Yesterday evening, I sat down in the ‘Missing Bean’ café on Turl Street in Oxford to drink my customary flat white (despicable right?!) and read about the Fiat and Starbucks Commission decisions. The ‘house roast’ coffee beans at the ‘Bean’ are imported from Bolivia, Honduras & Brazil, roasted in Cowley (East Oxford) with the know-how of Ori and Vicky (two Oxford residents) and then ground for use at the café in central Oxford. On Saturdays, between 10am and 2pm, customers are invited to the East Oxford roastery to see the process of coffee roasting and chat to the roaster. Meanwhile, around the corner from the flagship store on the High Street used to lie Starbucks, whose beans are imported from around the world to Switzerland, sold to Starbucks Manufacturing EMEA BV in the Netherlands where they are roasted with know-how acquired at a ‘very substantial royalty’ from Alki (a Starbucks LP in the UK), and then sold back to the stores in the UK.
As a competition law tutor and someone who enjoys a decent blend, the exit of Starbucks from the local market filled me with glee. For years, it had been selling a product of what I considered to be of low quality at an excessive price (grande cappuccino for £2.60?!). For my part, I can’t help but suspect that the low quality might have something to do with the fact that Starbucks beans are forced to travel around the world from purchase, to storage, to roast, to shipment before landing in their ‘tall’, ‘grande’ and ‘venti’ cups. Local entrepreneurs, at any rate, recognised the market potential and so exploited the incumbent’s failings. In an economic microcosm, the theory that competition brings about the best product at the best price proved to hold, with inefficient companies forced to exit the market.
This is where the argument that Starbucks enjoys a competitive advantage and so distorts the market as a result of its tax arrangements comes into difficulties. This is precisely the opposite of what was experienced in Oxford. Further, one might note that Starbucks’ arrangements are in fact quite similar to those of the Missing Bean in terms of the fact that purchase, roasting (with company know-how) and the grinding of beans all occur in different places, the only difference in the case of Starbucks is that these enterprises take place in different countries (an unfortunate bye-product of the perverse incentives provided by the international tax framework). Indeed, the CJEU in RBS Deutschland commented that:
“taxable persons are generally free to choose the organisational structures and the form of transactions which they consider to be most appropriate for their economic activities and for the purposes of limiting their tax burdens” (para 53 h/t Dr Tom O’Shea).
Nevertheless, it was the Commission’s contention yesterday that Starbucks does indeed enjoy an unfair competitive advantage by reason of a ruling obtained in the Netherlands. The Commission has accused the Netherlands revenue authority of providing unlawful state aid, in breach of EU Law (Article 107 TFEU). To recall from a previous blog, unlawful state aid arises where there is i) intervention by the state (or through state resources), ii) giving the recipient a selective advantage, iii) which distorts competition and iv) affects trade between member states. It is the third criterion on which I wish to focus for the remainder of this blog. SMEs, the Commission suggests, struggle against Starbucks’ power as they are taxed on their actual profits because they pay market prices for the goods and services they use. Thus, it is not Starbucks’ tax structure per se which is at issue, but rather the benevolent treatment granted by the Dutch revenue authorities. This apparently has had a distortionary effect on the market. The initial, detailed letter from the Commission to the Netherlands in June 2014 merely took the issue of distortion as read:
“Starbucks Manufacturing BV is a globally active firm, operating in various Member States, so that any aid in its favour distorts or threatens to distort competition and has the potential to affects intra-Union trade.” (para 72)
I anxiously await the full decision which might bring some clarity to this issue, for the Oxford case study would suggest that distortion is not axiomatic and cannot be assumed,
Nevertheless, the case for the Commission should not be hard to make out. First, it should be stressed that the caselaw of the CJEU has set a very low threshold for what is required in terms of distortion (see e.g: France v Commission  ECR I-307). Second, whilst the market in Oxford might be competitive enough to squeeze out Starbucks, notwithstanding its tax savings (being the benevolent treatment obtained abroad benefitting the Starbucks group as a whole), this is unlikely to be true of the rest of the UK and, more importantly, Europe. Local enterprises are completely handicapped by the cost of rent, for instance. Starbucks’ unfair tax “advantages” allow it to take the big hits on extortionate rent, undoubtedly beyond the ability of an SME, allowing it to cement its power and position in the UK market. It is unsurprising therefore that there is no ‘Missing Bean’ on Oxford Street, and yet there are 11 or so Starbucks dotted around Europe’s busiest shopping street. Following from this, strengthening its position in the UK market will by its nature result in a strengthening of Starbucks’ position in the European market.