Netherlands accused of subsidising tax bill for US coffee chain Starbucks

The Netherlands and Starbucks will be pulled into the political storm over tax deals as the European Commission confronts Amsterdam for allegedly subsidising the coffee group's tax bill.

Initial conclusions from the first stage of Brussels’ state aid inquiry, to be published today, will detail concerns over the Dutch illegally favouring Starbucks by understating its taxable income.

Full details of the Dutch investigation, which eventually could require it to claw back any illicit state support, will make uncomfortable reading for Starbucks, given it has already suffered consumer protests over its tax practices. Starbucks and the Netherlands are confident the arrangements are legal and proper.

It also emerges at a delicate time for Jean-Claude Juncker, president of the European Commission, who is under political pressure over revelations of widespread tax avoidance in Luxembourg during his time as premier.

Mr Juncker batted off criticism this week, arguing that he was not the “architect” of Luxembourg’s tax policy and wanted to clamp down on evasion and avoidance by better aligning EU rules.

Further questions were raised, however, by a 2003 speech in which Mr Juncker boasted of his lead role in luring Amazon to base its European operations in Luxembourg.

He said Amazon came to Luxembourg as a result of "a correct tax policy, of a correct infrastructure policy, but also the result of tough negotiations with the top management of the groups. They took place in America, they took place here at home, and I did not lead them alone." The Wall Street Journal reported the remarks.

Four investigations

The Amazon tax ruling is one of four that is under investigation by the commission, the others being Irish tax deals with

Apple

, Luxembourg’s arrangements and the Starbucks deal.

Margrethe Vestager, the EU’s competition chief, wants to bring the first cases to a conclusion by the end of spring 2015. Mr Juncker has said he will not intervene in the Luxembourg cases.

Germany has also questioned the fairness of hundreds of controversial tax deals struck in Luxembourg. But Wolfgang Schäuble, Germany's finance minister, used a radio interview to shift attention from Mr Juncker, saying he did not want to draw "personal accusations" from "annoying" but legal practices.

Brussels’ state aid cases do not challenge national tax laws but their implementation. The Netherlands case turns on the methodology used to calculate Starbucks’ taxable profit. The tax ruling allegedly underestimated the business risk carried by Starbucks’ coffee roasting facility and, as a result, attributed too little profit to the Netherlands.

The investigators question whether the profits Starbucks attributed to the Netherlands were based on the correct “transfer pricing” methodology, the technique used to assess the prices of goods and services provided by one arm of the group to another.

In a press release in June announcing the launch of the investigation, the commission made clear it did not expect to “encounter systematic irregularities in tax rulings” issued by the Netherlands.

The investigation into the ruling concerns the tax treatment of Starbucks Manufacturing Emea BV. This manufacturing company, which handles coffee roasting and distribution, buys green beans from its Swiss subsidiary Starbucks Trading, roasts them and distributes them to Starbucks UK and other retail operations.

Pretax profits

For the year to September 2012, its overall pretax profits were €1.6 million on sales of €286 million , with a corporate income tax charge of €395,365. It paid a royalty of €6 million, which it said was based on its tax ruling.

In 2012 Starbucks declined to tell British MPs what tax rate it paid the Dutch government overall, citing confidentiality constraints. It said the overall effective tax rate paid on royalties averaged 16 per cent over the past five years. – (Copyright The Financial Times Limited 2014)