The case against Starbucks

I’ve been having a brief discussion with Richard Murphy on his blog.  He says that Starbucks was clearly going against the spirit of the law and avoiding tax.

I have asked him for details of this, but he simply asserts that “The case against Starbucks is well known” and “The case was absolutely clear”.

Incidentally, he then deletes my further comments, which I find disappointing given that I am pains to comply with his comment policy, such as by using my real name rather than a pseudonym, and taking care to explain why I reach the conclusions I do.

Unfortunately, although last year I did have a good look at the Starbucks position I didn’t then, and don’t now, understand the detailed case against them.

I know that Murphy and others say they were avoiding tax, but that is a very vague accusation.

I know there were references to coffee beans and royalties, but it is clear that HMRC have reviewed the amounts paid and agreed the rates, so the letter and the spirit of transfer pricing law have been observed.

So far as I am aware there is no permanent establishment issue, as with Google and Amazon – Starbucks was not selling into the UK in a manner taxable elsewhere, but was trading here.

So what is the actual accusation against Starbucks?

The closest I can come to is that Murphy is on record as saying that tax avoidance includes structuring operations so as to follow the law, while not complying with what the law ought to say.  I have serious issues with that contention, but if we assume it to be true for the sake of argument then the only way I can find Starbucks to go against the spirit of the law is to look past the letter of the law, look past the agreed intention of the law, and adduce some deeper spirit which is not apparent.

So when transfer pricing law is considered: the letter is that one should apply the arm’s length principle; the spirit is that a group should not set prices so as to shift profits and erode tax bases; and the deeper spirit is… what?  Do we need to look at tax law in general, rather than transfer pricing, and say that there is some spirit of tax law that says large companies must always pay UK tax?

I really am at a loss.  If anyone can point me to a clear case against Starbucks, such as Murphy assures me exists, I would be very grateful.

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3 thoughts on “The case against Starbucks

  1. Firstly, there are those who think that Starbucks UK is simply an unprofitable business that wouldn’t be paying much/any tax even if it didn’t structure in the way it does. That’s because they have very high costs (prime retail sites etc) and aren’t really successful enough to make good money out of them. I’m going to leave all that to one side.. this is an attempt at a rational explination of why Murphy (et al) have a problem.

    Starbucks does two things that bother the campaigners:
    1) They pay a marketing royalty to a grouop company in the Netherlands
    2) the buy their coffee from a group company in Switzerland

    We’ll deal with the second one first.. Starbucks needs to buy coffee (everyone can agree on that), everyone can also agree an organisation who buys as much coffee as Starbucks has ever reason to have a single entity to source and supply the coffee onwards to the shops. Finally, everyone can agree that it is right and proper that the central organisation charges an ‘arms length’ markup on those sales. All of this is fine. The problem the campaigners have is that the central entity doing this is in Switzerland where the tax is lower than it would be in (say) the UK.

    Royalties are a bit different. These are, in the main, payments for intellectual property.. they’re what a Starbucks franchisee has to pay the Starbucks company for the right to be a Starbucks. Once again, most people think that this is a fair enough thing for Starbucks to charge for.. although Richard Murphy, as far as I’ve been able to tell, doesn’t agree and believes that intellectual property has no value and is only ever a tax avoidance tool. He’s a little out on the extremes there.

    How and ever.. he is, by no means, wrong to state that royalty agreements can be, and are, used for tax avoidance. Starbucks’ royalty payments move profits out of the UK into the Netherlands, where royalties are subject to little/no tax. This a net win for them. It’s all legal, and HMRC have agreed how much of the royalty can be used to relieve UK taxable profits.. but the existence or quantum of the payments is not what riles people.. it’s that Starbucks have arrange themselves so that the money moves from states where it will be taxed to states where it will not.

    So the anti-campaigners shout, quote rightly, that everything Starbucks do is legal and reasonable and arms-length and nothing at all for anyone to be angry about. They say there’s no tax avoidance because there’s no tax to be avoided.

    But.. that’s bollocks. The whole structure is set up with tax in mind. Starbucks are not stupid.. if they see a chance to have all that royalty income go to a countrythat won’t tax it, or have their central coffee distribution service in a country where it won’t be heavily taxed, then they’ll take said chance. It would be stupid not to.. but that doesn’t mean it’s not tax avoidance. That doesn’t mean they are not setting up their organisation in such a way as to make it possible to reduce their overall tax bill.

    The insanity of the campaigners is that they shout at the executives of Starbucks and demand that, in effect, they intentionally structure things in a more expensive fashion. The problem is that The Netherlands has a tax system that undermines other EU states, and that the EU and tax treaties mean that there’s nothing that HMRC or the UK Government can unilaterally do about it.

    • I disagree with your comments about Starbucks structure being set up with tax in mind. The whole structure is designed, first and foremost, to centralise and reduce costs through efficiency.

      The royalties, in this case, arise due to the Netherlands being the site of the roasting plant for the UK coffee beans.

      Prior to 2003 there was a separate roasting plant in the UK and no royalties were paid.

      Starbucks will have considered taxation in where to site the centralised function, but it would have been weighted against commercial factors too.

      It doesn’t look like Starbucks have given that much thought to tax planning, in all honesty. Otherwise they would have structured the intra-group loans a lot more effectively. It looks like they get taxed in the US, which is hardly very efficient…

  2. Thanks for that.

    So you’re not aware of anything more concrete than the fact that things happen which are legitimately deductible in the UK, but may not be taxed by the country they are received in?

    My take on that is that the UK tax treatment should not depend on the overseas treatment. If the Netherlands choose to forgo tax that they could levy, is that the UK’s problem?

    However, if the royalties were taxable in the Netherlands would people have a problem about the UK tax being nil? I suspect they still would –Murphy is on record as saying that paying UK tax is the important thing – I think this was in connection with Rolls Royce, though I could be wrong.

    So far as I can tell it simply comes down to a large US company not paying tax in the UK. Murphy seems to think that tax should be borne by large companies and rich people, ergo a large company ought to have a large tax bill regardless of the economic position. I’d very much hope that a well-known commentator would have a more sophisticated worldview, but I do struggle to find one in his writings.

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