The European Commission said on Friday, November 14th that it believes a recent tax ruling in the Netherlands permits Starbucks Corporation (NASDAQ:SBUX), the world’s largest coffee chain, to lower its taxable profit is not legal under currently accepted accounting rules.

Starbucks Tax Deal With Netherlands May Be Illegal: EU

Political analysts note that Luxembourg, Ireland, Malta, Belgium, Cyprus and Gibraltar are also facing reviews by the EC over tax deals they made with various multinational companies. The review of the Starbucks tax deal is just part of an already-announced, ongoing effort by the EC to crack down on member states who attempt to lure private  investment by helping businesses avoid taxes.

Cost of coffee beans excluded

The European Commission noted the Dutch tax authority had permitted a Starbucks Corporation (NASDAQ:SBUX) subsidiary called Starbucks Manufacturing EMEA BV to claim a taxable profit equal to a percentage of its costs, but also inexplicably permitted the firm to exclude most of its costs when making the calculation, including coffee beans!

Most of the savings was accomplished by excluding the cost of coffee beans. The Netherlands tax authority justified this obvious contradiction by saying that the coffee beans were the property of another Starbucks subsidiary.

In its comments on the questionable tax deal, the EC noted the beans appeared on Starbucks Manufacturing EMEA’s balance sheet.

Statements from Starbucks and other parties

“The Commission’s preliminary view is that the advanced pricing arrangements in favor of Starbucks Manufacturing EMEA BV constitutes state aid,” an EU executive said.

Dutch Deputy Finance Minister Eric Wiebes commented that the Starbucks tax deal “is fully in line with international transfer pricing standards, is consistent with the policy framework applied by the government in its efforts to create an attractive business climate”.

Starbucks Corporation (NASDAQ:SBUX) told the media it remained confident EU regulators would eventually conclude that the deal did not provide it with any kind of advantage.