not outsource the roasting function.
Dallmayr considers the payment of a royalty by a third party that provides the roasting services rather unusual. In fact, Dallmayr would expect the customer to pay the roaster, not the other way around.
By letter of 20 May 2015, Nestlé replied to the Commission's request for market information. Nestlé indicated that the three elements important in the value creation for coffee are the quality (the type of bean), the darkness (achieved by roasting), and the grind size. They also indicated that they do not and would not outsource the roasting function due to the importance of roasting to the flavour development of the product.
By letter of 26 May 2015, Melitta replied to the Commission's request for market information. Melitta indicated situations in which they could outsource the roasting of coffee beans. These situations are: (i) when machinery is not available in its factory to produce specific types of products, such as specific packaging formats or soft pads; (ii) when machinery is not available in its factory to produce soluble coffee; and (iii) when sales exceed the available roasting and packaging capacities at its factory. In that last case, when roasting and packaging is outsourced due to capacity constraints, green coffee beans from Melitta are sent to the supplier who roasts and packs the coffee to a finished product. That finished product is then delivered to Melitta. Such a contract was in place with the same supplier for a number of years.
To assure the quality and taste of the finished product, Melitta either provides roasting curve prescriptions or defined taste profiles to the third party to whom the roasting is outsourced.
The contractual arrangement does not foresee any royalties paid to Melitta when outsourcing the roasting activity.
By letter of 27 April 2015, Company Y replied to the Commission's request for market information. The Commission requested a clarification by a letter of 11 May 2015, to which Company Y replied on 21 May 2015.
Company Y does not outsource the coffee roasting function to third parties. The roasting is ensured by a group company designated as a toll manufacturer by Company Y. This coffee roasting company does not pay any royalty for the use of the intellectual property or the know-how used in the roasting process.
The company pays licence fees for the use of IT systems. For the remuneration of the group company, classified by Company Y as a toll-manufacturer, the cost base is the production costs, excluding raw material costs. The production costs are particularly energy, depreciations on machines (as for example roasting and packaging line), personnel costs, IT costs and maintenance of equipment.
By letters dated 20 and 26 April 2015, the Netherlands expressed their complete agreement to the observations of Starbucks, the NOB, VNO-NCW and ATOZ. With regard to the comments of Oxfam, the Netherlands indicated that this concerns an observation on detrimental tax competition in general and does not examine the SMBV case in particular. The Netherlands considers the claims made by BAK incorrect and refrains therefore from commenting on them.
By letter dated 11 March 2015, the Netherlands stated that they cannot provide any substantive reply to the comments by company X, as the Netherlands were not provided with the functional analysis and benchmark of the anonymous competitor.
By letter dated 27 May 2015, the Netherlands provided its comments to the market information provided by Dallmayr and Company Y. As a general comment, the Netherlands states that the functional analysis and the contractual arrangements are missing and that making a comparison is therefore very difficult as both parties do not outsource the roasting function to an independent third party.
With regard to Dallmayr, the Netherlands states that Dallmayr's definition of roasting includes more than just coffee roasting, as the sourcing function is integrated with the roasting function. Furthermore, the Netherlands argues that SMBV does not perform sales activities with regard to coffee and non-coffee items but that it seems that Dallmayr has been differently organised on this point. Furthermore, under Dallmayr's client — contractor relationship, the Netherlands argue that the remuneration takes place on the weight and price of green coffee beans which puts the occupation degree risk on the contractor where this is not the case with SMBV.
With regard to Company Y, the Netherlands states that coffee roasting is considered a routine function and that the roasting facility is remunerated on a cost plus margin, where the green coffee bean cost does not form part of the cost base. According to the Netherlands, this approach is fully in line with the SMBV APA.
With regard to Nestlé, the Netherlands states that the three elements that create value for coffee according to Nestlé are all performed by other foreign companies of the Starbucks group, not by SMBV (sourcing and quality control of the beans is performed by SCTC, the roasting curves are provided by Alki LP, and the Starbucks coffee Shops perform the grinding).
With regard to Melitta, the Netherlands states that the three situations described by Melitta where the coffee roasting function is outsourced is in some ways different to the situation of SMBV. In situation 1 and 3, similarity lies in the fact that the sourcing function is also not performed by the producer, but according to the Netherlands the difference is the length of the roasting contract (annual contract compared to the 50 year valid roasting agreement) and the occupation degree risk (which would be at the level of Alki LP according to the Netherlands compared to at the level of Melitta). The second situation the Netherlands considers too different to be able to make a comparison, as it not only concerns the roasting of coffee beans but also the production of all-inclusive products.
By letter dated 19 June 2015, the Netherlands provided its comments to the market information provided by Starbucks. In those comments, the Netherlands repeated its statement that they consider that the correct reference framework should be the Dutch national tax system and, in particular, Article 8b of the CIT 1969 and the Decree. It argues that Article 8b and the Decree always apply for intra-group transactions, whether a company asked for an APA or not. Moreover, the Netherlands states that the TNMM is internationally the most commonly used method and that the Netherlands does not apply a best method rule. It also argues that an advantage of the TNMM is that a country only has to consider the transfer price unilaterally and that a possible higher or lower transfer price for the green coffee beans would not affect the tax base of SMBV, as the cost of the beans are excluded from the cost base to which the margin is applied.
In its letter of 7 October 2015, the Netherlands repeats its argument that the CUP method is not applicable to the royalty payment by SMBV to Alki LP. In addition, the Netherlands indicates that the price paid for green coffee beans by SMBV to SCTC would be at arm's length, based on the fact that [unaffiliated manufacturing company 2] was paying a higher price for green coffee beans than SMBV under its contract with Starbucks. Finally, the Netherlands provided financial information on 11 companies from different Union Member States, all registered under the NACE code ‘Processing of tea and coffee’, indicating that on balance all these companies have a similar or lower profitability than SMBV and that some of those companies even have been loss-making over several financial periods.
According to Article 107(1) of the Treaty, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the provision of certain goods shall be incompatible with the internal market, in so far as it affects trade between Member States.
As regards the first condition for a finding of aid, the SMBV APA was concluded by the Dutch tax administration (Belastingdienst), which is part of the public administration of the Netherlands. That APA entails an acceptance by the Dutch tax administration of a profit allocation proposed by Starbucks on the basis of which SMBV determines its corporate income tax liability to the Netherlands on a yearly basis. The SMBV APA is therefore imputable to the Netherlands.
As regards the third condition for a finding of aid, the Commission will demonstrate from recital 252 onwards why it considers the SMBV APA to confer a selective advantage upon Starbucks, in so far as it results in a lowering of SMBV's tax liability in the Netherlands by deviating from the tax SMBV would be due under the general Dutch corporate income tax system, therefore fulfilling all the conditions for a finding of aid under Article 107(1) of the Treaty.
As a general rule, for the purposes of the selectivity analysis a reference system is composed of a consistent set of rules that apply on the basis of objective criteria to all undertakings falling within its scope as defined by its objective.
While the determination of taxable profits in the case of non-integrated/domestic standalone companies that transact on the market is rather straightforward, as it is based on the difference between income and costs in a competitive market, the determination of taxable profits in the case of integrated group companies like Starbucks requires the use of proxies. Standalone, non-integrated companies can take their accounting profits as a starting point for determining the tax base to which the Dutch corporate income tax applies, since those profits are dependent on prices dictated by the market for the inputs acquired and the products and services sold by the company. By contrast, an integrated company that transacts with companies of the same corporate group will first have to estimate the prices applied to those intra-group transactions for determining their taxable profits, that estimate being determined by the same company controlling the group instead of being dictated by the market.
This is also confirmed by Article 8b(1) CIT and the Decree that implements the OECD's arm's-length principle into Dutch tax law. In its introduction, the Decree states: ‘The policy of the Netherlands on the arm's-length principle in the field of international tax law is that this principle forms part of the Netherlands' system of tax law as a result of its incorporation in the broad definition of income recorded in Section 3.8 of the Income Tax Act 2001.’ Section 3.8 of the Income Tax Act 2001 reads: ‘[t]he profit from a business enterprise is the amount of the aggregate benefits that, under whatever name and in whichever forms, are derived from a business enterprise’. Thus, the Decree, through its reference to Section 3.8 of the Income Tax Act 2001 and the concepts of income and profit ‘under whatever name and in whichever form derived from a business enterprise’, does not make any distinction between income and profits derived by a group company or a standalone company.
In any event, contrary to what the Netherlands and Starbucks claim, the Groepsrentebox decision does not confirm that where a tax measure is granted in favour of an integrated company, the reference system must necessarily be limited to those types of companies. Moreover, the objective of the tax measure at the basis of the Groepsrentebox decision is not comparable to the present case and therefore, the conclusions the Netherlands and Starbucks draw from that decision are not applicable to the present case.
By contrast, the objective of the SMBV APA is to determine SMBV's tax base to calculate the tax due for the purposes of levying the Dutch corporate income tax on that amount. First, while it could be argued that the objective underlying the Groepsrentebox decision is only valid in a group context (such as the fact that stand-alone companies are not faced with the issue of arbitrage between different forms of financing), the determination of the tax base for the computation of the annual corporate income tax liability is equally relevant and applicable to entities that are part of a group as well as stand-alone companies.
The Commission therefore concludes that the reference system against which the SMBV APA should be examined is the general Dutch corporate tax system in the form of the Dutch corporate income tax rules (CIT). In particular, that reference system is composed of a consistent set of rules that apply on the basis of objective criteria for the taxation of profits of stand-alone companies, where the determination of the taxable profit usually coincides with the accounting profit (subject to certain adjustments based on tax law) and of group companies, which resort to transfer prices to allocate profits, alike. In light of the intrinsic objective of that system, both types of companies — non-integrated and integrated companies — should be considered to be in a similar factual and legal situation.
The Commission does not accept this line of reasoning.
As explained in recital 236, the objective of the Dutch corporate income tax system is to tax the profits of all companies that fall under its tax jurisdiction, irrespective of whether those companies are integrated or non-integrated companies. As explained in recital 232, Dutch corporate income tax is levied on the worldwide profits of companies resident in the Netherlands (unless a tax treaty applies), while non-resident companies, including Dutch branches of foreign companies, are only taxed on specific Dutch-sourced income.
By considering, as the Netherlands does, that the reference system only includes group companies, since only they need to revert to the arm's-length principle as required by Article 8b CIT and the Decree when allocating profit, an artificial distinction is introduced between companies based on their company structure for the purpose of determining their taxable profits that the general Dutch corporate income tax system does not recognise when taxing profits of companies falling within its tax jurisdiction. Indeed, the Decree is meant precisely to ensure that group and stand-alone companies are treated in a similar manner under the general Dutch corporate income tax system and taxed on profits that derive from their activities, whether those activities are carried out in an intra-group context or not.
The Commission considers that the purpose of the Decree is and cannot be to establish special rules for related companies, but to clarify the application of the arm's-length principle under Article 8b(1) CIT in light of the OECD TP Guidelines given that the purpose of the Decree is, as acknowledged by the Netherlands, ‘specifically aimed at aspects which the OECD TP Guidelines leaves open to interpretation or where there is a lack of clarity’. The rules laid down in the Decree are therefore meant to align the tax treatment of related companies with the treatment of unrelated companies to the extent that transactions between related parties should be priced at arm's length and therefore mirror the situation of unrelated parties for the purposes of levying corporate income tax on their profits.
In any event, the Commission observes that if the reasoning of the Netherlands and Starbucks were accepted that the Decree does establish special rules for integrated companies, the existence of those special rules could, in itself, lead to a finding of selectivity. In fiscal cases, selectivity exists when a Member State exempts a (certain category of) undertaking(s) from a general rule that applies to all undertakings in a comparable factual and legal situation. It also exists when a special regime is set up that deviates from that general rule for the benefit of certain but not all undertakings in a comparable factual and legal situation. Thus, considering the Commission concludes that integrated and non-integrated companies are in a comparable factual and legal situation as regards the imposition of Dutch corporate income tax to profits, the creation of a special regime that applies only to integrated companies, which deviates from the general Dutch corporate income tax rules, is in itself selective in nature, so that any benefit granted on the basis of that regime is selective in nature.
The Commission therefore concludes that, in the present case, the reference system against which the SMBV APA should be examined is the general Dutch corporate income tax system, irrespective of whether corporate income tax under that system is imposed on group or stand-alone companies.
Having determined that the general Dutch corporate income tax system constitutes the reference system against which the SMBV APA should be assessed, it is necessary to establish whether that APA constitutes a derogation from that reference system, leading to unequal treatment between companies that are factually and legally in a similar situation.
In relation to that second step of the selectivity analysis, whether a tax measure constitutes a derogation from the reference system will generally coincide with the identification of the advantage granted to the beneficiary under that measure. Indeed, where a tax measure results in an unjustified reduction of the tax liability of a beneficiary who would otherwise be subject to a higher level of tax under the reference system, that reduction constitutes both the advantage granted by the tax measure and the derogation from the system of reference.
In principle, the function of an APA is to establish in advance the application of the ordinary tax system to a particular case, given a set of facts and circumstances specific to that case, for a certain period of time and provided that there is no material change over the application of the APA in that specific set of facts and circumstances. Where an APA is based on a method of assessment that deviates from what would result from a normal application of the ordinary tax system without justification, that APA will be considered to confer a selective advantage upon its beneficiary in so far as that selective treatment results in the lowering of that beneficiary's tax liability in the Member State concerned as compared to companies in a similar legal and factual situation.
As explained in recital 42 et seq., by concluding the SMBV APA, the Netherlands accepted a methodology for determining SMBV's taxable profit in the Netherlands, as proposed by the Starbucks' tax advisor in the transfer pricing report, which allows SMBV to determine its corporate income tax liability in the Netherlands on a yearly basis for the duration of which that APA is valid. More specifically, the transfer pricing report endorsed by the SMBV APA determines, in the absence of transactions dictated by the market as would exist for a non-integrated independent company, the profit to be allocated to that company of the Starbucks group resulting from the transactions it concludes with the other group companies of the Starbucks group.
The Court has thus accepted that a tax measure which results in a group company charging transfer prices that do not reflect those which would be charged in conditions of free competition, that is prices negotiated by independent undertakings negotiating under comparable circumstances at arm's length, confers an advantage on that group company in so far as it results in a reduction of its taxable base and thus its tax liability under the ordinary corporate income tax system.
The principle that transactions between intra-group companies should be remunerated as if they were agreed to by independent companies negotiating under comparable circumstances at arm's length is generally referred to as the ‘arm's-length principle’. In the Belgian coordination centres judgment, the Court of Justice endorsed the arm's-length principle as the benchmark for establishing whether a group company receives an advantage for the purposes of Article 107(1) of the Treaty as a result of a tax measure that determines its transfer pricing and thus its taxable base.
The purpose of the arm's-length principle is to ensure that transactions between group companies are treated for tax purposes by reference to the amount of profit that would have arisen if the same transactions had been executed by independent companies. Otherwise, group companies would benefit from a favourable treatment under the ordinary corporate income tax system when it comes to the determination of their taxable profits that is not available to independent companies, leading to unequal treatment between companies that are factually and legally in a similar situation in light of the objective of such a system, which is to tax the profits of all companies falling under its tax jurisdiction.
The Commission's assessment of whether the Netherlands granted a selective advantage to SMBV must therefore consist in verifying whether the methodology accepted by the Dutch tax administration by concluding the APA for the determination of SMBV's taxable profits in the Netherlands departs from a methodology that results in a reliable approximation of a market-based outcome and thus from the arm's-length principle. In so far as the methodology the Netherlands accepted by the SMBV APA results in a lowering of SMBV's tax liability under the general Dutch corporate income tax system as compared to non-integrated companies whose taxable profit under that system is determined by the market, that APA will be deemed to confer a selective advantage to SMBV for the purposes of Article 107(1) of the Treaty.
In conclusion, if it can be shown that the methodology accepted by the Dutch tax administration, by concluding the SMBV APA, for the determination of SMBV's taxable profits in the Netherlands departs from a methodology that leads to a reliable approximation of a market-based outcome and thus from the arm's-length principle, that APA will be found to confer a selective advantage on SMBV for the purposes of Article 107(1) of the Treaty in so far as it leads to a lowering of SMBV's tax liability under the general Dutch corporate income tax system as compared to non-integrated companies whose tax base is determined by the profits they generate under market conditions.
The SMBV APA accepts a methodology for determining a profit allocation to SMBV within the Starbucks group, which is based on a transfer pricing report prepared by Starbucks' tax advisor that calculates a remuneration for a function performed by SMBV (roasting/manufacturing).
- (i)
the choice to use the TNMM to estimate a taxable profit;
- (ii)the choice of operating expenses as profit level indicator for use in the application of the TNMM132; and
- (iii)the application of a working capital adjustment to address differences between SMBV and the comparables used to estimate an arm's-length mark-up133.
The transfer pricing report concludes on a remuneration for the roasting function SMBV performs equal to a mark-up of [9-12] % of its operating expense, which is accepted by the Dutch tax administration as constituting an arm's-length remuneration in the SMBV APA. The Dutch tax administration further accepts in the SMBV APA that any profit generated by SMBV in excess of that level of remuneration will be paid out as a royalty to Alki LP.
In the following sections, the Commission will explain why it considers that several of the methodological choices underlying the transfer pricing report should not have been accepted by the Dutch tax administration in the SMBV APA, because their acceptance results in a taxable profit for SMBV that cannot be regarded to constitute a reliable approximation of a market-based outcome and results in a reduction of SMBV's tax liability as compared to non-integrated companies whose taxable profits is determined by the market.
The SMBV APA agrees to a taxable remuneration for SMBV for its roasting function. It also agrees that any profits generated by SMBV in excess of that level of remuneration will be paid out as a royalty to Alki LP which is not taxed in the Netherlands.
In other words, by concluding the SMBV APA, the Dutch tax administration expressly accepts that the tax advisor's methodology for calculating the taxable remuneration due to SMBV for its roasting function directly determines the level of the royalty paid by SMBV to Alki LP for the roasting IP licensing arrangement between them. It also expressly accepts that the actual level of profits generated by SMBV in the Netherlands is to be reduced for tax purposes by that royalty payment, resulting in a lower taxable profit than that actually recorded. Indeed, if SMBV's accounting profits are higher than the level of remuneration agreed to in the SMBV APA, the royalty payment to Alki LP will be increased by the difference between that level of remuneration and SMBV's accounting profits.
Thus, the royalty is an adjustment variable determined by combining SMBV's accounting profits and the remuneration agreed in the SMBV APA. As such, the roasting IP licensing arrangement between Alki LP and SMBV is the transaction for which the SMBV APA was effectively requested and the methodology for determining the level of that royalty as an adjustment variable is the transaction effectively being priced by the SMBV APA.
Nevertheless, the transfer pricing report upon which that APA is based only proposes a remuneration for SMBV by analysing a function performed by it (roasting/manufacturing) through the application of the TNMM; it does not identify the royalty payment as the adjustment variable in constructing that proposed remuneration. Consequently, that report fails to identify or analyse the roasting IP licensing arrangement for which that royalty is paid as the transaction effectively being priced and therefore fails to establish a methodology for ensuring that that royalty payment is in line with the arm's-length principle.
The purpose of a transfer pricing exercise, however, is to establish whether the conditions of controlled transactions are consistent with the arm's-length principle.
As will be shown in the following section, since the transfer pricing report failed to provide any information on uncontrolled transactions similar to the roasting IP licensing arrangement between SMBV and Alki LP and, thus, since it failed to examine the only intra-group transaction that was effectively being priced by the transfer pricing analysis, the transfer pricing methodology proposed by Starbucks' tax advisor and accepted by the SMBV APA cannot be considered to result in a reliable approximation of a market-based outcome in line with the arm's-length principle. Indeed, since the transfer pricing report engages in an analysis of an arm's-length remuneration for SMBV based on an incorrect point of departure (its roasting function), it results in a remuneration which is improperly estimated on the basis of the TNMM. Rather, recourse should have been had to more reliable comparisons to available information on similar transactions between unrelated parties for transfer pricing purposes, which was in the possession of Starbucks at the time that the APA request was made and should have been requested by the Dutch tax administration to ensure the royalty payment being priced by the SMBV APA was at arm's length.
The IP for which the royalty payment is made covers the roasting know-how and the roasting curves licensed by Alki LP to SMBV. That royalty payment does not relate to the value of the Starbucks' brand, since the right to use that brand is paid for by the Shops to Starbucks Coffee BV.
(EUR) | ||||||||
2006/2007 | 2007/2008 | 2008/2009 | 2009/2010 | 2010/2011 | 2011/2012 | 2012/2013 | 2013/2014 | |
|---|---|---|---|---|---|---|---|---|
Royalty paid by SMBV | 4 699 336 | 1 698 150 | 2 470 449 | 1 079 817 | 12 352 838 | 5 786 211 | 22 812 962 | 24 285 088 |
Revenue from sales of coffee | [20-30 million] | [20-30 million] | [20-30 million] | [20-30 million] | [40-50 million] | [50-60 million] | [50-60 million] | [60-70 million] |
Net result for the year | [20-30 %] | [1-10 %] | [1-10 %] | [1-10 %] | [30-40 %] | [10-20 %] | [30-40 %] | [30-40 %] |
In this specific context, the variable nature of the royalty payment gives a first indication that the level of that payment bears no relation to the value of the IP for which it is being paid.
For the reasons explained in recitals 291 to 338, the Commission considers that a comparison to comparable uncontrolled transactions using the CUP method, in particular the IP licensing arrangements in several roasting and manufacturing and distribution agreements Starbucks has concluded with third parties, demonstrates that the arm's-length value of the royalty paid by SMBV to Alki LP for the roasting IP should be zero. In other words, no royalty should be due for that IP in that specific relationship, since SMBV does not derive any benefit from the use of the roasting IP licensed from Alki LP.
Certain roasting and manufacturing contracts concluded by Starbucks group companies with third parties, listed in recitals 148 to 150, were provided by Starbucks to the Commission during the investigation. For the reasons explained in recitals 292 to 298, the Commission considers those transactions to constitute a direct comparable for determining the level of the royalty payment due by SMBV to Alki LP under the roasting IP licensing arrangement.
Paragraph 1.38 of the 2010 OECD TP Guidelines provides the following guidance on the comparability examination ‘the examination of the […] comparability factors is by nature two-fold i.e. it includes an examination of the factors affecting the taxpayer's controlled transactions and an examination of the factors affecting uncontrolled transactions. Both the nature of the controlled transaction and the transfer pricing method adopted […] should be taken into account when evaluating the relative importance of any missing piece of information on possible comparables […]’.
The Commission observes, first, that the characteristics of the property transferred under the roasting IP arrangement between Alki LP and SMBV is identical to the property transferred in the transactions between Starbucks and the third parties in the roasting agreements listed in recitals 148 to 150. Both sets of transactions consist of roasting technology, coffee blends and roasting curves.
Second, while not all of those third parties roast coffee (some are engaged in the production of ready-to-drink beverages or other products and ingredients for drink preparation), in those transactions where the third parties do roast coffee, the function of the third party relates to the exact same product as SMBV's roasting function in its contractual relationship with Alki LP. In particular, Starbucks contractual arrangements with [unaffiliated manufacturing company 2], [unaffiliated manufacturing company 3], [unaffiliated manufacturing company 4] and [unaffiliated manufacturing company 10] all pertain to the roasting of green coffee.
Fourth, there is no indication that the economic circumstances of the third parties affect their arrangement with Starbucks. In particular, as Starbucks provided many roasting IP licensing arrangements of which none could be identified as containing a royalty paid to Starbucks for the roasting IP, this cannot be related to the specific economic circumstances of an individual third party. The arrangements cover different geographic regions, including the Union and Switzerland, which was considered as a relevant geographic delimitation for the comparables search in the transfer pricing report.
Fifth, the business strategies of the third parties are discussed below. The arrangements differ principally depending on whether the third party exploits the IP directly on the market by selling products to end customers or not.
Accordingly, with those uncontrolled transactions, the level of an arm's-length royalty payment between SMBV and Alki LP can be determined using the CUP method, that is, comparing the payment due in a controlled transaction (from SMBV to Alki LP) to the payment due in comparable uncontrolled transactions (from third parties to other Starbucks group companies), conducted under comparable circumstances.
In this regard, the Commission notes that under similar agreements concluded by Starbucks with [unaffiliated manufacturing company 2], [unaffiliated manufacturing company 3], [unaffiliated manufacturing company 4], [unaffiliated manufacturing company 9], [unaffiliated manufacturing company 8], [unaffiliated manufacturing company 1] and [unaffiliated manufacturing company 10], third parties do not pay a royalty under their licensing arrangements with Starbucks if they do not exploit the roasting IP directly on the market.
Indeed, [unaffiliated manufacturing company 3] only pays a royalty to Starbucks when it sells its production to the [unaffiliated manufacturing company 3- Starbucks joint-venture]. In that case, [unaffiliated manufacturing company 3] directly exploits the roasting IP on the market through a related party, so that the royalty payment appears to cover the distribution of Starbucks' branded products to third parties by the joint venture. This conclusion is confirmed by the fact that when [unaffiliated manufacturing company 3] resells the roasted coffee to the Starbucks group, rather than to the joint venture, and the distribution and exploitation on the market of the brand is ensured by the Starbucks group, no royalty is paid by [unaffiliated manufacturing company 3] to Starbucks for the roasting IP.
As regards [unaffiliated manufacturing company 2], while Starbucks claims that the higher mark-up on the green coffee beans purchased for Starbucks in the contract with [unaffiliated manufacturing company 2] represents a remuneration for roasting IP, this mark-up appears to be passed on to [unaffiliated manufacturing company 5]. Indeed, the price at which [unaffiliated manufacturing company 5] buys coffee from [unaffiliated manufacturing company 2] is also defined as a mark-up to the cost of the acquired green coffee beans. In its relationship with [unaffiliated manufacturing company 2], which would apparently be remunerated through a higher mark-up, Starbucks acts as supplier, which is a different function than the function assumed by Alki LP in its relationship with SMBV. In response to Starbucks' argument that because [unaffiliated manufacturing company 2] is ready to pay a top-up on the price charged for beans by SCTC and that, therefore, SCTC's prices would be arm's length, the Commission considers that the purchase price for green coffee beans cannot be analysed in isolation of [unaffiliated manufacturing company 2]'s obligation under its contracts with Starbucks to sell its production to [unaffiliated manufacturing company 5] and that, therefore, the pricing arrangements between [unaffiliated manufacturing company 5] and [unaffiliated manufacturing company 2] must also be taken into consideration. There are no indications that any mark-up to a purchase price would not be passed on directly to [unaffiliated manufacturing company 5] or otherwise affect the commercial conditions between [unaffiliated manufacturing company 5] and [unaffiliated manufacturing company 2], as this contractual arrangement was not concluded independently of the contractual arrangement between Starbucks and [unaffiliated manufacturing company 5].
In addition, the Commission observes that in its relationship with [unaffiliated manufacturing company 5], [unaffiliated manufacturing company 6] and [unaffiliated manufacturing company 7], only the trademark and technology licence agreements concluded by Starbucks with those third parties contain a royalty payment. That royalty payment, however, is comparable to the royalty paid by the Shops to Starbucks Coffee BV for the exploitation of the Starbucks' brand IP on the market, since all three companies sell products to final consumers. The master and manufacturing and distribution agreements between the three companies and Starbucks, which concern the manufacturing process, do not provide for a royalty for the Starbucks IP.
Finally, for the purposes of assessing whether SMBV pays an arm's-length remuneration to Alki LP for the roasting IP, the arrangement between Alki LP with SMBV can also be compared to arrangements between Starbucks' competitors with third party roasters.
It follows that, since in the manufacturing agreements Starbucks concluded with third parties, several of which existed at the time the SMBV APA request was being considered by the Dutch tax administration, no royalty is required for the use of the roasting IP, the Commission considers that a transfer pricing analysis of the arm's-length value of the royalty paid by SMBV to Alki LP for roasting IP leads to the conclusion that no royalty should be due for that IP in that specific relationship. This conclusion also follows from a comparison with arrangements between Starbucks' competitors with third party roasters.
Whereas roasting know-how and curves can have a value, in the specific relationship between Alki LP and SMBV that value is not captured by the roaster. That is because the importance of the roasting know-how and curves lies, in the case of the Starbucks structure, in ensuring a consistent taste associated with the brand and individual products. Accordingly, the value of Starbucks' roasting know-how and curves is only exploited when Starbucks products are sold under the Starbucks brand by the Shops. On their own, the roasting know-how and curves do not generate value for the roaster on an on-going basis if they cannot be exploited on the market.
In addition, in the case of SMBV, the roasting know-how and curves appear to constitute a technical specification according to which the roasting should proceed due to a preference or a choice of the purchasing company. Roasting curves are described by Starbucks in the transfer pricing report as being dictated to SMBV. They allow SMBV and the third parties, with whom roasting agreements and manufacturing and supply agreements have been concluded, to meet the requirements of Starbucks. Roasting preferences are imposed on manufacturers, for example through the roasting standards requirements and quality assurance standards. Such specifications are part of each roasting or manufacturing and supply agreement.
(revenues and purchase price of coffee in EUR)
Figure 3 demonstrates that, since 2010, SMBV is loss-making on its roasting activities, when the margin on green coffee beans required by SCTC increased. Taking that fact into account, along with the data in Table 10 that show the percentage of royalty paid by SMBV to Alki LP over the revenue from sales of coffee, the roasting know-how and curves do not appear to create positive value for SMBV. For example, in 2013, although SMBV seems to have recorded a gross loss (before operating expense is deducted) of around EUR [1-10] million on its roasting activities, it paid a royalty of EUR 22,8 million to Alki LP for the roasting IP.
The fact that the roasting activity does not generate sufficient profit to allow for royalty payments therefore further confirms, given the specific intra-group relationship between SMBV and Alki LP, that the methodology for determining the level of that royalty as an adjustment variable as accepted by the SMBV APA is not in line with the arm's-length principle.
Accordingly, in light of the comparison with Starbucks' roasting arrangements with third parties, the Commission considers that a transfer pricing analysis of the arm's-length value of the royalty paid by SMBV to Alki LP for the roasting IP leads to the conclusion that no royalty should be due for that IP, since SMBV does not seem to derive any benefit from the use of the roasting IP in that relationship. None of the arguments advanced by the Netherlands or Starbucks during the investigation invalidate that conclusion.
Third, and most important, the Commission considers that if the Netherlands' claim were accepted, the business risk of any group company could be eliminated through intra-group reallocation of risks by simple means of contract. For example, a company undertaking all strategic decisions for a group, in particular, investment and R & D decisions, which would in principle be considered as a complex function concentrating entrepreneurial risk, could be considered as ‘low risk’ and taxed accordingly, so long as an intragroup contract would be put in place setting its remuneration at any random level of operating expense and passing its residual profits to any other group company. Accepting that claim would render the application of the arm's-length principle for the pricing of intragroup transactions meaningless, since contractual arrangements would be considered to trump economic reality.
Therefore, Alki LP cannot ensure the management of SMBV's business risks as effectively as direct employees or managers of SMBV could, and therefore that risk could, at best, be partially mitigated through its contractual transfer to Alki LP.
Sixth, the contractual arrangement invoked by the Netherlands by which the SCTC guarantees the quality of the green coffee beans supplied equally has no bearing on the relationship between SMBV and Alki LP. In any event, it is a standard business arrangement that does not reduce the risk of SMBV compared to normal market conditions.
In conclusion, the Commission rejects the claims that any effective risk transfer takes place from SMBV to Alki LP through contractual arrangements. Therefore, any component of the royalty meant to compensate for an entrepreneurial risk transfer cannot be justified.
Starbucks further seems to invoke that the royalty paid by SMBV to Alki LP is justified because Alki LP pays amounts of the same magnitude to Starbucks US for the coffee roasting technology.
The Commission notes, at the outset, that the SMBV APA is not concerned with the relationship between Alki LP and Starbucks US, but with the relationship between SMBV and Alki LP. Accordingly, all that matters for an assessment of whether the transfer pricing analysis of the transactions between those two entities has been determined in accordance with a methodology that gives a reliable approximation of a market-based outcome in line with the arm's-length principle is the value of those transactions as determined by Starbucks' tax advisor, and not the value of any payments outside that relationship.
Second, the payments from Alki LP to Starbuck US under the CSA do not appear to be set at arm's length. In particular, regarding the acquisition of the IP relating to business format and brand, Alki LP (including its predecessor [CV 1]) paid in aggregate EUR [30-40] million for the acquisition of this IP, as of 2005, while that IP was sold by Alki LP for EUR [1-1,5] billion in 2014. That difference in value seems to indicate that that arrangement did not reflect an arm's-length remuneration for the IP; the payments under the permanent royalty could therefore be seen as compensating for the sale of the brand in the same transaction for a value that was too low.
In sum, Starbucks' argument that the payments under the CSA justify the royalty payments between SMBV and Alki LP as being arm' length must be rejected.
In light of the above, the Commission considers that a comparison to comparable uncontrolled transactions, in particular the royalty arrangements in several roasting and manufacturing and distribution agreements Starbucks has concluded with third parties, demonstrates that the arm's-length value of the royalty paid by SMBV to Alki LP for roasting IP should be zero, thus, that no royalty should be due for that IP in that specific relationship, since SMBV does not derive any benefit from the use of the roasting IP licensed from Alki LP.
Given that conclusion, this royalty does not need to be estimated. Rather, SMBV's accounting profits, with no deduction of the royalty payment from SMBV to Alki LP from those profits for the licensing of the roasting IP, should be the starting point from which SMBV's tax liability in the Netherlands is determined to ensure that SMBV taxable profits correspond to a level obtained by non-integrated companies whose tax liability is determined by the profits they generate under market conditions. In other words, the un-taxed profits paid as a royalty by SMBV to Alki LP for the roasting IP should have been fully taxable in the Netherlands.
As explained in recital 272, the identification and analysis of SMBV's controlled and uncontrolled transactions is a necessary first step in assessing the arm's-length nature of commercial conditions applicable between related parties for transfer pricing purposes.
In recital 116 of the Opening Decision, the Commission explained that if the royalty payment was estimated using a direct transfer pricing method, such as the CUP method, the prices charged for the green coffee beans would be the outstanding related controlled transaction that needed to be assessed for transfer pricing purposes and the price charged for the green coffee beans by SCTC to SMBV would have to be assessed to establish whether the level of that price, reflected in SMBV's profit and loss account, was not exaggerated, leading to a reduction of SMBV's taxable profits.
The transfer pricing report lists the green coffee bean sourcing agreement between SMBV and SCTC among the most important transactions and inter-company flows, but fails to examine or analyse whether the price charged for the green coffee beans by SCTC to SMBV is at arm's length.
(%) | ||||||||||
2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | |
|---|---|---|---|---|---|---|---|---|---|---|
mark-up on COGS | [1,5-4,5] | [1,5-4,5] | [1,5-4,5] | [1,5-4,5] | [4,5-7,5] | [1,5-4,5] | [16,5-19,5] | [13,5-16,5] | [19,5-22,5] | [16,5-19,5] |
gross margin on COGS | [4,5-7,5] | [4,5-7,5] | [4,5-7,5] | [4,5-7,5] | [4,5-7,5] | [4,5-7,5] | [16,5-19,5] | [16,5-19,5] | [19,5-22,5] | [16,5-19,5] |
The average mark-up on the costs of green coffee beans supplied by SCTC for the period 2005 to 2010 is [around 3 %], compared to an average mark-up of [around 18 %] over the period 2011 to 2014. The corresponding gross margin on COGS for the period 2005 to 2010 is [around 6 %], compared to an average gross margin on COGS of [around 18 %] over the period 2011 to 2014.
Starbucks claims that the increase of that mark-up in 2011 was due to the growing importance of SCTC's operations, particularly the increased expertise in coffee procurement and, more important, its ownership and operation of the evolving C.A.F.E. Practices Programme. That justification does not, however, seem to correspond to the information provided during the investigation. In particular, the C.A.F.E. Practices Programme has been in place since 2004. Furthermore, as SCTC's remuneration is proportionate to the green coffee beans sold, any increase in capacity should have been remunerated accordingly. Indeed, so long as the remuneration constitutes a stable percentage of COGS, the increase of turnover resulted in a proportionate increase of profits.
Furthermore, the prices of coffee products sold by SMBV to the Shops is determined on a cost basis as explained in recital 96. Therefore, the Commission considers that the direct and indirect costs of C.A.F.E. Practices Programme is, contrary to what Starbucks claims, a more appropriate way to approach the arm's-length pricing of the programme on the price of green coffee beans charged to SMBV.
In sum, since the transfer pricing report fails to examine or analyse whether the price charged for the green coffee beans by SCTC to SMBV is at arm's length, the methodology proposed in that report to determine SMBV's taxable profits departs from a methodology that leads to a reliable approximation of a market-based outcome in line with the arm's-length principle. Since the application of that methodology leads to a lowering of SMBV's tax liability under the general Dutch corporate income tax system as compared to non-integrated companies whose taxable profits is determined by the market, the SMBV APA, by accepting that methodology, should be considered to confer a selective advantage on SMBV for the purposes of Article 107(1) of the Treaty.
In addition, the transfer pricing report's failure to examine or analyse whether the price charged for the green coffee beans by SCTC to SMBV is at arm's length means that the methodology proposed in that report, accepted by the SMBV APA, for determining SMBV's taxable profits in the Netherlands, confers a selective advantage on SMBV for the purposes of Article 107(1) of the Treaty.
As explained in recital 282, it is only if it is impossible to compare a particular intra-group transaction for which an APA is being sought, taking into account the functions performed, to similar uncontrolled transactions, that resorting to a comparison of functions performed is justified. As explained in Section 9.2.3.3, the Commission considers that the royalty arrangements in several roasting and manufacturing and distribution agreements Starbucks concluded with third parties constitute comparable uncontrolled transactions to SMBV's royalty arrangement with Alki LP as follows from the SMBV APA.
Without prejudice to this conclusion that no functional comparison was warranted in the present case, the Commission further submits that the transfer pricing report's analysis of the functions performed in the application of the TNMM does not result in a reliable approximation of a market-based outcome in line with the arm's-length principle.
To appropriately estimate the arm's-length remuneration of functions, the transfer pricing report should have engaged in a comparison of the functions performed by each party to the related transactions.
Nevertheless, in the following section, the Commission analyses the relative complexity of the group entities engaging in transactions with SMBV.
Such considerations are not sufficient to conclude on their own that SMBV is not the less complex function. The complexity of the functions ensured by Alki LP must also be assessed for this purpose.
The activities of Alki LP are assessed in recitals 324 to 329. It follows from that assessment that Alki LP's operating capacity is extremely limited to non-existent, given that it has no employees and none of its partners have any employees.
The Commission therefore concludes that Starbucks' tax advisor was unjustified in designating SMBV as the less complex function compared to Alki LP for the transfer pricing analysis.
Consequently, since the methodology for determining SMBV's tax base in the transfer pricing report was premised on the flawed assumption that SMBV should be the ‘tested party’ for the application of the TNMM, that methodology does not result in a reliable approximation of a market-based outcome in line with the arm's-length principle. Since the SMBV APA's endorsement of that methodology leads to a lowering of SMBV's tax liability under the general Dutch corporate income tax system as compared to non-integrated companies whose taxable profit under that system is determined by the market, that APA should be considered to confers a selective advantage to SMBV for the purposes of Article 107(1) of the Treaty.
SMBV's principal function was thus insufficiently identified in the transfer pricing report by Starbucks' tax advisor and wrongly accepted by the Dutch tax administration as the basis for calculating the remuneration accepted in the SMBV APA.
Moreover, recorded profits have to be attributed, because they are an economic reality, which cannot be superseded by the use of an economic or transfer pricing model that has as its objective approximating economic reality in absence of (direct) observables. In the case of SMBV, profits from the resale of non-coffee products are not attributed through a remuneration in any form to any other group entity nor to any third party that would be in a position to generate active profits from the resale of non-coffee products and, therefore, they should be attributed to SMBV.
The tax advisor thus inappropriately used operating expenses instead of sales as profit level indicator in the application of the TNMM.
To illustrate the impact of Starbucks' tax advisor's incorrect identification of SMBV's main functions and its inappropriate selection of operating expenses as profit level indicator, the Commission replicated the tax advisor's analysis with a corrected peer group of companies based on SMBV's reselling function and calculated a mark-up on sales for that corrected peer group.
For comparison purposes, the Commission then removed companies from the corrected peer group that mainly distribute products other than coffee and tea (such as spices, sugar or companies selling equipment only), while the retaining companies engaged in roasting, resulting in twelve comparable companies.
2007 | 2006 | 2005 | 2005-2007 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
company name | country | turnover | operating profit | total costs | material costs | Mark-up on Sales | turnover | operating profit | total costs | material costs | Mark-up on Sales | turnover | operating profit | total costs | material costs | Mark-up on Sales | average Mark-up on sales | |
1 | ETABLISSEMENTEN SAS KOFFIE | Belgium | 30 872 | 1 683 | 29 189 | 20 311 | 5,45 % | 28 128 | 1 155 | 26 973 | 19 167 | 4,11 % | 21 204 | 646 | 20 558 | 13 125 | 3,05 % | 4,20 % |
2 | TOSTADORES REUNIDOS SA | Spain | 14 899 | 231 | 14 668 | 14 403 | 1,55 % | 13 080 | 244 | 12 835 | n.a. | 1,87 % | 11 618 | 206 | 11 412 | n.a. | 1,77 % | 1,73 % |
3 | MAGAZZINI DEL CAFFE' S.P.A. O, IN FORMA ABBREVIATA: MDC SPA O MDC SPA | Italy | 2 301 | – 347 | 2 648 | 1 165 | – 15,07 % | 1 224 | – 558 | 1 782 | 803 | – 45,55 % | 639 | – 359 | 998 | 420 | – 56,15 % | – 38,92 % |
4 | LA CITTADELLA S.P.A. | Italy | 2 949 | 601 | 2 349 | 787 | 20,37 % | 2 865 | 786 | 2 079 | 668 | 27,43 % | 2 820 | 675 | 2 145 | 635 | 23,94 % | 23,91 % |
5 | CAFFE' UNIVERSALE BUONO AROMATICO - C.U.B.A. CAFE' | Italy | 1 397 | 181 | 1 217 | 511 | 12,92 % | 1 210 | 67 | 1 143 | 480 | 5,54 % | 1 005 | 50 | 955 | 439 | 4,95 % | 7,80 % |
6 | CAFES TC-3 SAL | Spain | 2 015 | 118 | 1 897 | n.a. | 5,87 % | 1 881 | 73 | 1 808 | n.a. | 3,88 % | 1 721 | 46 | 1 675 | n.a. | 2,65 % | 4,13 % |
7 | ΚΟΥΙΔΗΣ, Α.&Π.&Λ., Α.Ε.Β.Ε. | Greece | 12 880 | 832 | 12 048 | n.a. | 6,46 % | 10 092 | 310 | 9 782 | n.a. | 3,07 % | 10 126 | 212 | 9 914 | n.a. | 2,09 % | 3,87 % |
8 | CAFFE' SELE S.R.L. | Italy | 1 039 | 91 | 948 | 560 | 8,77 % | 968 | 82 | 886 | 536 | 8,47 % | 874 | 38 | 836 | 474 | 4,30 % | 7,18 % |
9 | RICO CAFÉ' S.R.L. | Italy | 306 | 1 | 305 | 181 | 0,40 % | 263 | 3 | 260 | 143 | 1,32 % | 211 | 2 | 209 | 139 | 1,11 % | 0,94 % |
10 | CAFÉ GRAEXPRES SL | Spain | 781 | 15 | 766 | n.a. | 1,92 % | 710 | 7 | 703 | n.a. | 1,05 % | 666 | 2 | 664 | n.a. | 0,31 % | 1,09 % |
11 | CERDANYA CAFES SL | Spain | 310 | 8 | 302 | n.a. | 2,63 % | 320 | 6 | 314 | n.a. | 1,77 % | 306 | 3 | 303 | n.a. | 1,11 % | 1,84 % |
12 | IMPORCAFÉ - COMÉRCIO E TORREFACÇÃO DE CAFÉ, LDA | Portugal | 321 | 14 | 307 | 146 | 4,28 % | 23 | 6 | 317 | 139 | 1,75 % | n.a. | n.a. | n.a. | n.a. | 3,01 % | |
number of companies | 12 | 12 | 11 | 12 | ||||||||||||||
lower quartile | 1,7 % | 1,5 % | 1,1 % | 1,5 % | ||||||||||||||
median | 4,9 % | 2,5 % | 2,1 % | 3,1 % | ||||||||||||||
upper quartile | 7,6 % | 4,8 % | 4,0 % | 5,5 % | ||||||||||||||
(EUR) | |||||||
2007/2008 | 2008/2009 | 2009/2010 | 2010/2011 | 2011/2012 | 2012/2013 | 2013/2014 | |
|---|---|---|---|---|---|---|---|
Sales SMBV | 128 784 681 | 135 677 607 | 142 627 243 | 184 159 097 | 286 217 379 | 327 632 453 | 350 538 852 |
taxable income SMBV based on Contested Ruling | 1 499 118 | 1 703 001 | 1 653 318 | 1 430 620 | 1 581 461 | 1 535 460 | 1 667 869 |
taxable income lower range (1,5 %) | 1 931 770 | 2 035 164 | 2 139 409 | 2 762 386 | 4 293 261 | 4 914 487 | 5 258 083 |
taxable income median of the range (3,1 %) | 3 992 325 | 4 206 006 | 4 421 445 | 5 708 932 | 8 872 739 | 10 156 606 | 10 866 704 |
taxable income upper range (5,5 %) | 7 083 157 | 7 462 268 | 7 844 498 | 10 128 750 | 15 741 956 | 18 019 785 | 19 279 637 |
taxable income of SMBV as % of sales | 1,2 % | 1,3 % | 1,2 % | 0,8 % | 0,6 % | 0,5 % | 0,5 % |
The purpose of the exercise undertaken by the Commission in recitals 392 to 398 is not to calculate an arm's-length remuneration for the functions performed by SMBV within the Starbucks group. The Commission acknowledges that the range presented above is not backed by a sufficient comparability analysis and that the exercise is simply meant to replicate and duplicate the tax advisors analysis if the functions would have been correctly identified. Rather, the purpose of the exercise undertaken by the Commission is to show that even if the conclusions reached by the Commission in Sections 9.2.3.3 and 9.2.3.4 were incorrect, the tax advisor's misidentification of SMBV's main functions and its inappropriate selection of operating expenses as profit level indicator in the application of the TNMM confirm that the methodology proposed by it in the transfer pricing report and accepted by the SMBV APA for determining SMBV's tax base in the Netherlands does not result in a reliable approximation of a market-based outcome in line with the arm's-length principle. Since that methodology results in a lowering of SMBV's tax liability under the general Dutch corporate income tax system as compared to non-integrated companies whose taxable profit under that system is determined by the market, the SMBV APA, by accepting that methodology, should be considered to confer a selective advantage on SMBV for the purposes of Article 107(1) of the Treaty.
In the transfer pricing report, Starbucks' tax advisor proposes a ‘Conversion Mark-up Adjustment’, which is presented by the Netherlands as a working capital adjustment, but the methodology used does not factor in the level of the working capital of either the comparables or of SMBV. Working capital is the sum of the inventories and trade receivable to be financed net of trade payables. There is no constant relation between the COGS used in the adjustment and working capital needs. In particular, a company with a high amount of raw material cost might have low working capital needs if it processes its stock efficiently. Working capital adjustments are aimed at capturing possible differences in the stock and trade receivable and payables processing, which is not captured by the amount of raw material used by the company.
The Netherlands further refers to an article of the 2012 International Transfer Pricing Journal that would argue that for both fully-fledged and toll or contract manufacturers the total costs, including COGS, are the most suitable profit level indicator. The article would also present a comparison between margins on total costs of fully-fledged manufacturers and toll or contract manufacturers. This analysis would show, on the basis of the sample chosen, that toll and contract manufactures would have higher margins on total costs than fully-fledged manufacturers. However, notwithstanding the general validity of the outcome of the empirical study presented in the article, the findings of the article contradict rather than support the Netherlands' argument that the profitability of low-risk manufacturers should be adjusted downwards compared to fully fledged manufacturers. This is because the Netherlands accepted a reduction of the margin on costs to factor in the fact that SMBV would not be a fully-fledged manufacturer, whereas the empirical findings of the article seem to indicate that a higher margin would have been appropriate.
Finally, the transfer pricing report also accepts a considerable reduction in the cost base used to calculate the tax base in 2008 compared to the previous arrangement by excluding the costs of [unaffiliated manufacturing company 1], although the activities of SMBV did not change and the commercial relationship with [unaffiliated manufacturing company 1] also did not change. Combined with the misclassification of the actual activities of SMBV, that adjustment does not seem sufficiently reasoned.
In sum, even if the comparables analysis had not been based on an incorrect classification of SMBV's activities as coffee roasting and Starbucks' tax advisor had not improperly used operating expense instead of sales as profit level indicator in the application of the TNMM, the use of the working capital adjustment and the exclusion of [unaffiliated manufacturing company 1]'s costs from SMBV's tax base mean that the methodology proposed by the transfer pricing report and accepted by the SMBV APA does not result in a reliable approximation of a market-based outcome in line with the arm's-length principle.
By accepting that methodology, which leads to a lowering of SMBV's tax liability under the general Dutch corporate income tax system as compared to non-integrated companies whose taxable profit under that system is determined by the market, the SMBV APA confers a selective advantage on SMBV for the purposes of Article 107(1) of the Treaty.
The Netherlands and Starbucks argued that the Decree constitutes the appropriate reference system against which the existence of a selective advantage resulting from SMBV APA must be determined.
As noted at recitals 245 to 251, the Commission does not agree with the arguments of the Netherlands and Starbucks concerning the applicable reference system. However, in a subsidiary line of reasoning, the Commission concludes that the SMBV APA also grants SMBV a selective advantage in the context of the more limited reference system composed of group companies applying transfer pricing to which Article 8b(1) CIT and the Decree apply.
Considering that the Commission has already demonstrated in Section 9.2.3.1 that the SMBV APA endorses certain methodological choices made by Starbucks' tax advisor for transfer pricing purposes that cannot be considered to result in a reliable approximation of a market-based outcome resulting in a reduction of SMBV's tax liability in the Netherlands, the Commission can similarly conclude that that APA also gives rise to a selective advantage under the more limited reference framework of Article 8b(1) CIT and the Decree.
Neither the Netherlands nor Starbucks have advanced any possible justification for the selective treatment of SMBV as a result of the SMBV APA. The Commission recalls, in this respect, that the burden of establishing such a justification lies with the Member State.
The Commission concludes that the SMBV APA, by endorsing a method for arriving at a profit allocation to SMBV within the Starbucks group that cannot be considered to result in a reliable approximation of a market-based outcome in line with the arm's-length principle and that results in a lowering of SMBV's tax liability under the general Dutch corporate income tax system as compared to non-integrated companies whose taxable profit under that system is determined by the market, confers a selective advantage on SMBV for the purposes of Article 107(1) of the Treaty.
By a subsidiary line of reasoning, the Commission concludes that the SMBV APA, by endorsing under the Decree, based on Article 8b(1) CIT, a method for arriving at a profit allocation to SMBV that cannot be considered to result in a reliable approximation of a market-based outcome in line with the arm's-length principle and that results in a lowering of SMBV's tax liability as compared to other group companies taxable in the Netherlands, confers a selective advantage on SMBV for the purposes of Article 107(1) of the Treaty.
The Commission considers the SMBV APA to grant a selective advantage to SMBV within the meaning of Article 107(1) of the Treaty, since it leads to a lowering of that entity's taxable profit in the Netherlands as compared to non-integrated companies whose taxable profits are determined by transactions concluded on market terms. However, the Commission notes that SMBV forms part of a multi-national corporate group, i.e. the Starbucks group, the remuneration of SMBV's role within that group being the subject-matter of the SMBV APA.
Moreover, it is the Starbucks group which took the decision to establish SMBV in the Netherlands and thus the Starbucks group which benefits from the SMBV APA as that APA, as indicated in recital 45, establishes the profit that should be allocated to SMBV within that corporate group for the functions it provides to the companies of that group. The SMBV APA is, after all, a ruling that accepts a transfer pricing methodology for transactions within the Starbucks group, so that any favourable tax treatment afforded to SMBV by the Dutch tax administration, benefits the Starbucks group as a whole by providing additional resources not only to SMBV, but to the entire the group. In other words, as discussed in recital 257, where transfer pricing is required to set prices for products and services within various legal entities of one and the same group, the effects of setting a transfer price affects by its very nature more than one group company (a price increase in one company reduces the profit of the other).
In light of the foregoing, the Commission concludes that the SMBV APA concluded by the Dutch tax administration grants SMBV and the Starbucks group a selective advantage which is imputable to the Netherlands, financed through State resources and which distorts or threatens to distort competition and is liable to affect intra-EU trade. The SMBV APA therefore constitutes State aid within the meaning of Article 107(1) of the Treaty.
Since the SMBV APA gives rise to a reduction of charges that should normally be borne by SMBV in the course of its business operations, that APA should be considered as granting operating aid to SMBV and the Starbucks group.
One of the arguments advanced by the Netherlands during the administrative procedure is that some of the information relied upon by the Commission in its Opening Decision, as well as data relied upon during the formal investigation procedure was not available to the Dutch tax administration on the date on which it entered into the SMBV. Thus, the Netherlands accuses the Commission of enjoying ‘the benefit of hindsight’ when examining the SMBV.
For instance, while the assessment of SMBV's classification as a toll manufacturer refers to the functions performed by SMBV at the time of the APA, it also relates to other activities, such as market research or the amortisation of intangible assets, which only occurred later and therefore could not have been taken into account by the Dutch tax administration when it entered into the SMBV APA in 2008. Equally, the fact that the costs for green coffee beans increased significantly after 2010, which implies that the royalty payments were financed through other activities than the roasting activity in contravention of the arm's-length principle, only became evident after the APA was concluded.
As regards information on the costs for green coffee beans, the Commission observes that the transfer pricing report lists the green coffee bean sourcing agreement between SMBV and SCTC among the most important transactions and inter-company flows, but fails to examine or analyse whether the price charged for the green coffee beans by SCTC to SMBV is at arm's length, since the tax advisor instead relied on the TNMM to calculate a remuneration based on the roasting function of SMBV.
In any event, as explained in recital 348 et seq., Starbucks did not provide any valid justification for the increase in the price of green coffee beans after 2010, so the argument is irrelevant.
The Netherlands has not invoked any of the grounds for a finding of compatibility in either of those provisions for the State aid it has granted by concluding the SMBV APA.
Moreover, as explained in recital 423, the SMBV APA should be considered as granting operating aid to SMBV and the Starbucks group. As a general rule, such aid can normally not be considered compatible with the internal market under Article 107(3)(c) of the Treaty in that it does not facilitate the development of certain activities or of certain economic areas, nor are the tax incentives in question limited in time, digressive or proportionate to what is necessary to remedy to a specific economic handicap of the areas concerned.
Consequently, the State aid granted to SMBV and the Starbucks group by the Netherlands by concluding the SMBV APA is incompatible with the internal market.
According to Article 108(3) of the Treaty, Member States are obliged to inform the Commission of any plan to grant aid (notification obligation) and they may not put into effect any proposed aid measures until the Commission has taken a final position decision on the aid in question (standstill obligation).
Article 16(1) of Regulation (EU) 2015/1589 provides that the Commission shall not require recovery of the aid if this would be contrary to a general principle of law.
The argument of legitimate expectations by NOB is therefore without merit for the purposes of recovery of the aid unlawfully granted by the Netherlands to Starbucks by way of the contested tax ruling in favour of SMBV.
In accordance with the Treaty and the Court of Justice's established case-law, the Commission is competent to decide that the Member State concerned must abolish or alter aid when it has found that it is incompatible with the internal market. The Court has also consistently held that the obligation on a State to abolish aid regarded by the Commission as being incompatible with the internal market is designed to re-establish the previously existing situation. In that context, the Court has stated that that objective is attained once the recipient has repaid the amounts granted by way of unlawful aid, thus forfeiting the advantage which it had enjoyed over its competitors on the market, and the situation prior to the payment of the aid is restored.
In relation to unlawful State aid in the form of tax measures, the Notice on business taxation provides in point 35 thereof that the amount to be recovered should be calculated on the basis of a comparison between the tax actually paid and the amount which should have been paid if the generally applicable rule had been applied.
As concluded in recitals 339 to 341, the Commission considers that a comparison to comparable uncontrolled transactions using the CUP method, in particular the roasting IP licensing arrangements in several roasting and manufacturing and distribution agreements Starbucks concluded with third parties, demonstrates that the arm's-length value of the royalty paid by SMBV to Alki LP for the roasting IP should be zero. In other words, no royalty should be due for that IP in that specific relationship, since SMBV does not seem to derive any benefit from the use of the roasting IP licensed from Alki LP.
Given that conclusion, the Netherlands should take SMBV's accounting profits, with no deduction of the royalty payment from SMBV to Alki LP from those profits for the licensing of the roasting IP, as the starting point from which SMBV's tax liability in the Netherlands is determined to properly ensure that the aid granted by the SMBV APA is eliminated through recovery.
In addition, given the Commission's conclusion in recital 358 that an average mark-up of up to [around 6 %] of the costs of green coffee beans sold by SCTC to SMBV for the period from fiscal years 2011 onwards and the prices of green coffee beans sold to SMBV corresponding to a gross margin of [around 9 %] for SCTC constitutes a reliable approximation of an arm's-length price, SMBV's accounting profits for 2011 fiscal years and onwards should be increased by the difference in the gross margin on green coffee beans effectively applied during that period and a gross margin on COGS of SCTC of [around 9 %].
It is the difference between the corresponding amount of accounting profits arrived at following the two steps detailed in recitals 446 and 447 fully taxed under the rules of the general Dutch corporate income tax system and the corporate income taxes effectively paid by SMBV to the Netherlands since 1 October 2007 that constitutes the amount of aid that must be recovered from SMBV and the Starbucks group to eliminate the advantage SMBV and the Starbucks group received from the Netherlands as a result of the SMBV APA.
In light of the observations in recitals 417 to 421, the Commission considers that the Netherlands should, in the first place, recover the unlawful and incompatible aid granted by the SMBV APA from SMBV. Should SMBV not be in a position to repay the full amount of the aid received as a result of the SMBV APA, the Netherlands should recover the remaining amount of that aid from Starbucks Corporation, since it is the entity which controls the Starbucks group, so as to ensure that the advantage granted is eliminated and the previously existing situation on the market is restored through recovery.
In conclusion, the Commission finds that the Netherlands has unlawfully granted State aid to SMBV and the Starbucks group by concluding the SMBV APA, in breach of Article 108(3) of the Treaty, which the Netherlands is required to recovery by virtue of Article 16 of Regulation (EU) 2015/1589 from SMBV and, if the latter fails to repay the full amount of the aid, from Starbucks Corporation for the amount of aid outstanding,
HAS ADOPTED THIS DECISION:
Article 1
The advanced pricing arrangement entered into by the Netherlands on 28 April 2008 with Starbucks Manufacturing EMEA B.V., which enables the latter to determine its corporate income tax liability in the Netherlands on a yearly basis for a period of 10 years, constitutes aid within the meaning of Article 107(1) of the Treaty on the Functioning of the European Union that is incompatible with the internal market and that was unlawfully put into effect by the Netherlands in breach of Article 108(3) of the Treaty.
Article 2
(1)
The Netherlands shall recover the incompatible and unlawful aid referred to in Article 1 from Starbucks Manufacturing EMEA B.V.
(2)
Any sums that remain unrecoverable from Starbucks Manufacturing EMEA B.V., following the recovery described in the preceding paragraph, shall be recovered from Starbucks Corporation.
(3)
The sums to be recovered shall bear interest from the date on which they were put at the disposal of the beneficiaries until their actual recovery.
(4)
The interest shall be calculated on a compound basis in accordance with Chapter V of Regulation (EC) No 794/2004.
Article 3
(1)
Recovery of the aid granted referred to in Article 1 shall be immediate and effective.
(2)
The Netherlands shall ensure that this Decision is implemented within four months following the date of notification of this Decision.
Article 4
(1)
Within two months following notification of this decision, the Netherlands shall submit information regarding the methodology used to calculate the exact amount of aid.
(2)
The Netherlands shall keep the Commission informed of the progress of the national measures taken to implement this Decision until recovery of the aid granted referred to in Article 1 has been completed. It shall immediately submit, on simple request by the Commission, information on the measures already taken and planned to comply with this Decision.
Article 5
This Decision is addressed to The Netherlands.
Done at Brussels, 21 October 2015.
For the Commission
Margrethe Vestager
Member of the Commission