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As you sip your morning latte, you should know that Starbucks has joined the list of multinational corporations whose tax-avoidance deals with European Union member states are being challenged by the European Commission, EU’s governing body. The Commission released a report last Friday stating that Starbucks’ tax arrangement with the Netherlands constitutes illegal state aid to the company.
The report focuses on two aspects of Starbucks’ Dutch subsidiaries: the intellectual property it holds, like the “coffee-roasting process,” which other subsidiaries pay royalties to use, and the way it determines the price of green coffee beans it purchases from its Swiss subsidiary (the transfer price). Both arrangements appear to improperly strip earnings from other countries and shift those profits to jurisdictions (in this case, the Netherlands) where Starbucks has negotiated extremely low tax rates.
The Starbucks report is the latest in a series of EC challenges to special deals between multinational corporations. We commented earlier on the investigations into Luxembourg’s deals with Amazon and Ireland’s deals with Apple. Luxembourg, Ireland, and the Netherlands are three of the top twelve tax havens used by U.S.-based multinationals, as we noted in our report earlier this year.
The arrangements challenged by the EC appear to be the same deals which prompted a U.K. parliamentary committee to summon the Starbucks’ executives to a hearing (along with Google and Amazon) over their “immoral” tax-dodging ways. Shortly after that hearing, Starbucks promised to review its U.K. tax position and later announced that it would move its European headquarters from the Netherlands to London. Whether Starbucks has meaningfully restructured its tax-driven strategies remains to be seen.
Aside from the Commission’s investigations into the effects on EU member states, it’s likely that the Netherlands and Luxembourg subsidiaries are also being used to shift profits out of the U.S. The IRS should be challenging these arrangements, too. Congress, meanwhile, should close some of the loopholes that make this kind of tax dodging possible, without waiting for tax reform.