The "Double Dutch with a Swiss Side" is not on the menu at Starbucks. It is a tax avoidance scheme they have now been forced to abandon at least in part after pressure from the UK tax authorities, Parliamentary Select Committee questioning and public criticism. They are to move their European headquarters from the Netherlands, where they have a secret special low tax deal, to the UK where their main operations in Europe are.
The scheme is a variation on the "Double Irish with a Dutch Sandwich" schemes which several tech companies, including Google, have used to reduce their tax liability.
Starbucks used their version to avoid paying any taxes in the UK between 2008 and 2013, apart from those on payrolls. In the ten years before that (the period they have operated there) they had paid a total of £8.6 million. Following a brouhaha last year they "voluntarily" paid £10 million with a promise of further £10 million in the 2014 financial year.
The company had consistently posted a loss on their UK operations to HMCR (Her Majesty's Customs and Revenue, the tax collecting agency) however they had expanded their UK operation from its start in 1998 to over 800 branches now. Now a sensible person would question whether such rapid expansion is sensible in a business making continuing losses. Of course it does not pass the "sniff test". Especially in the light of statements made by them to the company's shareholders and investors.
(T)ranscripts of investor and analyst calls over 12 years show Starbucks officials regularly talked about the UK business as "profitable", said they were very pleased with it, or even cited it as an example to follow for operations back home in the United States.
Details of how Starbucks have perfectly legally avoided UK taxes below the fold.
"MY GOOD NAME"
Shakespeare knew about the value of reputation - and Starbucks exploit their brand to the hilt. Starbucks UK has to pay to use the brand. In their case the money goes to their present European HQ in the Netherlands where they have done a sweetheart tax deal. For the privilege of using the name and branding, Starbucks UK pay 4-5% of their turnover. This is deducted from their profits as part of their "business expenses". It is believed other European subsidiaries pay 6%. The lower figure may have something to do with the HMRC scrutiny that it came under in 2010.
THERE'S AN AWFUL LOT OF COFFEE IN ....BASEL?
Starbucks UK buy their coffee not from Brazil or on an international exchange but from the Dutch subsidiary, Starbucks Coffee EMEA BV. (That company's President is based in their London Office). They in turn get it from their subsidiary in Switzerland, Starbucks Coffee Trading Co, at what is suggested is double the market price. Again, there are special tax concessions which reduce the company's liability - commodities pay as low as 5% whereas company profits in the UK were more like 25% . Whether a single bean ever crosses the Swiss border is rather doubtful, it is just a trading company set up in a country where the least tax is paid on the transaction.
It's unclear where the money paid to Starbucks Coffee EMEA BV ends up, or what tax is paid on it. The firm had revenues of 73 million euros in 2011 but declared a profit of only 507,000 euros. When asked how it burnt up all its revenue, Alstead [Troy Alstead, Starbucks' Chief Financial Officer] pointed to staff costs and rent. The HQ has 97 employees.
Alstead said some of the unit's revenue was also paid to other Starbucks units, including one in Switzerland. He declined to say if fees paid for the use of the brand, which originated in the United States, are sent back to be taxed.
Starbucks declined to give details, or comment on what the charges indicate about the price its roaster paid its Swiss unit for coffee beans. It also declined to say what profit the Swiss coffee-buying unit makes, although Alstead said it was "moderately" profitable. Swiss law does not require the unit to publish accounts.
http://www.reuters.com/...
(OK, the company offices are actually registered in Lausanne but I could not resist the alliteration).
GETTING ROASTED
Coffee geeks have restarted buying the "green" beans and roasting them at home:
In recent years there has been a revival in home roasting; what was originally a necessity has now become a hobby.
The attractions are four-fold: enjoying fresh, flavorful coffee; experimenting with various beans and roasting methods; perfecting the roasting process; and saving money. These hobbyists are being catered to by various sources including coffee suppliers selling green coffee in small quantities and manufacturers making counter-top roasters.
Some of these shops have "tasting rooms" which provide an opportunity to try their different offerings and an excuse to enjoy a really fresh cup. Monmouth Coffee in London is an example of this. They have expanded from their
original base in Monmouth Street, Covent Garden to two other sites. There they you can choose between different types of beans from different countries or growers, select the depth of roast you like and, if you want, they will grind it to your requirements - different grinds and roast are suitable for different methods like an expresso type machine or a cafetier. (The original shop is a real experience and is worth dropping into if you are in central London. It is within easy walking distance of Trafalgar Square and the British Museum)
Monmouth now have a central roasting house but all its shops are within a couple of miles so stocks are really fresh. Starbucks? Their roasting is done by yet another subsidiary based in the Netherlands which supplies the roasted beans to all its European outlets.
(W)hile its UK subsidiary is making a loss, its Dutch roasting operation has only a small profit. In the past three years, the Amsterdam unit has had an average annual turnover of 154 million euros but recorded average profit of 1.6 million euros, or 1 percent of that, according to its accounts.
On average, 84 percent of the Amsterdam unit's annual revenue has gone on buying goods such as raw coffee beans, the electricity to roast them, and packaging.
THE BANK OF MERMAID
All that expansion over 15 years requires investment of course and it is common in most countries for the interest paid on loans to be offset against taxes as a business expense. The accounts show that the UK operation is funded entirely by such debts. To fund these debts, Starbucks group issues bonds which pay interest at the LIBOR rate plus 1.3%. This is then lent to Starbucks UK at a rate of LIBOR plus 4%. In comparison KFC charge its subsidiaries LIBOR plus 2% and McDonalds at or under LIBOR which is a higher rate than normal base rate. The 12 month LIBOR sterling rate is currently under 1% which would mean about 2/5ths or 40% of any interest charges are in addition to what KFC would demand. This device likely wipes around £1 million from the taxable UK income. Not a great deal compared to the others but every little helps.
THE AVOIDED TAXES
Value Added Tax
To understand how Starbucks avoids this tax, I am afraid I will have to give a quick primer. All EU countries charge "Value Added Tax" on goods and services. These can be at various rates from 0% which the UK charges on books and newspapers to over 20%. It is sometimes compared to a sales tax but each link in the retail chain only pays tax on the "value added".
A simple example: I am a retailer and but something for £121 which includes Dutch VAT at 21%. I sell it for £180 which as far as the purchaser is concerned includes £30 VAT. I however am only required to pay HMRC the difference between the "output tax" (£30) and the "input tax"(£21) So at the end of the accounting period I pay HMRC £9. However if I buy something for £180 (£31.24 Dutch VAT) and sell it at a loss for £121 (£20.17 UK VAT), I can offset the minus £11.07 from my total VAT liability. The equivalent of VAT is charged at 2.5% in Switzerland for foodstuffs but is outside the EU. This changes the VAT liability within the EU. For example, the Dutch roasting company is only charged VAT for the fees it makes from the Swiss company to process them.
Corporation Taxes
Sometimes called "company taxes" are the taxes on the profits a company makes. The UK rate for profits above £200,000 has reduced from 26% in 2011 to 21% today. Of course if you have no profits because you have "offshored" all your income by the various methods above, you pay no taxes. Incidentally, the rate in the Netherlands is 20% over the first € 200,000, 25% over the surplus which might have had some influence on the decision to relocate the European HQ to London.
WILL THEY PAY UK TAXES?
This is an interesting question. There are suggestions that a "sweetheart" deal might have been done. Under current legislation, there is nothing to stop Starbucks redirecting their royalty payments for using the name to their Swiss subsidiary or another in a tax haven. Similarly the use of "transfer pricing" to offshore profits to Starbucks Coffee Trading Co in Switzerland is still legal.
There are however proposals to make "aggressive tax avoidance" a criminal offence at least in the UK. Similarly the rest of the EU is well aware of these games - many of which they use to their own advantage. There does seem to be a political will in at least the UK to stamp down on what most people would consider shady practices.
(Note; to keep this diary to a reasonable length, I have simplified some aspects of the various schemes and tax regimes)