What can we learn from Starbucks and Fiat

By Slaughter and May

The European Court ruled yesterday that the EU Commission had not been able to demonstrate that the advance pricing agreement between Starbucks and the Dutch tax authorityTax authorities are fundamental institutions within government frameworks, overseeing tax assessment, collection, and administration. Their operations ensure that tax laws are enforced and public funds are collected efficiently. This article delves into tax authorities' purpose, responsibilities, and structure, offering insights into their essential role in supporting government functions and economic stability. What is a Tax Authority? A tax authority is... amounted to illegal State aidState Aid refers to financial assistance provided by public bodies, typically governments, which can selectively benefit certain businesses or industries. This concept is critical in European Union (EU) law, where such support can distort competition and trade within the single market. State Aid, regulated under EU law, aims to ensure fair competition and prevent Member States from favouring local businesses....

The Starbucks Dutch company concerned was responsible for buying and roasting coffee beans and supplying these, and other consumables, to EMEA Starbucks companies. In order to do this, it paid a royalty, deductible for Dutch tax purposes, to another Starbucks group company.

The Court held that, although tax was a “national competency” for member states, the application of the arm’s length principleThe Arm’s Length Principle (ALP) is a cornerstone concept in international taxation and transfer pricing. It requires that transactions between related parties, such as subsidiaries or affiliates within a multinational enterprise (MNE), mirror those that would occur between independent entities under similar circumstances. This principle ensures that each entity within an MNE is compensated fairly and transparently, based on the..., which underlies the transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... rules, was still something that the Commission was entitled to investigate. This did not, however, mean that the Commission could challenge the methodology just because it thought it was incorrect – it had to show that the APAAdvance Pricing Agreements (APAs) are formal arrangements between a taxpayer, usually a multinational enterprise (MNE), and one or more tax authorities. These agreements pre-emptively establish the transfer pricing methods for a set of cross-border transactions over a specified period. APAs aim to provide certainty in tax outcomes by mitigating the risk of disputes and double taxation, which are common challenges... terms agreed were not arm’s length AND that the APAAdvance Pricing Agreements (APAs) are formal arrangements between a taxpayer, usually a multinational enterprise (MNE), and one or more tax authorities. These agreements pre-emptively establish the transfer pricing methods for a set of cross-border transactions over a specified period. APAs aim to provide certainty in tax outcomes by mitigating the risk of disputes and double taxation, which are common challenges... amounted to a selective advantage over other companies such that it was State aidState Aid refers to financial assistance provided by public bodies, typically governments, which can selectively benefit certain businesses or industries. This concept is critical in European Union (EU) law, where such support can distort competition and trade within the single market. State Aid, regulated under EU law, aims to ensure fair competition and prevent Member States from favouring local businesses....

The Court held that the Commission had not been able to demonstrate this, and so Starbucks won its appeal. The Commission expressly accepted that Member States have a margin of appreciation in applying their transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... rules – and so, implicitly, that the State aidState Aid refers to financial assistance provided by public bodies, typically governments, which can selectively benefit certain businesses or industries. This concept is critical in European Union (EU) law, where such support can distort competition and trade within the single market. State Aid, regulated under EU law, aims to ensure fair competition and prevent Member States from favouring local businesses... process should be used to police only the more extreme divergences from an arm’s length result.

In another case, Fiat, the Court found that a tax rulingA tax ruling is a formal decision provided by a tax authority, clarifying how specific tax laws and regulations apply to an individual taxpayer or a corporate entity in particular circumstances. Often sought before a significant financial transaction or investment, tax rulings offer legal certainty by outlining the tax implications and obligations in advance. Such rulings are pivotal for multinational... given by the Luxembourg tax authorities relating to certain intra-group financing arrangements did, on its facts, amount to State aidState Aid refers to financial assistance provided by public bodies, typically governments, which can selectively benefit certain businesses or industries. This concept is critical in European Union (EU) law, where such support can distort competition and trade within the single market. State Aid, regulated under EU law, aims to ensure fair competition and prevent Member States from favouring local businesses....

These decisions are potentially a significant development in the Commission’s recent expansion of its activities into using State aidState Aid refers to financial assistance provided by public bodies, typically governments, which can selectively benefit certain businesses or industries. This concept is critical in European Union (EU) law, where such support can distort competition and trade within the single market. State Aid, regulated under EU law, aims to ensure fair competition and prevent Member States from favouring local businesses... to investigate tax arrangements between Member States and individual taxpayers, as it demonstrates the problems for the Commission in winning these cases – every case depends on its own facts. This may explain the difference between the two decisions – is it easier for the Commission to find comparables for financing transactions than for other more bespoke commercial arrangements?

In any event, some may well question whether cases such as this are a useful use of the Commission’s time. Certainly in the UK, transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... cases are rarely litigated in the domestic courts, because the cases are so fact dependent and evidence intensive. It is one thing for the Commission to spend time and resources investigating legislative provisions in tax regimes – such as the UK CFC rules and the Belgium excess profits regime – but surely, as a general matter, member states need to be trusted to implement their tax regimes properly?

As for Starbucks, some might argue that the real tax issue here is how the royalty income was taxed. Few would doubt that there is real value in the Starbucks name and its “way of doing business”, but where is this IP owned and developed? And if the answer to this is the US, then why was the US not taxing this income?