Starbucks in Hot Water Over British Tax
by Kenneth Thomas
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?
“However, Richard Murphy reports that HMRC has been cutting audit staff”
Ah, no, you need to take Richard Murphy’s stories with a little pinch of salt I’m afraid. He’s a paid report writer for PCS, the union the taxmen belong to. Not entirely the most unbiased source.
8 years back the then (Labour) government announced that Customs and Excise would merge with the Inland Revenue to create HMRC. At that time it was pointed out that at least 25,000 of the 100,000 jobs would go: this was the point of the merger. To get rid of two sets of overheads and thus reduce the costs of collecting tax.
That PCS union is still complaining bitterly about this. But there’s actually no evidence at all that audit staff have been cut. Total staff, yes, but when you merge to organisations with the intent of cutting staff you rather expect that.
“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.”
Which Richard Murphy works with as well.
This is all rather a one man campaign. And he seems to have missed the economics of taxation altogehter: I know for I’ve been arguing with him for five years now.
Richard Murphy emailed me that he was having difficulty making a comment here, so here is his verbatim response:
Tim Worstall, as usual, plays the man rather than the issue.
First, it’s widely known I work for a number of unions. Nothing suggests that reduces my objectivity: but if you hate unions then of course you’ll think that the case.
Second, let’s be clear Worstall’s claim that the number of investigators has not gone down is wrong. I deal some of that here. http://www.taxresearch.org.uk/Documents/PCSTaxGap.pdf
Third, the UK House of Commons Parliamentary Accounts Committee has confirmed this is the case.
And recent investigations by firms of accountants has found the number of enquiries has fallen heavily.
But Tim rarely lets evidence get in the way of his prejudices.
I deal in facts
I really think that you’re the last person that ought to be implying others are in the pocket of someone else.
Perhaps you, Taxpayers Alliance, the Adam Smith Institute and other so called independent opinion shapers, would like to disclose their sources of funding?
I can only think of one reason why you don’t!
I have revealed my sources of funding several times.
But to do so again.
I get paid as a freelance writer. Forbes, Daily Telegraph, The Register etc. Just the straight and simple amounts paid to everyone else at the same outlets.
My financial relationship with the Adam Smith Inst is on exactly this basis. I am a freelancer for their website. I get paid beer money type amounts. £200 or £300 a month.
I also have an income from being a wholesaler of scandium and other weird and exotic metals to people.
And that’s it I’m afraid. No salary from anywhere, no backers, no funding.
I asked Richard Murphy to comment on Tim’s nefarious comments via Angry Bear Blog. It is easy to comment on someone’s motives when they are not present to counter the points being made.
It does not appear Richard has questioned Tim’s funding and has question the validity of Tim’s comments. Perhaps using non sequitors in return answer are a plausible way to skew the discussion in another direction?