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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?

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Comment Preferences

  •  A double Irish coffee and a Dutch sandwich (9+ / 0-)

    sounds like it could be ordered in a Starbucks. Of course they're both names of tax avoidance schemes that use Ireland or the Netherlands to route money thru holding corporations to avoid taxes. Until there is an international agreement prohibiting these sorts of tricks I can't see anyway for the US or other countries from stopping them. Of course even if we get 99% of the countries to agree the remain few would gladly thumb their noses at the world and welcome the business criminal transactions.

    Every time Romney and Republicans mention Benghazi it proves they are the sort of opportunists that would mine for gold in a graveyard.

    by ontheleftcoast on Sun Oct 21, 2012 at 05:13:20 PM PDT

    •  Don't need 100% cooperation (3+ / 0-)
      Recommended by:
      George3, phonegery, ontheleftcoast

      The first thing to demand is country-by-country reporting of accounts, rather than accepting consolidated accounts.

      Second, an individual country could use worldwide unitary taxation (aka combined reporting), which would render transfer pricing irrelevant. Of course, multinationals and the OECD oppose it, but the US Supreme Court has ruled it constitutional even for a state to use it.

      •  Kenneth - I think the US is the only country (0+ / 0-)

        (or one of a very few) that try to tax worldwide profits. California has a version of unitary taxation which has encouraged companies to incorporate in other states, and move employees and facilities to more business friendly neighboring states.

        "let's talk about that"

        by VClib on Mon Oct 22, 2012 at 12:09:39 AM PDT

        [ Parent ]

        •  WUT does not tax wordwide profits (1+ / 0-)
          Recommended by:
          VClib

          These are separate issues. The U.S taxes on worldwide income, certainly.

          But worldwide unitary taxation only taxes that portion of worldwide profits attributable to your jurisdiction. That portion is calculated on the basis of an apportionment formula (% of sales, % of employment, % of assets, but as you know states have been monkeying with their formulas quite a bit) rather than on what the company says its profit is in that jurisdiction on the basis of transfer prices.

          I think California has paid a price in investment due to WUT, but my impression is that it's not all that large. The only empirical estimate I've seen is old, and it was statistically significant but relatively small. In theory, larger jurisdictions can tax and regulate more than smaller ones. Perhaps you've heard of the "California effect" from Vogel's Trading Up? To me, this is an application of MNC/host bargaining theory from the international political economy literature (Vernon, Moran, etc.)

  •  Makes me glad I'm a tea-drinking Yank! n/t (1+ / 0-)
    Recommended by:
    Kenneth Thomas

    Float like a manhole cover, sting like a sash weight! Clean Coal Is A Clinker!

    by JeffW on Sun Oct 21, 2012 at 05:14:22 PM PDT

  •  I was amazed at the number of Starbucks (3+ / 0-)
    Recommended by:
    George3, Cedwyn, JeffW

    I saw in London last month. I wonder how many of its customers would be willing to boycott the place.

    The spirit of liberty is the spirit which is not too sure that it is right. -- Judge Learned Hand, May 21, 1944

    by ybruti on Sun Oct 21, 2012 at 05:25:32 PM PDT

  •  vote with your dollars (4+ / 0-)
    Recommended by:
    George3, Cedwyn, JeffW, skyounkin

    in a capitalist corporate run democracy the real vote you have is every dollar you spend. if you don't buy from the likes of starbucks and apple ( big tax avoiders) they won't have the profits to pay tax on ... problem solved.
    VOTE WITH YOUR WALLET

    Those who make peaceful revolution impossible will make violent revolution inevitable. - JFK

    by taonow on Sun Oct 21, 2012 at 05:27:02 PM PDT

  •  like we needed yet another reason (3+ / 0-)
    Recommended by:
    JeffW, skyounkin, kestrel9000

    to boycott starbucks.  great news!

    Die with your boots on. If you're gonna try, well stick around. Gonna cry? Just move along. The truth of all predictions is always in your hands. - Iron Maiden

    by Cedwyn on Sun Oct 21, 2012 at 06:57:03 PM PDT

    •  I am willing to bet that Starbucks (1+ / 0-)
      Recommended by:
      VClib

      has done as much or more for coffee growers through price parity, fair trade and negotiations with coffee growing countries than any other organization has ever done. This is not a simple issue.I advise doing research before deciding that Starbucks is a corporate oppressor of coffee growers.

      "You can die for Freedom, you just can't exercise it"

      by shmuelman on Sun Oct 21, 2012 at 10:15:03 PM PDT

      [ Parent ]

      •  who said anything about coffee growers? (1+ / 0-)
        Recommended by:
        kestrel9000

        anyhoo, that may have been true back in the day, but having gone corporate, starbucks is a bunch of assholes now.  

        they don't even keep the fair trade coffee on brew all the time; you have to ask for it.

        and who do you imagine you are to tell me i need to do some research?  do you always assume people reach conclusions without doing research first?  i've done plenty of research to know starbucks sucks, thank you.

        Die with your boots on. If you're gonna try, well stick around. Gonna cry? Just move along. The truth of all predictions is always in your hands. - Iron Maiden

        by Cedwyn on Mon Oct 22, 2012 at 05:11:07 AM PDT

        [ Parent ]

  •  Problem is a bad tax policy not Starbucks (1+ / 0-)
    Recommended by:
    VClib

    In today's global world, tax policies need to be designed so they are not vulnerable to transfer pricing.  

    The issue is not just gaming transfer prices, but where operations and jobs are located.

    The UK's income tax policy is severely broken, as it pushes employment out of the country, even when the local workforce would be competitive.

    The most important way to protect the environment is not to have more than one child.

    by nextstep on Mon Oct 22, 2012 at 09:20:12 AM PDT

    •  It's both (0+ / 0-)

      Whether it's Starbucks, Apple, Microsoft, etc., etc., it is not like they are merely passive observers of the laws that are in place. They are working with far more resources than you or I have to change the rules even further in their favor.

      But information is power, too, and we can fight their money with that.

      •  If these companies have such great power (1+ / 0-)
        Recommended by:
        VClib

        Why does the US have marginal corp tax rates 40% higher than the average for developed countries?  Why does the US try to have a global income tax when few industrialized countries do, and all that do have high unemployment and terrible trade balances?

        US tax policy strongly discourages investments in the US that employ people, while other industrialized countries have this problem to a far lower extent or not at all.  My criticism is not about the total taxation in the US but how it is done in ways that hurt US employment and lower US wages.

        The most important way to protect the environment is not to have more than one child.

        by nextstep on Mon Oct 22, 2012 at 10:52:12 AM PDT

        [ Parent ]

        •  The simple answer is (0+ / 0-)

          The top marginal tax rate is irrelevant to these companies because decades of lobbying have made the corporate income tax into Swiss cheese. The CIT's share of GDP and of total taxation have been falling for 50 years. You can see this at stats.oecd.org, which has data from 1965 to 2010. Click on "statistics by theme," then "public sector, taxation, and market regulation," then "taxation," and finally "revenue statistics -- OECD member countries." You'll still have a lot of choices there, but it will be reasonably clear at that point how you can choose level of government, what tax, and what variable. I used total government, total corporate tax, and then tax as a % of GDP and selected tax as a share of total taxation. The U.S. is now below the OECD average on both of these measures.

          •  KT - your data is correct (0+ / 0-)

            But our corporate tax policy encourages all the wrong corporate behavior reducing investment, jobs, and exports, while expanding our trade deficit, as well as funding a diminishing portion of the total US tax burden.

            "let's talk about that"

            by VClib on Mon Oct 22, 2012 at 06:51:31 PM PDT

            [ Parent ]

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