EN Official Journal of the European Union L 83/38

COMMISSION DECISION (EU) 2017/502

of 21 October 2015

on State aid SA.38374 (2014/C ex 2014/NN) implemented by the Netherlands to Starbucks

(notified under document C(2015) 7143)

(Only the Dutch text is authentic)

(Text with EEA relevance)

THE EUROPEAN COMMISSION,

Having regard to the Treaty on the Functioning of the European Union, and in particular the first subparagraph of Article 108(2) thereof,

Having regard to the Agreement on the European Economic Area, and in particular Article 62(1)(a) thereof,

Having called on interested parties to submit their comments pursuant to the provisions cited above (1) and having regard to their comments,

Whereas:

1. PROCEDURE

(1) By letter dated 30 July 2013, the Commission requested the Dutch authorities to provide information on the tax ruling practice in the Netherlands as well as all rulings related to Starbucks Coffee EMEA BV (hereinafter: ‘Starbucks Coffee BV’) and Starbucks Manufacturing EMEA BV (hereinafter: ‘SMBV’), both companies indirectly controlled by Starbucks Corporation. Starbucks Corporation and all the companies controlled by that corporation are referred to hereinafter collectively as ‘Starbucks’ or the ‘Starbucks group’.

(2) By letter dated 2 October 2013, the Dutch authorities submitted the requested information to the Commission, including the advance pricing agreement (hereinafter ‘APA’) (2) concluded in 2008 between the Dutch tax administration and Starbucks Coffee BV (hereinafter: the ‘Starbucks Coffee BV APA’), the APA concluded in 2008 between the Dutch tax administration and SMBV (hereinafter: the ‘SMBV APA’) and supporting documents. Those documents concern, in particular, a transfer pricing report supporting the request for the two aforementioned APAs (hereinafter: the ‘transfer pricing report’) and other exchanges between the Dutch tax administration and the tax advisor of Starbucks Corporation, [the tax advisor] (*1), (hereinafter: ‘the tax advisor’) on behalf of Starbucks Coffee BV and SMBV (3).

(3) On 9 January 2014, in preparation of a meeting to be held on 15 January 2014, the Commission sent an email to the Dutch authorities listing a number of questions concerning, among others, the transfer pricing arrangement agreed upon in the Starbucks Coffee BV APA and the SMBV APA concluded by the Dutch tax administration.

(4) On 15 January 2014, a meeting was held between the Commission services and representatives of the Dutch tax administration in which the Commission services sought, among others, further clarifications on the adjustments made to the cost base in the transfer pricing report as regards the SMBV APA and the fluctuating royalty payments made by SMBV.

(5) By letter dated 28 January 2014, in response to the questions posed in the meeting of 15 January 2014, the Dutch authorities provided information on the comparability adjustments, the choice of the comparable companies and the fluctuating royalty. Further information on the documents provided is described in recitals 59 to 62 of the Opening Decision as mentioned in recital 9.

(6) By letter dated 7 March 2014 (4), the Commission informed the Dutch authorities that it was considering whether the APAs in favour of Starbucks Coffee BV and SMBV could constitute new State aid within the meaning of Article 107(1) of the Treaty and invited the Dutch authorities to comment on the compatibility of such aid. The Commission invited the Dutch authorities to provide any additional information relating to the Starbucks Coffee BV and SMBVAPAs, as well as the tax returns of Starbucks Coffee BV and SMBV and companies related to those two companies in the Netherlands.

(7) By letter dated 21 March 2014, the Dutch authorities responded to the letter of 7 March 2014 and provided the requested tax returns. The Dutch authorities also confirmed that all relevant documents regarding the APAs submitted previously to the Commission had already been provided to the Commission.

(8) On 6 May 2014, a meeting was held between the Commission services and representatives of the Dutch tax administration.

(9) On 11 June 2014, the Commission adopted the decision to open the formal investigation procedure under Article 108(2) of the Treaty on the SMBV APA on the grounds that that APA could constitute State aid within the meaning of Article 107(1) of the Treaty (hereinafter ‘the Opening Decision’) (5).

(10) By letter dated 16 July 2014, the Dutch authorities submitted their comments on the Opening Decision. The submission included, among others, the Roasting Agreement between Alki Limited Partnership (hereinafter: ‘Alki LP’) and SMBV and the Green Coffee Purchase Agreement between SMBV and Starbucks Coffee Trading Company SARL (hereinafter: ‘SCTC’).

(11) By letter dated 25 November 2014, the Commission requested the Dutch authorities to provide the information asked for in the Opening Decision which was only partly submitted by the Dutch authorities on 16 July 2014 and to provide additional information necessary to analyse the SMBV APA.

(12) By letter dated 19 December 2014, the Dutch authorities replied to the letter of 25 November 2014, indicating that part of the requested information is not in the possession of the Dutch authorities.

(13) On 19 December 2014, the Opening Decision was published in the Official Journal of the European Union. The Commission invited interested parties to submit their comments on the measure.

(14) By letter dated 16 January 2015, Starbucks submitted its observations on the Opening Decision. Comments on the Opening Decision were also submitted by the Dutch Association of Tax Advisors (De Nederlandse Orde van Belastingadviseurs, hereinafter: ‘NOB’), the Confederation of Netherlands Employers and Industry (Verbond van Nederlandse Ondernemingen & Nederlands Christelijk Werkgeversverbond, hereinafter: ‘VNO-NCW’), ATOZ Tax Advisers Luxembourg, Oxfam International and the Austrian Chamber of Commerce (the Bundesarbeitskammer Österreich, hereinafter: ‘BAK’).

(15) By letter dated 8 January 2015, in response to the Commission's letter of 25 November 2014, the Dutch authorities provided the limited partnership deed constituting Alki LP.

(16) On 12 February 2015, the Commission informed the Netherlands that, in accordance with Article 6a of Council Regulation (EC) No 659/1999 (6), it had identified the formal investigation procedure on the SMBV APA as ineffective to date (7). By letter dated 6 February 2015 and in accordance with Article 6a(2)(b) of Regulation (EC) No 659/1999, the Commission requested the agreement of the Dutch authorities to contact Starbucks directly to obtain the missing information.

(17) By letter dated 18 February 2015, the Commission informed the Dutch authorities that it had received observations by a competitor on the value added of the roasting process to green coffee beans and invited the Dutch authorities to comment on this observation. The Dutch authorities submitted their comments on those observations by letter dated 11 March 2015.

(18) By letter dated 12 March 2015, the Netherlands provided its permission to contact Starbucks directly in response to the Commission's letter of 6 February 2015. Following that permission, by letter dated 16 March 2015, the Commission requested Starbucks, based on Article 6(a)(6) of Regulation (EC) No 659/1999, to provide information on the legal structure, the business model with regard to the Starbucks shops, and the raw material used by SMBV, i.e. the green coffee beans (hereinafter: the ‘Starbucks MIT request’).

(19) By letters dated 20 and 26 March 2015, the Dutch authorities submitted their observations on the comments of third parties to the Opening Decision.

(20) On 7 April 2015, following the adoption of the decision of 12 February 2015 and in accordance with Article 6a(6) of Regulation (EC) No 659/1999, the Commission contacted four competitors of Starbucks to provide market information on their business model and their value creating activities so as to enable the Commission to complete its assessment of the case (hereinafter: the ‘competitor MIT request’). Those four competitors included Company Y, Alois Dallmayr Kaffee oHG (hereinafter: ‘Dallmayr’), Nestlé SA (hereinafter: ‘Nestlé’) and Melitta Europa GmbH & Co. KG (hereinafter: ‘Melitta’). The Commission simultaneously informed the Dutch authorities that it had sent requests for information to competitors of Starbucks.

(21) On 13 April 2015, Starbucks submitted the information requested in the Commission's letter of 16 March 2015.

(22) By letters dated 27 April 2015, Dallmayr and Company Y replied to the Commission's request for market information of 7 April 2015.

(23) On 29 April 2015, a meeting was held between the Commission services and Starbucks at which the Commission services provided clarifications on how certain questions in the Starbucks MIT request should be understood in the context of the investigation.

(24) By letter dated 6 May 2015, following the reply of Starbucks of 13 April 2015, the Commission requested Starbucks to provide additional information.

(25) By letter dated 11 May 2015, the Commission requested Company Y to provide further clarifications on the submitted market information. Those clarifications were provided by Company Y by letter dated 21 May 2015.

(26) By letters dated 20 May 2015 and 26 May 2015, Nestlé and Melitta replied to the Commission's competitor MIT request of 7 April 2015.

(27) By letter dated 27 May 2015, the Dutch authorities submitted their comments on the information provided by Company Y and Dallmayr.

(28) By letter dated 29 May 2015, Starbucks submitted their replies to the Commission's request of 6 May 2015.

(29) By letter dated 19 June 2015, the Dutch authorities provided their comments on the information submitted by Starbucks on 13 April 2015 and 29 May 2015.

(30) By letter dated 26 June 2015, the Dutch authorities submitted their comments on the market information provided by Nestlé, Melitta and the clarifications provided by Company Y.

(31) On 29 June 2015, in addition to its submissions of 13 April 2015 and 29 May 2015, Starbucks provided a further substantiation of the supposed arm's-length nature of the transfer prices applied by SCTC for the supply of green coffee beans.

(32) By letter dated 24 July 2015, Starbucks spontaneously submitted additional information on the functions performed by SCTC, SMBV and Starbucks US (8) and provided new figures relating to Alki LP.

(33) By letter dated 5 August 2015, the Commission requested Starbucks to provide clarifications and other documents with regard to its submission of 24 July 2015 to be able to fully analyse the new information.

(34) By letter dated 24 August 2015 and email sent on 26 August 2015, Starbucks partially submitted the information requested by the Commission in its letter of 5 August 2015. The Commission forwarded this information to the Dutch authorities on 28 August 2015.

(35) By letter dated 10 September 2015 and email sent on 11 September 2015, Starbucks submitted the remaining information to the Commission. By letter dated 23 September 2015, Starbucks complemented the information submitted to the Commission on 10 and 11 September 2015.

(36) By letters dated 25 September 2015 and 7 October 2015, the Dutch authorities provided their comments on the information submitted by Starbucks on 10, 11 and 23 September 2015.

2. DESCRIPTION OF THE CONTESTED MEASURE

2.1. Description of the beneficiary

(37) The beneficiary of the measure is SMBV. SMBV is a subsidiary incorporated in the Netherlands of the Starbucks group. The Starbucks group is composed of the Starbucks Corporation and all the companies controlled by that corporation. The Starbucks Corporation is headquartered in Seattle, United States of America (hereinafter ‘US’). The corporate structure of the Starbucks group is explained in more detail in recital 27 and Figure 1 of the Opening Decision.

(38) Starbucks is a roaster, marketer and retailer of specialty coffee, operating in 65 countries. It purchases and roasts coffees that are sold, along with handcrafted coffee, tea and other beverages and fresh food items, through company-operated stores. It also sells a variety of coffee and tea products and licenses its trademark through other channels, such as licensed stores, grocery and national foodservices accounts (9). In 2014, the Starbucks group had worldwide net revenues of USD 16 448 million and post-tax earnings of USD 2 067 million (10).

(39) SMBV is the only wholly controlled Starbucks group entity outside of the US which roasts coffee.

2.2. The contested measure

(40) This Decision concerns the SMBV APA, an advance pricing agreement concluded by the Dutch tax administration with SMBV on 28 April 2008 (Vaststellingsovereenkomst APA). The SMBV APA is binding for 10 years, from 1 October 2007 to 31 December 2017 (11).

(41) An APA is an agreement between a tax administration and a taxpayer on the application of tax law regarding (future) transactions, i.e. it determines the amount of profit that the taxpayer generates from its activities that are taken into account in that tax jurisdiction. An APA determines, in advance of intra-group transactions, an appropriate set of criteria (e.g. method, comparables and appropriate adjustments thereto, critical assumptions as to future events) for the determination of an arm's-length pricing for those transactions over a fixed period of time. An APA is formally initiated by a taxpayer.

2.2.1. The SMBV APA

(42) By concluding the SMBV APA, the Dutch tax administration accepted that the remuneration determined by Starbucks' tax advisor in the transfer pricing report for the functions performed by SMBV in the Netherlands (including risk assumed and assets used) constitutes an arm's-length remuneration (12).

(43) That remuneration consists of a mark-up of [9-12] % of the relevant cost base. The relevant cost base used to calculate that remuneration includes all personnel costs engaged in both manufacturing and supply chain activities, the cost of production equipment (i.e. depreciation) and plant overheads. It does not include the costs of the Starbucks cups, paper napkins, etc., the costs of green coffee beans (cost of raw materials), the logistics and distribution cost for services provided by third parties, the remuneration for activities provided by third parties under so-called ‘consignment manufacturing contracts’ and the royalty payments to Alki LP.

(44) In the SMBV APA, the Dutch tax administration further accepted that the level of the royalty payment from SMBV to Alki LP would be determined at the end of each year as the difference between the realised operating profit before royalty expenses and the aforementioned [9-12] % mark-up on operating expenses. The SMBV APA further provides that ‘this royalty payment is deductible for corporate income tax purposes and is not subject to Dutch withholding tax’ (13).

(45) The SMBV APA thus endorses a profit allocation to SMBV within the Starbucks group that enables it to determine its corporate income tax liability to the Netherlands on a yearly basis for 10 years. Since the APA entered into force on 1 October 2007, this Decision analyses the SMBV APA under the State aid rules as from that date.

2.2.2. The transfer pricing report

(46) The remuneration accepted by the Dutch tax administration in the SMBV APA is based on the transfer pricing analysis prepared by Starbucks' tax advisor in the transfer pricing report, which forms an integral part of that APA.

(47) The objective of the transfer pricing report is to support the proposed profit allocation to SMBV within the Starbucks group as being based on an arm's-length pricing of intra-group transactions. The transfer pricing report presents a company overview, a functional analysis and a selection of transfer pricing methods. The report presents the following relevant information about Starbucks Coffee BV and SMBV (14):

2.2.2.1. Starbucks Coffee BV

(48) Starbucks Coffee BV functions as the Starbucks group's head office for the Europe Middle-East and Africa (‘EMEA’) region, supporting the group's EMEA business operations. Starbucks Coffee BV assists with identifying developers to develop and operate Starbucks retail stores in the EMEA territories. In its capacity as head office, Starbucks Coffee BV licenses certain Starbucks trademarks, technology and know-how (15) from its shareholder, Alki LP, in return for a royalty payment. Starbucks Coffee BV enters into what is referred to as an ‘Area Development and Operation Agreement’ (hereinafter: ‘ADOA’) with related and unrelated operators of Starbucks shops in the EMEA region. Those operators are called Developers, also referred to hereinafter as ‘Shops’. Starbucks Coffee BV sublicenses intellectual property (hereinafter: ‘IP’) rights to the Developers to enable them to develop and operate their shops as Starbucks Shops. For the use of the IP, the Developers pay a royalty and other fees to Starbucks Coffee BV based on a percentage of turnover. According to the submission of the Netherlands of 2 October 2013, both related and unrelated Developers pay the same percentage of turnover as a royalty to Starbucks Coffee BV. Therefore, Starbucks' tax advisor considers that a comparable uncontrolled price method (16) is applied to determine the arm's-length price of intra-group royalty payments to the EMEA head office Starbucks Coffee BV (17).

2.2.2.2. SMBV

(49) Starbucks' tax advisor, when presenting the most important transactions and inter-company flows for SMBV in the transfer pricing report (18), limits itself to describing that SMBV primarily processes green coffee and sells roasted coffee to affiliated and non-affiliated parties. It also explains that the green coffee beans sourced by SMBV are sourced from an affiliated Starbucks' subsidiary in Switzerland (SCTC). Furthermore, it explains that SMBV operates as an intermediary distribution entity for a variety of non-coffee items. In addition to the supply chain function for its own manufacturing activities, the tax advisor further explains that certain markets also receive some supply chain support from SMBV. The tax advisor does not describe the roasting IP licensing arrangement under which SMBV pays royalties to Alki LP for licensed IP among the most important transactions and inter-company flows, but only shows it in a graph and describes it in a separate section in the transfer pricing report describing the EMEA market and Netherlands operations (19).

(50) According to the functional analysis provided in the transfer pricing report (20), the focus of SMBV's activities is its Amsterdam-based roasting facility. The main raw material component of that roasting process is green coffee beans. The actual roasting process for a particular coffee blend depends on the particular type of green coffee bean used in the recipe and the desired flavour profile. SMBV is responsible for executing roasting forecasts provided by Starbucks US and ensuring that the resulting product meets the quality standards of Starbucks US. SMBV buys the green coffee beans from SCTC, a designated supplier (21). The beans for the EMEA market are roasted and packaged in the Netherlands by SMBV.

(51) SMBV licenses a subset of IP from Alki LP, which is not mentioned in the functional analysis, but described in a separate section on the EMEA market and Netherlands operations as ‘necessary to utilise the coffee roasting manufacturing process and the right to supply coffee to [D]evelopers. In return [SMBV] remits a royalty to Alki LP for the licensed IP’ (22). That coffee roasting related IP consists, in particular, of roasting curves, which according to the transfer pricing report dictates the temperature and the length of time required to complete the roasting process.

(52) According to the transfer pricing report, SMBV employed [40-60] people, of which [20-30] perform supply chain operations including procurement, planning, logistics and distribution planning (23). SMBV has a distribution centre in the United Kingdom (hereinafter: ‘UK’) operated under contract by a third party (24). SMBV has a supply and logistics agreement with a third party in the Netherlands, whereby the third party purchases inventory for resale to developers at arranged prices (25). SMBV also engaged another third party to open a distribution centre in Germany during 2006.

(53) SMBV also has a relationship with a consignment manufacturer, [unaffiliated manufacturing company 1]. [Unaffiliated manufacturing company 1] mainly produces [a trademark registered coffee product] powder for the Starbucks [trademark registered coffee] product. SMBV is responsible (26) for managing this toll manufacturing relationship (27) and sells the majority of the product produced by [unaffiliated manufacturing company 1] to Starbucks' US resident companies.

(54) Figure 1 is based on the description of the transfer pricing report to illustrate the part of the structure of Starbucks which is relevant for this Decision (28). Figure 1 Structure of Starbucks based on the description in the transfer pricing report

(55) According to the transfer pricing report, the transactional net margin method (hereinafter: ‘TNMM’ (29)) was selected by the tax advisor to estimate an arm's-length remuneration due to SMBV over other transfer pricing methods, because, ‘in the specific set of Starbucks' circumstances; the net margin is less affected by transactional differences and functional differences, as in the case with measures employed in standard traditional methods’ (30). For a more detailed description of the choice of the method and of the peer analysis in the transfer pricing report, see recitals 40 to 58 of the Opening Decision.

(56) In applying the TNMM to SMBV's roasting activities, the tax advisor considered the relevant base (31) for the net profit indicator to be the costs of the services rendered by SMBV, in line with the cost plus method, which is considered an appropriate methodology for supply chain and manufacturing services. However, the mark-up is only applied to those costs where, according to the tax advisor, SMBV adds value. The transfer pricing report lists those costs as main operating costs, such as cost of personnel and depreciation, excluding COGS.

(57) To determine the appropriate arm's-length range of profitability for the activities performed by SMBV, the tax advisor conducted a search to identify companies operating in Europe with similar functions and risks. A comparable companies search in the Amadeus database (32) using the primary NACE Rev 1.1 code 1586 — Processing of tea and coffee to identify companies engaged in the trade of coffee (the buying and selling of coffee not processed by the company itself were not deemed comparable) followed by elimination through the use of additional financial selection criteria and a manual screening by the tax advisor (33), ultimately resulted in 20 companies as potentially comparable (34).

(58) The net profit indicator calculated for each company was a mark-up on total costs, which is defined as operating profit divided by total operating costs. The median of the unadjusted mark-up on total costs for those companies from 2001 to 2005 was estimated at 7,8 %.

(59) However, according to the tax advisor, this set of comparable companies includes full-fledged manufacturers that typically perform more functions and incur risk relating to their raw materials. To correct for this difference and to allegedly increase the reliability of the comparison, the tax advisor performed a first adjustment to account for the fact that the proposed application of the mark-up to SMBV's cost-base does not include a cost component for green coffee beans.

(60) Additionally, the comparable companies' returns would, according to the tax advisor, reflect a return on a cost base that includes such raw materials. Therefore, a raw materials cost adjustment was applied by the tax advisor to modify the total cost mark-up (35) obtained from the comparable companies set. The tax advisor indicated that this adjustment is associated with what the tax advisor refers to as ‘taking title to the raw materials’. Concretely, the tax advisor subtracted from the profit of each company in the set their estimated price of raw material multiplied by 12-month EURIBOR plus 50 basis points.

(61) The combination of those two adjustments lowered the estimated remuneration from a median of 7,8 % on total costs to an estimated median of 9,9 % on operating costs (36). A (rounded) mark-up of [9-12] % of operating costs was considered on that basis to reflect an arm's-length mark-up for the provision of roasting services and associated supply chain activities by SMBV for its intra-group transactions.

2.3. Description of OECD guidance on transfer pricing

(62) The Organisation for Economic Cooperation and Development (hereinafter the ‘OECD’) OECD provides guidance on taxation for its member countries. The OECD's guidance on transfer pricing can be found in its Transfer Pricing Guidelines (hereinafter the ‘OECD TP Guidelines’), which is a non-binding legal instrument providing guidance on transfer prices.

(63) Transfer prices refer to prices charged for commercial transactions between various parts of the same corporate group. Multinational companies have a financial incentive to allocate as little profit as possible to jurisdictions where those profits are subject to higher taxation. This could lead to exaggerated transfer prices which should not be accepted as a basis for calculating taxable income. To avoid this problem, tax administrations should only accept transfer prices between intra-group companies that are remunerated as if they were agreed to by independent companies negotiating under comparable circumstances at arm's length (37). This is known as the ‘arm's-length principle’.

(64) The authoritative statement of the arm's-length principle is found in paragraph 1 of Article 9 of the OECD Model Tax Convention, which forms the basis of bilateral tax treaties involving OECD member countries and an increasing number of non-member countries. Article 9 provides: ‘[Where] conditions are made or imposed between the two [associated] enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly’.

(65) On 27 June 1995, the OECD's Committee on Fiscal Affairs adopted transfer pricing guidelines (hereinafter: the ‘1995 OECD TP Guidelines’ (38)) which were the object of a Recommendation of the OECD Council (39). The latest version of the OECD TP Guidelines was adopted in July 2010 (hereinafter the ‘2010 OECD TP Guidelines’) (40).

(66) Given their non-binding nature, the tax administrations of the OECD member countries are simply encouraged to follow the Guidelines. However, in general, the OECD TP Guidelines serve as a focal point and exert a clear influence on the tax practices of OECD member (and even non-member) countries. Moreover, in numerous OECD member countries those Guidelines have been given the force of law or serve as a reference for the purpose of interpreting domestic tax law. To the extent the Commission cites the OECD TP Guidelines in the present Decision, it does so because those guidelines are an existing manual in the area of transfer pricing that are the result of expert discussions in the context of the OECD and elaborate on techniques aimed to address common challenges of the application of the arm's-length principle to concrete situations. The OECD TP Guidelines therefore provide useful guidance to tax administrations and multinational enterprises on the application of the arm's-length principle. They also capture the international consensus on transfer pricing.

2.3.1. Transfer pricing methods

(67) Both the 1995 and the 2010 OECD TP Guidelines describe five methods to approximate an arm's-length pricing of transactions and profit allocation between companies of the same corporate group: (i) the comparable uncontrolled price method (hereinafter ‘CUP’); (ii) the cost plus method; (iii) the resale minus method; (iv) the TNMM and (v) the transactional profit split method. Both Guidelines also draw a distinction between traditional transaction methods (the first three methods) and transactional profit methods (the last two methods). Both Guidelines further explain that multinational corporations retain the freedom to apply methods not described in those Guidelines to establish transfer prices, provided those prices satisfy the arm's-length principle.

(68) The 1995 OECD TP Guidelines declare an express preference for traditional transaction methods, such as the CUP, over transactional methods, such as the TNMM, as a means to establish whether transfer pricing is at arm's length. Paragraph 3.49 of the 1995 OECD TP Guidelines provides: ‘Traditional transaction methods are to be preferred over transactional profit methods as a means of establishing whether a transfer price is at arm's length, i.e. whether there is a special condition affecting the level of profits between associated enterprises. To date, practical experience has shown that in the majority of cases, it is possible to apply traditional transaction methods.’

(69) In this regard, paragraph 2.3 of the 2010 OECD TP Guidelines provides: ‘As a result, where, taking account of the criteria described at paragraph 2.2, a traditional transaction method and a transactional profit method can be applied in an equally reliable manner, the traditional transaction method is preferable to the transactional profit method.’

(70) The CUP and the TNMM are relevant for the present Decision and are therefore described in more detail in recitals 71 to 75.

(71) The CUP method compares the price charged for the transfer of property or services in a controlled transaction (i.e. a transaction between two enterprises that are associated enterprises with respect to each other) to the price charged for the transfer of property or services in a comparable uncontrolled transaction (i.e. a transaction between enterprises that are independent enterprises with respect to each other), conducted under comparable circumstances.

(72) The TNMM is one of the ‘indirect methods’ to approximate an arm's-length pricing of transactions and profit allocation between companies of the same corporate group. It approximates what would be an arm's-length profit for an entire activity, rather than for identified transactions. It does not seek to establish the price of goods sold, but estimates the profits independent companies could be expected to make on an activity, such as the activity of selling goods. It does this by taking an appropriate base (‘a profit level indicator’), such as costs, turnover or fixed investment, and applying a profit ratio reflecting that observed in comparable uncontrolled transactions to that base.

(73) Because the TNMM does not set a price for individual transactions, the taxable profit of an entity estimated using the TNMM might not have a direct effect on the taxable profit of another entity of the same corporate group. The method is therefore different to using, for example, the CUP method, where transfer pricing establishes the price of a specific good or service which is then recorded in the taxable profit for the same amount by the group company selling and the group company buying the particular good or service.

(74) The use of the TNMM is often associated with paragraph 3.18 of the 2010 OECD TP Guidelines, according to which the ‘tested party’, i.e. the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested, should, in principle, be the company which has the less complex function. In detail, paragraph 3.18 of the 2010 OECD TP Guidelines provides for the following recommendation: ‘When applying a cost plus, resale price or transactional net margin method as described in Chapter II, it is necessary to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested. The choice of the tested party should be consistent with the functional analysis of the transaction. As a general rule, the tested party is the one to which a transfer pricing method can be applied in the most reliable manner and for which the most reliable comparables can be found, i.e. it will most often be the one that has the less complex functional analysis’ (41).

(75) That paragraph of the 2010 OECD TP Guidelines is often interpreted by tax advisors in situations of transactions between two related companies as allowing to estimate the arm's-length profitability of only one of them, i.e. the less complex one, and attributing any other profit observed in the accounts to the second company, which is considered more complex. This is done regardless of whether the company considered as more complex earns an arm's-length remuneration as a result of the transactions between it and the less complex company, and regardless of the fact that the 2010 OECD TP Guidelines themselves do not seem to lift the requirement for resulting transactions to be priced at arm's length when paragraph 3.18 of the 2010 OECD TP Guidelines is relied upon.

2.3.2. Arm's-length range

(76) The OECD TP Guidelines describe as an acceptable arm's-length outcome from a comparison analysis a range of outcomes rather than one specific outcome (42). In practice, what tax advisors refer to as a ‘range’ is the interquartile range. Quartiles in a series of data are three points which divide the figures in the set ranked from smallest to largest into three equally populated sets, that is 25 % of the data is in the 25th percentile (also called lower quartile), 50 % of the data is below or equal to the second quartile, which is the median of the set, and 75 % of the data is below or equal to the 75th percentile (also called upper quartile). Such an interquartile range is mentioned in paragraph 3.57 of the 2010 OECD TP Guidelines for situations where comparability defects cannot be fully addressed. According to the 2010 OECD TP Guidelines, in such cases, if the range includes a sizeable number of observations, statistical tools that take account of central tendency to narrow the range (e.g. the interquartile range or other percentiles) might help to enhance the reliability of the analysis. In practice, tax advisors often consider that any outcome within an interquartile range is acceptable and equally correct.

(77) Furthermore, when making adjustments to pricing by the taxpayer that is outside a correct range, the tax administration in presence of comparability defects should according to paragraph 3.62 of the 2010 OECD TP Guidelines (43) rely on measures of central tendency (for instance the median, the mean or weighted averages, etc.) to determine the appropriate point in the range.

2.4. Description of main accounting and financial terms used in the transfer pricing analysis

(78) The transfer pricing analysis in the transfer pricing report included in the SMBV APA request contains a number of accounting concepts and financial profit indicators. A brief overview of financial indicators and accounting concepts frequently used in transfer pricing assessment and relevant for the present case are explained below.

2.4.1. Main profit and loss accounting items (non-financial company)

(79) A typical profit and loss account first records the income that a company receives from its normal business activities, usually from the sale of goods and services to customers. This accounting item is referred to as ‘Sales’ or ‘Turnover’ or ‘Revenue’.

(80) Cost of goods sold (hereinafter: ‘COGS’) represents mainly the value of material used for the production of goods (raw materials) or the purchase price of goods that have been resold if the company does not process the goods sold. COGS is deducted from sales to calculate gross profit.

(81) Operating expenses covers principally salary expenses (44), energy expenses and other administrative and sales expenses. In the case of SMBV, the royalty paid to Alki LP is classified as an operating expense, but it is excluded from the operating expenses used to calculate the taxable income according to the SMBV APA (45).

(82) Table 1 provides a simplified overview of a profit and loss account (46). Table 1 Simplified profit and loss account Sales (or Turnover or Revenue) — Cost of goods sold (COGS) Gross Profit — Operating Expense (OpEx) Operating profit (EBITDA) — Interest and depreciation Taxable income (EBT) — Tax Net profit

2.4.2. Profit margins

(83) Performance and profitability is often measured using ratios presented as ‘margins’ or ‘mark-ups’. Margins are also used in peer comparisons in transfer pricing.

(84) Some margins are conventionally defined. This is the case for gross margins, which are in principle defined as gross profits divided by sales, and for net margins defined in principle as the net profits divided by sales. Net profit margins used in transfer pricing analyses will often use as a starting point (nominator) the taxable income, rather than the net profits, in particular when using the TNMM, which serves to approximate the taxable income of a tested party.

2.5. Description of the Dutch rules on arm's-length pricing

2.5.1. Article 8b of the corporate income tax 1969

(85) The SMBV APA was concluded on the basis of Article 8b(1) of the Dutch Corporation Tax Act 1969 (Wet op de Vennootschapsbelasting 1969) (hereinafter ‘CIT’).

(86) Article 8b(1) CIT, which was inserted in the CIT in 2002, lays down the arm's-length principle in the domestic tax law of the Netherlands and reads as follow: ‘Where an entity participates, directly or indirectly, in the management, control or capital of another entity, and conditions are made or imposed between these entities in their commercial and financial relations (transfer prices) which differ from conditions which would be made between independent parties, the profit of these entities will be determined as if the last mentioned conditions were made’.

2.5.2. Dutch Transfer Pricing Decree 2001

(87) Guidance as to how the Dutch tax administration interprets the arm's-length principle laid down in Article 8b(1) CIT is provided in the Dutch Transfer Pricing Decree of 30 March 2001 (hereinafter ‘the Decree’) (47). The preamble to the Decree states the following: ‘[…] The policy of the Netherlands on the arm's-length principle in the field of international tax law is that this principle forms an integral part of the Netherlands' system of tax law as a result of its incorporation in the broad definition of income recorded in Section 3.8 of the Income Tax Act 2001’ (48). In principle, this means that the OECD Guidelines apply directly to the Netherlands under Section 3.8 of the Income Tax Act 2001. There are a number of areas in which the OECD Guidelines provide scope for individual interpretation by the member countries. In a number of other areas, practical experience has shown that the OECD Guidelines are in need of clarification. This decree explains the Netherlands' position in relation to these particular points and seeks, where possible, to remove any confusion'.

(88) With regard to the use of a range, the Decree determines under Chapter 1.2: ‘In some cases it will be possible to apply the arm's-length principle and arrive at one single figure that is the most reliable to determine the arm's-length character of the transfer prices. Because, however, transfer pricing is not an exact science, a particular transfer pricing method will often generate a range of figures all of which are equally reliable’.

(89) With regard to the transfer pricing methods, under Chapter 2, the Decree states the following: ‘Chapter II of the OECD Guidelines discusses the three traditional transaction methods introduced in Paragraphs 1.68 to 1.70 (i.e. the comparable uncontrolled price method, the resale price method and the cost-plus method), whilst Chapter III examines the methods known as the transactional profit methods (i.e. the profit-split method and the transactional net margin method or TNMM). Depending on the circumstances, a choice of one of these five accepted methods has to be made. The methods can supplement each other. The OECD Guidelines are based on a certain hierarchy of the methods where a preference exists for the traditional transaction methods. On the one hand, transactional profit methods are considered more or less as methods of last resort. On the other hand, the OECD Guidelines state that the tax authorities need to start a transfer pricing audit from the perspective of the method chosen by the taxpayer (see Paragraph 4.9 of the OECD Guidelines). In accordance with Paragraph 4.9 of the OECD Guidelines, whenever the Netherlands' tax administration undertakes a transfer pricing audit, it should start from the perspective of the method adopted by the taxpayer at the time of the transaction. This complies with Paragraph 1.68 of the OECD Guidelines. The implication is that taxpayers are in principle free to choose a transfer pricing method, provided that the method adopted leads to an arm's-length outcome for the transaction in question. In certain situations, however, some methods will generate better results than others. Although taxpayers may be expected to base their choice of a transfer pricing method on the reliability of the method for the particular situation, taxpayers are definitely not expected to weigh up the advantages and disadvantages of all of the various methods and then explain why the method that was ultimately adopted generates the best results in the prevailing conditions (i.e. the best method rule). Certain situations are also suited for a combination of methods. At the same time, taxpayers are not obliged to use more than one method. The only obligation resting on the taxpayer is to explain why the decision was taken to adopt the particular method that was adopted.’

(90) Under Chapter 2.1 of the Decree, the CUP method is described. With regard to the preference for the use of this method, the Decree states: ‘(…) If a comparable price is available, the comparable uncontrolled price method (commonly known as the CUP method) will, in general, be the most direct and the most reliable method in determining the transfer price, so that this method is to be preferred over other methods’.

2.6. Additional information received after the opening of the formal investigation procedure from Starbucks and the Netherlands

(91) The Netherlands and Starbucks provided complementary information and figures regarding SMBV, Alki LP, the Starbucks Shops and SCTC.

2.6.1. Information on the activities and risks of SMBV

(92) In the transfer pricing report, SMBV is presented as a low risk manufacturer. The Commission requested information to verify whether the main activity of SMBV was indeed low-risk manufacturing, which in this case would be the roasting of coffee. The Commission also requested information about the structure of SMBV's costs to verify whether the underlying activities generating those costs confirm that the tasks performed by SMBV are indeed routine execution tasks and do not present any degree of complexity, in line with the assumptions in the transfer pricing report. Information on the degree of business risk assumed by SMBV is presented in different sections, where contracts are described.

(93) In order to analyse what products are the main drivers of SMBV's sales and to verify whether coffee roasting is indeed the main economic activity of SMBV, the Commission requested the breakdown of SMBV's sales by product. Starbucks provided the amounts received from the Shops for the coffee beans (highlighted in Table 2) and separately the amounts of any other payments from the Shops for other activities such as sale of cups, presented in Table 2. Table 2 Revenues of SMBV by category of products sold Description FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 REV PASTRY/BAKERY — — [700-800 thousand] [1-10 million] [1-10 million] [20-30 million] [20-30 million] [20-30 million] REV PREPARED FOOD — — — — [1-10 million] [10-20 million] [10-20 million] [20-30 million] REV READY TO DRINK [1-10 million] [1-10 million] [1-10 million] [1-10 million] [1-10 million] [1-10 million] [10-20 million] [10-20 million] REV PKGD FOOD [10-20 million] [10-20 million] [1-10 million] [1-10 million] [1-10 million] [20-30 million] [20-30 million] [20-30 million] REV PACKAGED COFFEE [20-30 million] [20-30 million] [20-30 million] [20-30 million] [40-50 million] [50-60 million] [50-60 million] [60-70 million] REV SINGLE SERVE PODS-COFFEE — — — — — [1-10 million] — ([1-10 thousand]) REV SINGLE SERVE PODS-VERISMO — — — — — [1-10 million] [10-20 million] [10-20 million] REV SOLUBLE COFFEE — — [200-300 thousand] [1-10 million] [1-10 million] [1-10 million] [10-20 million] [10-20 million] REV PACKAGED TEA [1-10 million] [1-10 million] [1-10 million] [1-10 million] [1-10 million] [1-10 million] [1-10 million] [1-10 million] REV SERVEWARE [1-10 million] [1-10 million] [1-10 million] [1-10 million] [1-10 million] [1-10 million] [10-20 million] [10-20 million] REV BREWING EQUIPMENT [900 thousand-1 mln] [1-10 million] [700-800 thousand] [500-600 thousand] [600-700 thousand] [700-800 thousand] [800-900 thousand] [600-700 thousand] REV BREWING EQUIPMENT-VERISMO — — — — — [20-30 thousand] [1-10 million] [800-900 thousand] REV TANGIBLE MEDIA ([1-10 thousand]) [300-400 thousand] [200-300 thousand] [80-90 thousand] [100-200 thousand] [100-200 thousand] [1-10 thousand] — REV GIFTPACKS [100-200 thousand] [100-200 thousand] [50-60 thousand] [1-10 thousand] — — — — REV GAMES & TOYS — — [200-300 thousand] [300-400 thousand] [100-200 thousand] [100-200 thousand] [100-200 thousand] [30-40 thousand] REV MISC MERCHANDISE — — ([100-200]) [400-500] [1-10 thousand] [30-40 thousand] [500-600 thousand] [500-600 thousand] REV RAW MATERIALS — — [100-200 thousand] [1-10 million] [100-200 thousand] [200-300 thousand] [1-10 thousand] [30-40 thousand] REV PAPER PACKAGING [10-20 million] [10-20 million] [10-20 million] [10-20 million] [20-30 million] [20-30 million] [20-30 million] [20-30 million] REV BLENDED BEVG MIX [40-50 million] [40-50 million] [50-60 million] [50-60 million] [40-50 million] [50-60 million] [50-60 million] [60-70 million] REV FRAP COFFEE BASE — — — — [20-30 million] [30-40 million] [20-30 million] [20-30 million] REV EXTRACT — — — — [1-10 million] [10-20 million] [10-20 million] [10-20 million] REV EQUIPMENT [1-10 million] [1-10 million] [1-10 million] [1-10 million] [1-10 million] [1-10 million] [10-20 million] [20-30 million] REV SHIPPING [40-50 thousand] [30-40 thousand] [70-80 thousand] [300-400 thousand] [300-400 thousand] [200-300 thousand] [1-10 million] [1-10 million] REV ROYALTIES — — — — — — — — REV MANAGEMENT SERVICE FEE [1-10 million] [1-10 million] [1-10 million] [800-900 thousand] [900 thousand-1 mln] [600-700 thousand] — — REV OTHER REV [1-10 million] [1-10 million] [1-10 million] [1-10 million] [1-10 million] [1-10 million] [1-10 million] [1-10 million] SALES DISC ([100-200 thousand]) [80-90 thousand] ([1-10 thousand]) ([200-300 thousand]) ([500-600 thousand]) ([600-700 thousand]) ([1-10 million]) ([100-200 thousand]) TRADE DISCOUNTS-DIRECT TO MARKET — — — — — ([30-40 thousand]) ([10-20 thousand]) ([1-10 million]) DIRECT TO MARKET COUPON DISCOUNTS — — — — — — — ([20-30 thousand]) DIRECT TO MARKET SLOTTING COSTS — — — — — — ([20-30 thousand]) ([200-300 thousand]) UNSALABLE RETURNS AND ALLOWANCE — — — — — — — ([20-30 thousand]) SALES RETURNS/ALLOWANCES — — — — — ([1-10 thousand]) ([10-20 thousand]) ([90-100 thousand]) Rounding 0 (0) (0) 0 (0) 0 (0) (0) Revenues as per Statutory Accounts [100-200 million] [100-200 million] [100-200 million] [100-200 million] [100-200 million] [200-300 million] [300-400 million] [300-400 million]

(94) Starbucks indicated that the revenues under the description ‘REV PACKAGED COFFEE’ in Table 2 relate to SMBV's roasting and packaging function. The remainder of the revenues relate, according to Starbucks, to SMBV's administrative and logistics support function. A small portion of the coffee roasted in the Netherlands is further processed by third-party manufacturers. It concerns: ‘REV SINGLE SERVE PODS-COFFEE’, ‘REV SINGLE SERVE PODS-VERISMO’, ‘REV SOLUBLE COFFEE’, ‘REV FRAP COFFEE BASE’ and ‘REV EXTRACT’. Those revenues should also be classified as administrative and logistics support revenue, as the underlying revenue invoiced to Developers represents the value created by third parties rather than SMBV. In any case, according to Starbucks, those revenues represent only a small portion of the total roasting output of SMBV.

(95) Regarding the pricing of products, Starbucks provided […] price list examples for different quarters in 2013 and 2014 that provide prices for coffee and non-coffee products sold by Starbucks. According to Starbucks, […].

(96) Regarding the pricing of coffee products, the prices are calculated on the basis of formulas referring to costs and they vary per product. Starbucks provided, as an illustration, the cost build up formula for the item ‘[certification programme coffee product e]’ which is the highest volume item sold by SMBV. The coffee prices charged to Shops by SMBV are calculated based on the costs that SCTC pays for green coffee beans, to which cost […] of coffee acquisition and coffee […] are added. To this amount, ‘[…]’ costs are added for […], as well as a […] summing up to the roasted coffee price. Finally a licensing fee paid to a third party is paid relating to the [certification programme] designation (49).

(97) Regarding the prices of non-coffee products sold to Shops by SMBV, Starbucks indicated that the prices of the non-coffee products delivered by SMBV to Shops are determined by adding a so-called [cost recovery margin] to the purchase price of the non-coffee products. That [cost recovery margin] is charged by SMBV to recover the […] expenses. However, it covers not only the […] expenses of SMBV, but also all the relevant […]costs of the […]. In fact, as the final prices for non-coffee products charged by SMBV to Shops are calculated by applying the [cost recovery margin] to the product costs, the profit on non-coffee products that SMBV records corresponds to this [cost recovery margin].

(98) The most important expense item of SBMV is salary expense, which amounted to EUR [1-10 million] in 2014 out of a total operating expense of EUR 16 124 000 that year. Other large operating expense items of SMBV in 2014 were wage related expenses, payroll tax, property rents and lease payments, equipment depreciation and intangibles amortisation. Although prior to 2013 SBMV did not have intangibles amortisation expenses, it was one of the largest operating expense items in 2014, amounting to EUR 628 000, which was a larger expense in that year than equipment repair and maintenance, electricity, bad debt, office and computer supplies and others (for example software licence expenses, which are recorded as a separate item). The intangible amortisation expense seems to relate to an IP right first recorded in the financial accounts in 2012, which would have been acquired for more than EUR 4 million. Additionally, in 2014, a large operating expense item was represented by ‘Market research’ amounting to EUR [100-200 thousand] that year.

2.6.2. Royalty payments

(99) The taxable profits of SMBV in the Netherlands, which are determined based on the SMBV APA in reference to the operating expense of the company, are reduced by a royalty paid to Alki LP. The Commission requested further information from the Netherlands and Starbucks on the amount of the royalty payment and the exact calculation of the tax base.

(100) SMBV's profit and loss account as presented in its financial statements are reproduced in Table 3. Table 3 SMBV's profit and loss accounts 2001-2014 (EUR) 2001/2002 2002/2003 2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 Sales 14 067 934 51 700 060 63 950 312 83 240 391 108 855 325 118 663 171 128 784 681 135 677 607 142 627 243 184 159 097 286 217 379 327 632 453 350 538 852 Direct Cost of sales (15 398 686 ) (41 799 345 ) (50 148 768 ) (68 349 376 ) (85 467 406 ) (98 615 765 ) (108 107 101 ) (115 352 332 ) (120 020 824 ) (153 275 834 ) (252 500 829 ) (286 969 488 ) (305 831 016 ) thereof green beans (*2) [0-10 million] [10-20 million] [10-20 million] [10-20 million] [10-20 million] [20-30 million] [20-30 million] [20-30 million] [30-40 million] [40-50 million] [60-70 million] [60-70 million] [60-70 million] Gross Margin (1 330 752 ) 9 900 715 13 801 544 14 891 015 23 387 919 20 047 406 20 677 580 20 325 275 22 606 419 30 883 263 33 716 550 40 662 965 44 707 836 General and administrative expenses (3 150 256 ) (8 474 279 ) (8 997 548 ) (5 086 145 ) (7 303 608 ) (10 158 687 ) (15 221 123 ) (16 742 108 ) (16 835 153 ) (14 303 059 ) (17 469 758 ) (16 626 967 ) (16 124 052 ) Foreign currency exchange 219 905 33 743 5 102 24 784 (388 855 ) (166 915 ) (467 072 ) 1 849 067 (2 266 492 ) (2 089 448 ) (8 162 650 ) 709 539 (2 272 582 ) Other expenses (see Note) 4 744 084 526 555 (2 165 152 ) (6 336 360 ) (11 594 191 ) (4 699 336 ) (1 698 150 ) (2 470 449 ) (1 079 817 ) (12 352 838 ) (5 786 211 ) (22 812 962 ) (24 285 088 ) EBIT 482 981 1 986 734 2 643 946 3 493 294 4 101 265 5 022 468 3 291 235 2 961 785 2 424 957 2 137 918 2 297 931 1 932 575 2 026 114 Interest income 17 328 34 576 27 668 51 766 167 195 248 997 304 939 86 995 45 402 30 073 18 763 14 200 76 209 Interest expense 0 (803 856 ) (1 263 915 ) (1 272 114 ) (817 041 ) (2 356 989 ) (2 097 056 ) (1 345 779 ) (817 041 ) (737 371 ) (735 233 ) (411 315 ) (434 454 ) Result before taxation 500 309 1 217 454 1 407 699 2 272 946 2 763 349 2 914 476 1 499 118 1 703 001 1 653 318 1 430 620 1 581 461 1 535 460 1 667 869 Corporate income tax (171 805 ) (418 774 ) (484 408 ) (733 370 ) (783 194 ) (844 309 ) (383 909 ) (427 159 ) (428 611 ) (337 599 ) (395 365 ) (391 220 ) (575 812 ) Net result for the year 328 504 798 680 923 291 1 539 576 1 980 155 2 070 167 1 115 209 1 275 842 1 224 707 1 093 021 1 186 096 1 144 240 1 092 057

(101) Under the notes to the financial statements, the position ‘Other expenses’ in Table 3 is defined as follows: ‘Other expenses relate to a royalty agreement held with the affiliated company [CV 1], which was assigned to Alki LP on December 13, 2006 and is based on a tax ruling with the Dutch tax authorities’. The APA to which this footnote relates is the SMBV APA and thus indicates that SMBV's auditor interpreted the SMBV APA to determine the royalty payments by SMBV to Alki LP.

(102) That royalty is calculated as a residual in the profit and loss account. When constructing the profit and loss account of SMBV, all the input figures other than the royalty are either observed or assumed to be priced at arm's length. Based on the pricing agreed in the SMBV APA, a taxable profit (the position ‘Result before taxation’ in Figure 2) is calculated at approximately [9-12] % of SMBV's operating expenses (the position ‘General and administrative expenses’ in Figure 2). However, as the position ‘Sales’ in Figure 2 minus all the accounting costs before the royalty payment (50) do not sum up to this taxable profit calculated based on the SMBV APA, the excess profit beyond that [9-12] % mark-up is paid by SMBV in the form of a tax deductible royalty to Alki LP for the coffee roasting related IP (the position ‘Other expenses’ in Figure 2). Based on SMBV's accounts, the royalty payment thus takes place as determined by the SMBV APA issued by the Dutch tax administration. Figure 2

(103) As the tax base in SMBV's accounts for the period of application of the SMBV APA is equal to but not exactly [9-12] % of each year's ‘General and administrative expense’, the Commission requested Starbucks to provide the actual costs for each year used to calculate the tax base. Starbucks provided information on the amount of operating expenses used to calculate the taxable income each year on the basis of the SMBV APA and also for the previous accounting periods (since 2001), when a previous APA was in force. For each period of the application of the SMBV APA, the costs taken into account for the calculation of the tax base are lower but close to the amounts reported as ‘General and administrative expense’. For example, for the period 2012/2013 those costs are EUR 15 694 137 and for the period 2007/2008 those costs are EUR 15 055 253. In the periods preceding the application of the SMBV APA, the costs taken into account for the calculation of the tax base are much higher, as they would, according to Starbucks, also include the costs charged by [unaffiliated manufacturing company 1]. For example, for the period 2006/2007, the costs used to calculate the tax base were EUR [30-40 million]. This explains why the corporate tax liability decreased by more than half when the SMBV APA entered into force (51), i.e. from EUR 844 309 in 2006/2007 to EUR 383 909 in 2007/2008, as shown in Table 3.

2.6.3. Information on Alki LP

(104) In response to the questions of the Opening Decision, the Netherlands provided a description of the licence rights held by Alki LP to use and sublicense the IP right for which SMBV pays a royalty to Alki LP. In this regard, the Netherlands explained that the IP right includes three categories: (i) trade mark rights (52); (ii) Starbucks system rights (53); and (iii) coffee-related rights (54). The Netherlands further explained that the knowledge and information relating to coffee includes the use and applications of confidential information, technology and specific knowledge with regard to the recipes for mixing green coffee beans, the process of roasting green coffee beans and the production of other derived coffee products (55).

(105) The Netherlands further explained that under the Roasting Agreement, further described at recital 142, Alki LP acts as the principal that bears all the company risks and performs the associated activities (56). Therefore, according to the Netherlands, the royalty does not solely represent remuneration for the IP right, but also for Alki LP's role as principal.

(106) Regarding Alki LP, Starbucks specified that Alki LP has no employees on its payroll to perform its role as principal under the Roasting Agreement, nor do its partners have employees on the payroll who perform this role. According to Starbucks, Alki LP performs that role through the guidance, expertise and required functions provided by Starbucks entities in the US pursuant to the [Cost Sharing Agreement] (hereinafter: ‘CSA’) (57). According to Starbucks, and as evidenced by the limited partnership deed constituting Alki LP, SCI UK I, Inc. (58) and Starbucks Coffee International, Inc. (59) are the partners of Alki LP.

(107) Starbucks clarified that Alki LP was added to the group structure in December 2006 as part of the expansion of the CSA to cover the entire EMEA region by including the UK market. By adding Alki LP to the structure, Starbucks avoided that the royalty income received by Alki LP would be directly integrated in the income of the partners of Alki LP under US tax law.

2.6.4. Payments by Alki LP to Starbucks Corporation under the Cost Sharing Agreement

(108) As neither Alki LP, nor its partners, have any employees (60), and Starbucks claims that Alki LP is able to perform its role as principal through the CSA, the Commission requested information about the payments under the CSA and the services those payments relate to, as well as the way in which the payments are financed by Alki LP. Starbucks provided the following overview of payments by Alki LP to Starbucks US broken into different types of payment.

(109) Under the CSA, Alki LP makes royalty payments to Starbucks US for the three categories of IP that Starbucks US licenses to Alki LP. Those royalty payments consist of (i) a buy-in royalty allocated to the brand/trademark rights; (ii) a buy-in royalty allocated to the business format rights; and (iii) a permanent royalty allocated to the coffee knowledge.

(110) The amount of the royalty payment is calculated on the basis of a formula that takes as a starting point the residual profit pool. The residual profit pool is the sum of the royalties paid by SMBV and Starbucks Coffee BV to Alki LP (61) and income that Alki LP receives from Starbucks Corporation (62). From that amount, an arm's-length return for routine functions performed by Alki LP is deducted (63). […]. In this respect, a difference is made between the IP rights for the brand/trademark and the business format, on the one hand, and the coffee knowledge, on the other. That difference is explained by the fact that Alki LP holds the beneficial ownership of the business format related intangibles and the trademark/brand for the EMEA region, whilst the legal and beneficial ownership of the coffee knowledge rights are held by Starbucks US.

(111) The beneficial ownership of the business format related intangibles and the trademark/brand for the EMEA region was transferred from Starbucks Corporation in 2002 to [CV 1] and assigned to Alki LP since 2006. For the beneficial ownership, [CV 1] and Alki LP made buy-in royalty payments, where the percentage of the US share of the cost which Alki LP needed to pay to Starbucks US digressively reduced from [65-70] % in 2002 to [0,5-1] % in 2010 and onwards for the trademark, and [70-75] % in 2002 to [0-0,5] % in 2010 and onwards for the business format IP. With those buy-in payments, the beneficial ownership rights for these two categories of IP for the EMEA region are deemed to be paid off by Alki LP. With regard to the coffee knowledge IP, Alki LP pays a permanent royalty of [70-75] % of the residual profit allocated to this IP category to Starbucks US.

(112) Starbucks submitted an overview of the permanent royalty and the buy-in payments by [CV 1] and Alki LP for the period 2005-2014. With regard to the buy-in payments, [CV 1] paid a total of EUR [1-10] million as buy-in payments for the trademark and business format IP to Starbucks Corporation (64) (65). In December 2006, the CSA was assigned by [CV 1] to Alki LP. From 2007 to 2014, Alki LP paid EUR [1-10] million for the trademark and EUR [20-30] million for the business format IP (66). This means that, in total, EUR [10-20] million was paid as buy-in payments for the trademark and EUR [20-30] million for the business format IP. In 2014, Alki LP transferred the beneficial ownership of the IP rights to Starbucks EMEA Ltd for which it recorded a gain of EUR [1-1,5] billion as other operating income in its profit and loss account. With regard of the permanent royalty, Alki LP paid on average EUR [1-10] million a year (EUR [70-80] million in total) over the period 2005–2014 to Starbucks Corporation for the coffee knowledge IP (67).

(113) In addition to the buy-in and permanent royalty, Alki LP pays service fees for services provided by Starbucks Corporation and cost sharing payments for the development of certain intangible assets (68). Over the period 2008–2014, Alki LP paid on average EUR [1-10] million per year on cost sharing payments and EUR [1-10] million per year on service fees.

2.6.5. Information on SCTC and on the prices of green coffee beans paid by SMBV

(114) Given that green coffee beans are procured by SMBV through a group transaction, more precisely they are purchased from SCTC, the Commission requested information about how the prices for this intra-group transaction are set and about the price set for each year throughout the application of the SMBV APA.

(115) Starbucks submitted the balance sheet and profit and loss accounts for SCTC since 2005. Table 4 reproduces information contained in those accounts. The calculation of the mark-up on the costs of green coffee beans (COGS) applied by SCTC was added by the Commission for the purpose of this Decision. Based on the accounting information available, which starts at 2005, the average mark-up on the costs of green coffee beans stood at [around 3 %] for the period 2005 to 2010, compared to an average mark-up of [around 18 %] over the period 2011 to 2014.

(116) Starbucks submitted that from 2011 onwards, Starbucks adjusted the transfer pricing policy applicable to the sale of green coffee beans to increase the mark-up on product costs given the growing importance of SCTC's operations, especially its increasing expertise in coffee procurement and, more importantly, its ownership and operation of the evolving C.A.F.E. Practices Programme.

(117) The C.A.F.E. Practices Programme was launched in 2004 in conjunction with the opening of SCTC's farmer support centre in Costa Rica to provide an evolving programme where farmers, exporters, and buyers could have an ongoing conversation to (i) improve coffee quality; (ii) provide economic accountability for payments along all levels of the supply chain; (iii) encourage social responsibility in working conditions, protection of workers' rights, and adequate living conditions; and (iv) inspire environmental leadership for growing and processing green coffee beans.

(118) In order to verify whether the growing operations, which Starbucks invokes to explain the increased mark-up, are confirmed in the accounts, Table 4 also presents the assets of SCTC. Although the total assets have indeed grown significantly since 2010, this is mainly due to increased cash holding. Operating assets net of cash have increased by less than a third over the four years from 2010 to 2014.

(119) The annual reports of SCTC submitted by Starbucks also do not describe in the accompanying notes any difference in risks, functions or assets from 2010 to 2011. The activities and risks are described in identical terms over this period, i.e. the principal activity of SCTC is according to both annual reports the purchase and sale of high-quality green coffee beans and related activities of quality assurance and operations (logistics, warehousing, blending, decaffeinating, etc.). Table 4 Financial data of SCTC (CHF) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 SCTC Sales [500-600 million] [600-700 million] [600-700 million] [600-700 million] [600-700 million] [500-600 million] [900-1 000 million] [1,5-2 billion] [1-1,5 billion] [900-1 000 million] SCTC COGS [500-600 million] [500-600 million] [600-700 million] [600-700 million] [600-700 million] [400-500 million] [800-900 million] [1-1,5 billion] [800-900 million] [700-800 million] gross margin (Sales — COGS) [20-30 million] [30-40 million] [40-50 million] [30-40 million] [40-50 million] [30-40 million] [100-200 million] [200-300 million] [100-200 million] [100-200 million] gross margin on COGS [4,5-7,5] % [4,5-7,5] % [4,5-7,5] % [4,5-7,5] % [4,5-7,5] % [4,5-7,5] % [16,5-19,5] % [16,5-19,5] % [19,5-22,5] % [16,5-19,5] % OpEx (excl. provisions) [1-10 million] [1-10 million] [1-10 million] [1-10 million] [1-10 million] [1-10 million] [1-10 million] [1-10 million] [1-10 million] [1-10 million] profit before tax [10-20 million] [20-30 million] [20-30 million] [20-30 million] [30-40 million] [20-30 million] [100-200 million] [200-300 million] [100-200 million] [100-200 million] Tax [1-10 million] [1-10 million] [1-10 million] [1-10 million] [1-10 million] [1-10 million] [10-20 million] [10-20 million] [10-20 million] [10-20 million] net profit [10-20 million] [20-30 million] (*3) [20-30 million] (*3) [20-30 million] [20-30 million] [10-20 million] [100-200 million] [100-200 million] [100-200 million] [100-200 million] Total assets [200-300 million] [200-300 million] [200-300 million] [200-300 million] [200-300 million] [100-200 million] [300-400 million] [500-600 million] [600-700 million] [700-800 million] Total assets net of cash and cash equivalent (incl. marketable securities) [100-200 million] [100-200 million] [100-200 million] [100-200 million] [100-200 million] [100-200 million] [300-400 million] [100-200 million] [100-200 million] [100-200 million]

(%) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 mark-up on COGS [1,5-4,5] [1,5-4,5] [1,5-4,5] [1,5-4,5] [4,5-7,5] [1,5-4,5] [16,5-19,5] [13,5-16,5] [19,5-22,5] [16,5-19,5]

(120) As Starbucks invoked the C.A.F.E. Practices Programme to explain the increase in the margin charged by SCTC, the Commission requested Starbucks to provide the costs of that programme and the Farmer Support Centres costs. Starbucks provided estimations of the yearly costs of (i) the C.A.F.E. Practices Programme; and of (ii) the Farmer Support Centres, presented in Table 5. Table 5 Direct and indirect costs of C.A.F.E. Practices Programme and Farmer Support Centres (USD) FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 (1) Allocated C.A.F.E. Practices Expenses N/A N/A N/A N/A N/A N/A [500 000 -600 000 ] [100 000 -200 000 ] [1 000 000 -10 000 000 ] [1 000 000 -10 000 000 ] [1 000 000 -10 000 000 ] (2) Farmer Support Centers costs [800 000 -900 000 ] [1 000 000 -10 000 000 ] [1 000 000 -10 000 000 ] [1 000 000 -10 000 000 ] [1 000 000 -10 000 000 ] [1 000 000 -10 000 000 ] [1 000 000 -10 000 000 ] [1 000 000 -10 000 000 ] [1 000 000 -10 000 000 ] [1 000 000 -10 000 000 ] [1 000 000 -10 000 000 ] (3) Other C.A.F.E. Practices related costs N/A N/A [60 000 -70 000 ] [1 000 000 -10 000 000 ] [1 000 000 -10 000 000 ] [200 000 -300 000 ] [700 000 -800 000 ] [400 000 -500 000 ] [60 000 -70 000 ] [200 000 -300 000 ] [1 000 000 -10 000 000 ] Total [800 000 -900 000 ] [1 000 000 -10 000 000 ] [1 000 000 -10 000 000 ] [1 000 000 -10 000 000 ] [1 000 000 -10 000 000 ] [1 000 000 -10 000 000 ] [1 000 000 -10 000 000 ] [1 000 000 -10 000 000 ] [1 000 000 -10 000 000 ] [1 000 000 -10 000 000 ] [1 000 000 -10 000 000 ]

(121) Over the period 2011-2014, the combined costs of the C.A.F.E. Practices Programme and the Farmer Support Centres present at most [0,5-1] % of the value of the green coffee beans purchased by SCTC (69).

(122) In response, Starbucks indicated that the C.A.F.E. Practices Programme should be considered IP of which the value is unrelated to underlying costs.

(123) The Commission requested Starbucks to provide the transfer pricing report covering the pricing of green coffee beans sold by SCTC to SMBV. According to Starbucks, historically, no transfer pricing documentation has been prepared that covers the relationship between SCTC and SMBV. For the purpose of responding to the Commission's request, Starbucks provided an ad hoc report on the SCTC transfer prices to the Commission on 13 April 2015.

(124) According to the ad-hoc transfer pricing report provided, SCTC determines the prices to its affiliates by applying a mark-up to the product costs associated with the green coffee beans sourced by it.

(125) In addition, to determine a current arm's-length mark-up on product costs for SCTC for green coffee beans procurement, three separate components were identified: — Intellectual Property — C.A.F.E. Practices Programme: SCTC manages the C.A.F.E. Practices Programme and uses valuable know-how that, when incorporated into Starbucks' business operations, ensures consistent supply and supports the Starbucks brand for sustainability. Starbucks analysed this transaction using comparable licensing agreements relating to food and agricultural technologies. — Procurement: SCTC provides procurement functions for green coffee beans. Starbucks analysed this transaction using comparable sourcing agreements between third parties. — Financing: SCTC should generate a return for financing costs it incurs when holding unsold inventory and net receivables for green coffee beans. Starbucks analysed an appropriate return for financing that should be returned to SCTC.

(126) Combining the results for each separate component analysed by SCTC would yield a combined result for green coffee beans overall from 2005 through 2014 as demonstrated in Table 6: Table 6 Mark-up on product costs (%) Component Markup on product costs Lower Quartile Markup on product costs Median Markup on product costs Upper Quartile Intellectual Property – C.A.F.E. Practices Program 1,4 4,2 9,9 Procurement 4,7 6,0 8,0 Financing [1,5-4,5] [1,5-4,5] [1,5-4,5] Total % markup on product costs [7,5-10,5] [10,5-13,5] [19,5-22,5]

(127) The combined arm's-length range for the total mark-up on product costs charged by SCTC for the coffee sold to SMBV is according to the ad hoc transfer pricing report between a lower quartile of [around 9 %] and an upper quartile of [around 21 %], with a median of [around 12 %], for the overall period 2005 through 2014.

(128) According to Starbucks, SCTC's actual realised gross margin (70) falls squarely within the arm's-length range. This would be evidenced by the fact that the gross margin over Sales of SCTC stood at [around 12 %] for the years 2005 through 2014, based on a weighted average.

(129) The Commission requested Starbucks to provide the data and the components of the mark-up used to establish the quartile and median figures for the period 2005 through 2014, submitted to the Commission. Starbucks indicated that this data is not available.

(130) Starbucks submitted information on 29 June 2015 to substantiate the pricing of green coffee beans in the ad hoc transfer pricing report provided and in particular the figures presented in Table 6 for which the Commission requested the underlying data.

(131) Contrary to what was indicated in the table provided by Starbucks on 13 April 2015, the values in the table regarding the C.A.F.E. Practices Programme 1,4 % and 9,9 % are not the lower quartile (25th quartile) and the upper quartile (75th quartile). Rather, they would be the two extreme values, i.e. lowest value and highest value, of a comparison of licence agreements. In its submission of 29 June 2015, Starbucks identified eleven licence agreements relating to technology licensing, which they consider comparable to the C.A.F.E. Practices Programme. Those agreements relate to food and beverage products. The range of percentages that Starbucks arrives to is presented in Table 7. Starbucks explained that ‘Percentage Mark-up on Product Cost’ in Table 7 ‘is calculated by the average of each observation divided by one minus the average of the observation’, although there is no explanation as to why that step was taken to calculate a mark-up on product costs in complete absence of information or consideration on the costs of the companies to the respective agreements. Table 7 Explanation by Starbucks of previously provided data on C.A.F.E. Practices Programme pricing interquartile range of 1,4 % to 9,9 % Average Observation Percentage Markup on Product Cost Highest Observed Value 9,0 % 9,9 % Upper Quartile 6,0 % 6,4 % Median 4,0 % 4,2 % Lower Quartile 2,7 % 2,8 % Lowest Observed Value 1,4 % 1,4 % Observations 11 11

(132) In its submission of 29 June 2015, Starbucks also provided a pricing of the procurement function of SCTC estimated by using comparable transactions identified by Starbucks using the PowerK database and LIVEDGAR database. Thirteen agreements whereby buying agency services are provided by a third-party buying agent are considered consistent with the procurement services that SCTC provided to SMBV.

(133) The results of the analysis are presented as percentages of ‘Free on Board’ product costs, which is the costs charged to the client for delivered products. The median of the observations presented is 6 %. Starbucks presents the result in terms of an interquartile range of product costs from 4,7 % to 8,0 %.

(134) In detail, the observations used refer to agreements with the following principals and the commissions as percentage of Free on Board rates specified in the brackets: Aeropostale, Inc. (5 %); Ateca Production International, Inc. (7 %); BELL SPORTS CORP. (6 %), COLUMBIA SPORTSWEAR CO. (1,5 %); Designs Apparel Inc. (5 %); F.I.S. Inc. (10 %); He-Ro Industries Incorporated (10 %); JONES APPAREL GROUP INC/NINE WEST GROUP INC. (10 %); Mannesmann Pipe&Steel Corporation (2 %), Skin Shoes LLC (8 %); Skin Inc. (6 %); TI Sportswear Inc. (4,7 %) and WW Mexicana (1 %). The interquartile range on these observations is 4 % to 8,5 %. As in the case of the C.A.F.E. Practices Programme pricing, Starbucks indicated that ‘percent of sales is calculated as the percent of FOB divided by one plus the percent of FOB’ (71). This modification of the figures from the comparative analysis is not explained and does not seem to correspond to any customary financial adjustment.

(135) Finally, Starbucks calculates the pricing of what is presented as a financing function and which SCTC should earn as a return according to Starbucks for ‘holding green coffee and financing of net receivables for its own risk and account’. This return is calculated by Starbucks by applying a weighted average cost of capital (‘WACC’) to the account receivables and inventory stock of SCTC for 2014 and is on this basis set at [around 3 %].

(136) Finally, to calculate the profits that SMBV generated on the roasting of the green coffee beans purchased from SCTC, the Commission requested Starbucks for the price paid by SMBV to SCTC. Starbucks provided an overview of the average prices (per pound) charged by SCTC to SMBV and the amounts paid by SMBV to SCTC, which are presented in Table 8. No other payments have been made by SMBV to SCTC. Table 8 Amounts paid by SMBV to SCTC for the purchase of green coffee beans Purchases from SCTC

FY Purchase value in EUR Purchase volume in Pounds Unit price in EUR/lbs 2002 — — 2003 [10 000 000 — 20 000 000 ] [10 000 000 — 20 000 000 ] [1,0000 — 1,5000] 2004 [10 000 000 — 20 000 000 ] [10 000 000 — 20 000 000 ] [1,0000 — 1,5000] 2005 [10 000 000 — 20 000 000 ] [1 000 000 — 10 000 000 ] [1,0000 — 1,5000] 2006 [10 000 000 — 20 000 000 ] [10 000 000 — 20 000 000 ] [1,0000 — 1,5000] 2007 [20 000 000 — 30 000 000 ] [20 000 000 — 30 000 000 ] [1,0000 — 1,5000] 2008 [20 000 000 — 30 000 000 ] [10 000 000 — 20 000 000 ] [1,0000 — 1,5000] 2009 [20 000 000 — 30 000 000 ] [10 000 000 — 20 000 000 ] [1,0000 — 1,5000] 2010 [30 000 000 — 40 000 000 ] [20 000 000 — 30 000 000 ] [1,0000 — 1,5000] 2011 [40 000 000 — 50 000 000 ] [20 000 000 — 30 000 000 ] [2,0000 — 2,5000] 2012 [60 000 000 — 70 000 000 ] [20 000 000 — 30 000 000 ] [2,0000 — 2,5000] 2013 [60 000 000 — 70 000 000 ] [30 000 000 — 40 000 000 ] [1,5000 — 2,0000] 2014 [60 000 000 — 70 000 000 ] [40 000 000 — 50 000 000 ] [1,5000 — 2,0000]

2.6.6. Information and figures on Starbucks Shops

(137) The products distributed by SMBV, either produced by SMBV or bought by SMBV from other suppliers, are sold to Shops. Some of the Shops are independent and some are owned by Starbucks. The Commission requested information to verify whether there is a difference in the commercial conditions applied to Shops owned by the group and independent Shops.

(138) With regard to the Starbucks Shops, Starbucks provided information on the different licensee programmes and eligibility criteria to develop Starbucks Shops in the EMEA region, an overview of the stores in the EMEA region, and figures regarding the turnover of the Shops and the licence fees paid in 2012 by those Shops to Starbucks Coffee BV. According to this information, the licence fees percentage over turnover paid by the three different types of licence programmes (independent geographic licensees, company-owned geographic licensees and channel licensees –the three different types of licence programmes) varies across countries with percentage ranges from [5 to 10] %.

2.6.7. Information on the profitability of other roasting facilities operated by Starbucks

(139) The Commission requested from Starbucks financial information on the profitability of any other roasting facility operated by the group and, in particular, Starbucks Manufacturing Corporation (hereinafter ‘SMC’), which was identified from publicly disclosed information as belonging to the Starbucks group. The Commission requested this information because the 2010 OECD TP Guidelines recommend the use of internal data to test the arm's-length nature of the division of profits (72). Starbucks indicated that SMC was the only roasting facility operated by the group other than SMBV. As SMC does not have audited accounts, Starbucks provided pro-forma accounts based on the internal reporting of the company.

(140) The data provided by Starbucks is presented in Table 9. The ratios of profits over sales and profits over operating expense (73) were added by the Commission for the purpose of this Decision, considering a ratio of [9-12] % of profits over operating expense is agreed in the SMBV APA as an arm's-length remuneration of SMBV. For SMC, this ratio stood at around 500 % over the past four accounting periods. Table 9 Financial information on US manufacturing company Starbucks Manufacturing Corporation 2011 2012 2013 2014 Sales of Starbucks Manufacturing Corporation [700 000 000 – 800 000 000 ] [1 000 000 000 – 1 500 000 000 ] [1 000 000 000 – 1 500 000 000 ] [1 000 000 000 – 1 500 000 000 ] Cost of Goods Sold [(500 000 000 ) – (600 000 000 )] [(800 000 000 ) – (900 000 000 )] [(800 000 000 ) – (900 000 000 )] [(700 000 000 ) – (800 000 000 )] Other income and gain [100 000 – 200 000 ] [600 000 – 700 000 ] [300 000 – 400 000 ] [1 000 000 – 10 000 000 ] Deductions [(40 000 000 ) – (50 000 000 )] [(60 000 000 ) – (70 000 000 )] [(70 000 000 ) – (80 000 000 )] [(80 000 000 ) – (90 000 000 )] Thereof salaries and wages [(10 000 000 ) – (20 000 000 )] [(20 000 000 ) – (30 000 000 )] [(20 000 000 ) – (30 000 000 )] [(30 000 000 ) – (40 000 000 )] Thereof depreciation [(10 000 000 ) – (20 000 000 )] [(10 000 000 ) – (20 000 000 )] [(10 000 000 ) – (20 000 000 )] [(10 000 000 ) – (20 000 000 )] Total Income [100 000 000 – 200 000 000 ] [400 000 000 – 500 000 000 ] [300 000 000 – 400 000 000 ] [500 000 000 – 600 000 000 ] Profit margin (income/sales) [20 % – 25 %] [30 % – 35 %] [30 % – 35 %] [35 % – 40 %] Profit on Operating Expense (income/deductions) [400 % – 450 %] [650 % – 700 %] [500 % – 550 %] [550 % – 600 %]

2.7. Description of the various contracts setting out the roles and responsibilities of SMBV

(141) When SMBV was set up in the Netherlands, it entered into various agreements that set out the contractual divisions of the roles and responsibilities of SMBV and its counterparties. The three agreements relevant for this Decision are the Roasting Agreement between SMBV and Alki LP, the Green Coffee Purchase Agreement between SMBV and SCTC, and the Supply Agreement between SMBV and the Shops.

(142) The Roasting Agreement, which entered into force on 1 January 2002, governs the manufacturing process. Under the Roasting Agreement, Alki LP acts as the principal and SMBV as the owner of the roasting facility. SMBV pays a licence to Alki LP in exchange for which Alki LP grants SMBV access to the IP rights and takes over the entrepreneurial risk in the business of SMBV such as cost overruns and the sale of the products. SMBV will roast the green coffee beans and make the roasted coffee and other coffee related products available to the Shops (according to the Supply Agreement discussed below and the ADOA (74)). As owner of the facility, SMBV has to ensure that the correct equipment is used, the correct processes are carried out and the goods are produced in line with the specifications provided by Alki LP. SMBV will be the owner of the purchased products, which it has to buy from suppliers designated and/or approved by Alki LP. SMBV has to ensure that the products at the time of delivery comply with Alki LP's product specifications and SMBV is obliged to promptly replace any quantity of defective or non-performing products at its own expense. Alki LP however bears the risks relating to losses which may be incurred as a result of the production, sale, transport, storage, treatment or other use of the products and has to indemnify SMBV against any compensation claims.

(143) The Green Coffee Purchase Agreement entered into force on 22 April 2002 and stipulates the conditions for the sale of green whole-bean coffee from SCTC to SMBV. SCTC will sell the beans to SMBV at prices set forth on price lists issued by SCTC. SMBV will issues a purchase order for coffee on the basis of purchasing forecasts. SCTC will deliver the beans […].

(144) The Supply Agreement sets out the responsibilities in the supply of essential Starbucks goods between SMBV and the Shops. The Shops commit to purchase all branded roasted coffee and other essential coffee-related products as defined in that agreement exclusively from SMBV or approved suppliers at prices which are either determined under a formula attached to that agreement (for coffee and coffee-related products) or pursuant to a […] price list (for other goods). The Shops must provide SMBV with a [periodic] purchase forecast (75) whereas SMBV guarantees to the Shops that at the time when the coffee and other goods leave SMBV's warehouse, they are free from defects and, where this is not the case, SMBV replaces free of charge any defective product or grants a credit to the Shops (76).

2.8. Cost Sharing Agreement

(145) The CSA between Alki LP and Starbucks Corporation of 1 August 2006 determines the direct rights of Alki LP to license and sublicense to third parties the right to: (i) […] operate Starbucks stores […], (ii) […] operate ‘[…]’ and (iii) manufacture and/or distribute products using the Trademarks and Technology and Know-How.

(146) Under the CSA, Alki LP is to pay Starbucks Corporation a royalty, service fees for services provided by Starbucks Corporation, and cost sharing payments for the development of certain intangible assets. The royalty payments consist of: (i) a buy-in royalty allocated to the trademark and business format IP and a (ii) permanent royalty allocated to the coffee knowledge IP. Payments under this agreement are detailed in recitals 112 and 113.

2.9. Contracts between Starbucks and third parties relating to the manufacturing and the sale of coffee

(147) In order to compare the commercial conditions fixed between SMBV and the Starbucks group and in particular the royalty payment for the roasting IP, on the one hand, with commercial conditions fixed between the Starbucks group and third parties, on the other, the Commission requested from Starbucks all contracts whereby Starbucks licenced IP and all contracts where Starbucks outsourced the roasting of coffee. The Commission also requested information about the commercial conditions applied between Starbucks Corporation and its group roasting company located in the US.

(148) In response to the Commission's request, Starbucks provided contracts with: — [Unaffiliated manufacturing company 2], (‘[unaffiliated manufacturing company 2]’), […].Starbucks entered into two types of agreements with [unaffiliated manufacturing company 2] to subcontract the roasting of coffee, which have been amended at several instances. In a technology licence agreement of [before 2008], an affiliate of Starbucks, […], grants a non-exclusive licence to [unaffiliated manufacturing company 2] to use, amongst others, the technology and know-how of Starbucks to produce and sell roasted coffee to selected third parties with which Starbucks has entered into supply agreements, such as [unaffiliated manufacturing company 5] […]. [Unaffiliated manufacturing company 2] has to perform the services so that the Roasted Coffee is of high quality, for which [unaffiliated manufacturing company 2], among others, has to comply with certain quality assurance standards established by Starbucks. The technology licence agreement stipulates that [unaffiliated manufacturing company 2] does not have to pay any fees for the licence (77). A green coffee supply agreement stipulates that [unaffiliated manufacturing company 2] has the obligation to buy green coffee beans exclusively from Starbucks for a fixed fee [per a certain quantity]. — [Unaffiliated manufacturing company 3], (‘[unaffiliated manufacturing company 3]’), […]. Under a roasting licence agreement of [after 2008], [unaffiliated manufacturing company 3] provides coffee roasting services which it sells to Starbucks and a joint-venture between [unaffiliated manufacturing company 3] and Starbucks called [unaffiliated manufacturing company 3-Starbucks joint-venture] that operates the Starbucks coffee stores in [a certain country]. [Unaffiliated manufacturing company 3] pays a roasting fee to Starbucks […] of USD […] [per a certain quantity] of green coffee produced and sold to the [unaffiliated manufacturing company 3-Starbucks joint-venture]. — [Unaffiliated manufacturing company 4], (‘[unaffiliated manufacturing company 4]’), […]. In order to subcontract the roasting of coffee [unaffiliated manufacturing company 4] entered into three types of agreements, of which only the […] purchase agreement of [after 2008] was submitted. Accordingly Starbucks appoints [unaffiliated manufacturing company 4] to manufacture, package, produce and supply coffee product. The agreements do not provide for any fee or royalty to be paid to Starbucks. The manufacturing has to take place under certain product specifications and standards provided by Starbucks. The agreement stipulates that [unaffiliated manufacturing company 4] shall sell the products to Starbucks and its affiliates for a price set at the level of the green coffee beans (according to Starbucks, the green coffee beans are therefore just a pass-through cost for [unaffiliated manufacturing company 4]) and supply cost to which a conversion fee is added. This conversion fee includes fees for roasting […]. The pricing formula is then translated into a sales price [per a certain quantity] of roasted coffee. Starbucks claims that this results in a margin of [5-10] % on total conversion costs, without further indications on how this alleged mark-up was arrived to. — [Unaffiliated manufacturing company 5] (‘[unaffiliated manufacturing company 5]’), […]. Starbucks entered into three types of agreements with [unaffiliated manufacturing company 5] on [before 2008]. In a supply agreement, Starbucks takes the obligation to supply to [unaffiliated manufacturing company 5] roasted coffee beans, concentrate and other coffee ingredients for a price based on a formula used to develop coffee ingredient pricing for [Starbucks'] retail coffee shop business, […]. The […]agreement, which is a manufacturing and distribution agreement, grants [unaffiliated manufacturing company 5] the right to exclusively distribute certain pre-packed, ready-to-drink beverages under the Starbucks Trademark in a specific territory. The manufacturing has to take place under certain product specifications and standards provided by Starbucks. The […]agreement does not provide for any fee or royalty to be paid by [unaffiliated manufacturing company 5] to Starbucks. The trademark and technology licence agreement allows [unaffiliated manufacturing company 5] to use the trademark of Starbucks as well as its technology and know-how for the purpose of manufacturing the agreed products. [Unaffiliated manufacturing company 5] pays a licence fee of [10-15] % of net sales subject to an adjustment mechanism, which according to Starbucks results in a fee of approximately [10-15] % on net sales of ready-to-make drinks (78). — [Unaffiliated manufacturing company 6] (‘[unaffiliated manufacturing company 6]’), […]. Starbucks entered into three types of agreements with [unaffiliated manufacturing company 6] on [before 2008], which have subsequently been amended. In a supply agreement, Starbucks takes the obligation to supply to [unaffiliated manufacturing company 6] roasted coffee beans, concentrate and other coffee ingredients for a price based on a formula used to develop coffee ingredient pricing for Starbucks' […] retail coffee shop business, […]. The manufacturing and distribution agreement grants [unaffiliated manufacturing company 6] the right to exclusively distribute certain pre-packed, ready-to-drink beverages under the Starbucks Trademark in [a certain country]. The manufacturing has to take place under certain product specifications and standards provided by Starbucks. The manufacturing and distribution agreement does not provide for any fee or royalty to be paid by [unaffiliated manufacturing company 6] to Starbucks. The trademark and technology licence agreement allows [unaffiliated manufacturing company 6] to use the trademark of Starbucks as well as its technology and know-how for the purpose of manufacturing the agreed products. [Unaffiliated manufacturing company 6] pays a licence fee depending on the product. According to Starbucks, this fee amounts to between [5 and 10] % of net sales of ready-to-make drinks (79). — [Unaffiliated manufacturing company 7] (‘[unaffiliated manufacturing company 7]’), […]. Starbucks entered into three types of agreements with [unaffiliated manufacturing company 7] on [after 2008], which have subsequently been amended. In a supply agreement, Starbucks takes the obligation to supply to [unaffiliated manufacturing company 7] coffee ingredients, […], for a price set [per a certain quantity]. The manufacturing and distribution agreement grants [unaffiliated manufacturing company 7] the right to exclusively distribute certain pre-packed, ready-to-drink beverages under the Starbucks Trademark in a specific territory. The manufacturing has to take place under certain product specifications and standards provided by Starbucks. The manufacturing and distribution agreement does not provide for any fee or royalty to be paid by [unaffiliated manufacturing company 7] to Starbucks. The trademark and technology licence agreement allows [unaffiliated manufacturing company 7] to use the trademark of Starbucks as well as its technology and know-how for the purpose of manufacturing the agreed products. [Unaffiliated manufacturing company 7] pays a licence fee depending on the territory of between [10 and 20] % of net sales.

(149) The contracts that Starbucks has with [unaffiliated manufacturing company 5], [unaffiliated manufacturing company 6] and [unaffiliated manufacturing company 7] listed above were classified in three categories: (i) supply agreements, similar to the Supply Agreement between SMBV and Developers described at recital 144; (ii) manufacturing and distribution agreements, similar to the agreement between SMBV and Alki LP; and (iii) trademark and technology licence agreements, similar to the ADOA between Starbucks Coffee BV and the Shops described at recital 48. Of the three types of agreement between Starbucks and [unaffiliated manufacturing company 5], [unaffiliated manufacturing company 6] and [unaffiliated manufacturing company 7], only the last category of agreements requires Starbucks' counterparties to pay a royalty.

(150) In addition, four other roasting agreements with [unaffiliated manufacturing company 8], [unaffiliated manufacturing company 1], [unaffiliated manufacturing company 9], and [unaffiliated manufacturing company 10] were provided by Starbucks to the Commission. — The [unaffiliated manufacturing company 8] manufacturing and supply agreement dates from [after 2008] and stipulates that [unaffiliated manufacturing company 8] is to produce flavoured coffee for Starbucks for a specified price (80). […] stipulates that [unaffiliated manufacturing company 8] must strictly comply with a technical manual regarding, among others, the manufacturing of the products. […] stipulates that Starbucks grants [unaffiliated manufacturing company 8] a royalty-free licence for the use of the know-how in connection with the manufacturing process. — The [unaffiliated manufacturing company 1] manufacturing and supply agreement is dated [after 2008] and provides that [unaffiliated manufacturing company 1] shall produce certain coffee products for Starbucks for a specified price (81). […] stipulates that [unaffiliated manufacturing company 1] must strictly comply with a technical manual regarding, among others, the manufacturing of the products. The agreement does not provide for any fee or royalty to be paid by [unaffiliated manufacturing company 1] to Starbucks. — The [unaffiliated manufacturing company 9] manufacturing and supply agreement is dated [after 2008] and provides that [unaffiliated manufacturing company 9] shall produce flavoured coffee for Starbucks for a specified price (82). […] stipulates that [unaffiliated manufacturing company 9] must strictly comply with a technical manual regarding, among others, the manufacturing of the products. The [manufacturing and supply agreement] does not provide for any fee or royalty to be paid by [unaffiliated manufacturing company 9] to Starbucks. The agreement also refers to a technology and trademark licence agreement, which was however not submitted. — The [unaffiliated manufacturing company 10] manufacturing agreement is dated [after 2008] and concerns the manufacturing and roasting of green coffee beans for Starbucks by a […] roaster who sources its coffee beans directly. The agreement does not provide for any fee or royalty to be paid by [unaffiliated manufacturing company 10] to Starbucks. […] of the agreement clarifies that Starbuck owns the IP rights in the coffee blend, the time temperature curve of the roast progression and the roaster end point, etc. Starbucks pays a fee to [unaffiliated manufacturing company 10] for the coffee [per a certain quantity], following a specific formula which charges less for roasting than for packaging.

2.9.1. Arguments presented by Starbucks regarding the agreements with third parties and with Starbucks Manufacturing Corp.

(151) In addition to the contracts listed in recital 148, Starbucks supplied an analysis of the comparability of those contracts with the royalty payments made by SMBV to Alki LP.

(152) Among the agreements whereby Starbucks licensed out intangibles (trademarks and certain specific coffee related know-how) for exploitation by a third party, Starbucks distinguishes between (i) third-parties that utilised those intangibles to manufacture products containing Starbucks coffee ingredients in roasting agreements ([unaffiliated manufacturing company 3] and [unaffiliated manufacturing company 2]), and (ii) third parties which distributed such manufactured products directly to customers ([unaffiliated manufacturing company 7], [unaffiliated manufacturing company 6] and [unaffiliated manufacturing company 5]). [Unaffiliated manufacturing company 7], [unaffiliated manufacturing company 6] and [unaffiliated manufacturing company 5] use the intangibles to produce ready-to-drink coffee, which they sell to retailers (mainly supermarkets). Starbucks considers the royalties paid by [unaffiliated manufacturing company 7], [unaffiliated manufacturing company 6] and [unaffiliated manufacturing company 5] to be comparable to the royalties paid by SMBV, which it estimates to represent [5-10] % of sales (83).

(153) More generally, Starbucks made a distinction among all agreements concluded with third parties since 2002. To the best of Starbucks' knowledge, the main categories would be the following: (1) Agreements whereby third parties exploit St