Leiden Law Blog

How the Dutch help Starbucks avoid taxes

How the Dutch help Starbucks avoid taxes

On 12 November 2012 the UK Parliament's Public Accounts Committee interviewed Troy Alstead, global chief financial officer of Starbucks. It appeared that Starbucks reduces its UK tax bill by paying a 6% royalty to Starbucks headquarters in Amsterdam.  Mr. Alstead explained that about half of the payments flow through Amsterdam directly to the US, as a compensation for the historical development of the brand, the product innovation and store design systems. The other half, he added, remains in Amsterdam.  The Committee then asked whether Starbucks paid Dutch tax on the royalties:

“Q242 Chair: Can I ask a question about that? You are paying on royalties in the Netherlands, aren’t you? Is there a special low-tax regime in the Netherlands on royalties?

Troy Alstead: Yes, there is. We have a tax ruling that we have had since—

Q243 Chair: So it is less.

Troy Alstead: Oh yes, it is a very low tax rate.

Q244 Chair: So there is a tax advantage to you from paying the royalties in the Netherlands.

Troy Alstead: It is a favourable tax rate that we have in the Netherlands on all income that comes in from all over the—

Q245 Chair: That is why you put it into the Netherlands.

Troy Alstead: It is not why, but it is an attractive reason to be there, there’s no question.

Chair: No, it is why.

Q246 Stephen Barclay: What is the tax rate you pay in the Netherlands?

Troy Alstead: I am very happy to provide that to the Committee, but I am bound by confidentially to the Dutch Government on that. My request would be: could I follow up afterwards and provide it just to the Committee? I am very happy to do that—just confidential."

(See this pdf-file for the full interview)

This discussion led the Committee to conclude that the whole purpose of the Dutch tax ruling is to reduce tax. Mr. Alstead confirmed this: “yes, they do offer very competitive tax rulings—it is not unique just to Starbucks.”

Assuming that this is correct – how does it work? Due to the confidentiality of Dutch tax rulings, we have to make an educated guess. The rulings could be based on the innovation box that offers an effective tax rate of 5% for income from qualifying intellectual property. Another possibility is that the Dutch tax authorities issue so called informal capital rulings. These rulings typically involve cases where a Dutch taxpayer is granted a royalty-free license of intangibles by a group company. The ruling allows the taxpayer to deduct a deemed arm’s length royalty from its taxable income. Alternatively, the ruling enables the taxpayer to capitalize the intellectual property at fair market value and subsequently amortize that intangible (for more information see this pdf-file).

With increasing international attention drawn to multinationals’ tax avoidance, these tax rulings are harmful to the reputation of the Dutch tax climate. It is now up to the Dutch Parliament to ask the State Secretary for Finance to clarify this matter.

1 Comment

Robert Vos
Posted on December 18, 2012 at 15:06 by Robert Vos

I would like to offer some general comments:

- Whatever the specific tax ruling is based on (royalty box seems unlikely so assuming normal taxation rules applicable) I would like to disagree that the Dutch tax regime is actively facilitating tax avoidance (reference is made to the final paragraph).
- Tax avoidance in line with International taxation principles should be dealt with in the so-called source country (in subject case UK), or wherever the beneficial owner of the income is resident, i.e. where “economically” the IP resides (in subject case I imagine this is a Tax haven country, or US). I’ll refer to this as “owner country”.
- In other words it should be dealt with in the country where tax is avoided from. 
- The Netherlands taxes what is considered the arm’s length income of a tax resident, based on enterprise’s functions and risks in the Netherlands (i.e. using internationally accepted transferprincing rules).
- Furthermore, the Netherlands does not apply source taxation on interest and royalties (like many countries) making it a favorable jurisdiction. This should not be considered harmful.

Coming back to my argument that tax avoidance should be dealt with in the source country or where the beneficial ownership is resident.

- Source country / UK, should evaluate whether royalty is at arm’s length and if not, can consider the royalty as a non-deductible expense, increasing the tax basis and consequently taxes paid in the UK.
- Source country / UK, if it applies source taxation on royalties can consider reviewing whether the Dutch entity is beneficial owner or not and apply source taxation (allowed under the DTC).
- The owner country should review whether the income of the entity that is economic owner of the IP should assess whether its taxable income is at arm’s length.
- If the Dutch entity is true owner of the IP, the Netherlands will tax in accordance with sound taxation principles. A step up in value upon migration and allowance of subsequent amortization is not harmful it ensures that the Netherlands does not tax income that is not economically earned in the Netherlands. The jurisdiction the IP migrated from should have taxed any (deemed) capital gain upon migration. 

If all countries involved apply (similar to the Netherlands) solid transferpricing principles or an economic substance over form approach we would not be having this discussion.

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