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Sunday, October 21, 2012

Starbucks in Hot Water Over British Tax

Reuters (via Tax Research UK) reported on October 15 the results of an extensive investigation into the British unit of coffee giant Starbucks, the second largest restaurant firm in the world after McDonald's. It turns out that the company has reported losing money in every one of the 14 years it has operated in the country, even as it tells investors that the unit is profitable. Reuters documented this latter fact by getting the transcripts of 46 investor conference calls Starbucks has made over the last 12 years.

For the last three years, Starbucks has paid no income tax at all in the United Kingdom. This is a textbook case of using transfer pricing to hide your profits from the taxman and make them show up in tax havens instead.

According to the Reuters report, there are three potential routes the company has to make its profitable British subsidiary legally have no tax liability.

1) The British subsidiary pays a Dutch subsidiary for the use of trademarks and other intellectual property of Starbucks, at a cost of 6% of sales as royalties. An undisclosed amount of this barely profitable unit's revenue is paid to another Starbucks subsidiary in Switzerland. Where the money goes from there only Starbucks and its accountants, Deloitte, know for sure.

2) Starbucks UK buys its beans through another Swiss subsidiary and they are roasted at a second Dutch subsidiary (this may be a pattern: pay a Dutch subsidiary, which pays a Swiss subsidiary). This gives a second opportunity for transfer pricing, although a transfer pricing investigation by Her Majesty's Revenue and Customs (HMRC) in 2009-10 resulted in no penalties, the company told Reuters (HMRC would not comment). However, Richard Murphy reports that HMRC has been cutting audit staff and been subject to regulatory capture by the companies it is supposed to be regulating.

3) Finally, the British subsidiary's operations are financed entirely through debt, for which it pays interest to other Starbucks subsidiaries. The interest is deductible from income in the UK and can accumulate in tax havens as income there. Reuters found that Starbucks UK pays at least 4 percentage points more in interest than McDonald's UK does.

Paying zero corporate income tax (or corporation tax, as they call it in the UK) gives Starbucks a competitive advantage over other coffee companies that are purely domestic and can't get out of the tax. Not surprisingly, this has ignited a firestorm of controversy in the United Kingdom. In the last 6 days, HMRC officials have been summoned for testimony before Parliament, probably in November. The Irish Congress of Trade Unions (which represents unions in Northern Ireland/UK as well as in the Irish Republic) has called for a boycott of Starbucks. And the company's reputation has been simply hammered in the social media there, with studies by YouGov and Buzz showing sharp dips into negative territory on their measures of brand perception.

Of course, if Starbucks goes to all this effort to avoid British taxes, you've got to wonder what strategies it's using to avoid taxes in the United States. Any reporters out there up for the challenge?


  1. I am a tax lawyer, and would be interested, but doubt, that Starbucks is able to avoid tax is the US (generally. the US rules are harder to beat, though the tech companies are able to do so).

    But by far the way US corporations have beaten the US corporate income tax is by avoiding doing business in corporate form in the US. Companies move to MLPs, REITs, or other type of businesses that do not pay corporate tax, or in the case of Starbucks or McDonald's, they sell their stores to a operator, who uses a partnership which pays no corporate income tax, and collect the franchise fees (and invest offshore where they can beat the corporate tax system).

    In a way, I think you are outraged at the wrong thing. That Starbuck's pays no corporate income tax helps the middle class, as they can buy shares in Starbucks. In the US, if you had a private domestic chain of coffee shops, it would pay no corporate income tax as it would be organized as a partnership (one that only rich investors could invest in). So in a way, Starbucks is leveling the field between the rich investor that can invest in the private partnership and the middle class person that can only buy stock.

    But I do love it is Starbucks.

  2. In UK companies like MLPs,REITs, are responsible for the violation of tax paid rules ,have started new business as well but do not paid intention to pay the tax so that these companies have the facility of Depreciation report