A Dutch unit of Starbucks Corp. paid millions of euro to a UK-based arm of the company that isn’t taxed in Britain in exchange for a technique to roast coffee beans.
Exaggerated tax-deductible royalty payments for this technique may have allowed Starbucks to unfairly lower its Dutch taxes, the European Union said as it continues to probe sweetheart fiscal deals for multinationals. The EU findings are preliminary.
Starbucks’s Alki LP arm, based in the UK, collected royalty that “fluctuates from year to year and is not in line with sales,” according to a European Commission letter outlining its case to Dutch officials posted on its website. The royalty payments from Starbucks Manufacturing EMEA BV in the Netherlands rose from €1 million in 2010 to €12 million in 2011.
The EU is targeting tax deals throughout the 28-nation bloc that may have given companies unfair advantages over competitors.
The publication of the Starbucks letter comes a week after leaked documents revealed that more than 340 companies such as PepsiCo Inc., Ikea Group and FedEx Corp. transferred profits to Luxembourg using complicated tax arrangements. The commission has said tax avoidance and evasion in the EU cost about €1 trillion a year.
The report by the International Consortium of Investigative Journalists has put pressure on European Commission President Jean-Claude Juncker, who was the Luxembourg prime minister when most of the controversial deals were approved.
“The Dutch authorities confer an advantage on Starbucks Manufacturing” through tax agreements that may have constituted illegal state aid, the EU said in the letter dated June 11.
The Netherlands allowed that Starbucks unit to transfer profits through royalty payments to a unit outside the country - Alki - that “could be overestimated.” Alki is a UK limited partnership that is also not liable for corporate income tax in the Netherlands.
A spokesman for Seattle-based Starbucks said that the company complies with all tax laws and international guidelines. The company considers the commission “will find that there is no selective advantage.”
The tax deal between the Netherlands and Starbucks Manufacturing was concluded in 2008 and was based on a previous agreement running back to 2001, the EU said.
The fluctuation of royalty payments and their disconnect with the economic value of the underlying intellectual property - a coffee bean roasting technique - is “an indication” the method agreed on “might not be the most appropriate means to approximate arm’s length pricing,” the commission said.
The arm’s length principle is meant to ensure that, for tax purposes, transactions between subsidiaries are based on prices an unrelated company would pay.
The EU also said that Starbucks informed Dutch tax authorities in 2002 that it planned to create an entity that wouldn’t be liable to corporate income tax to avoid that income from a Swiss entity fall under the US tax legislation.
Bloomberg News, edited by Hospitality Ireland