Reference no: EM132197531
STARBUCKS IN HOT WATER IN THE UNITED KINGDOM AFTER TAX-RELATED CUSTOMER REVOLT
Starbucks opened its first U.K. shop in 1998. Over the 14 years that the chain had operated in the United Kingdom, Star- bucks had paid just £8.6 million despite £3 billion sales. One Labour MP (member of parliament) who had campaigned against companies that use tax avoidance techniques com- mented: “The fact they [Starbucks] have paid 0.3 percent tax on their turnover is utterly scandalous. If they didn’t think they could get away with it, they wouldn’t dare it.”
The main reason why Starbucks had avoided paying taxes for a 3-year string in the United Kingdom was a complex transfer pricing scheme for transactions within the company. Starbucks UK had incurred losses due to a 4.7-percent pre- mium paid to the Netherlands division where the coffee is roasted and another 20 percent premium to Switzerland where it buys the coffee beans. The claim of losses, however, was contradicted by statements that corporate executives made to analysts about the U.K. business. For instance, in 2010, John Culver, the president of Starbucks international division, said: “We are very pleased with the performance in the United Kingdom” in spite of filing a £33 million loss.
When news about Starbucks low tax contributions spread in 2012, pressure groups and British MPs called for an inquiry into the company’s tax affairs. UK Uncut, a grassroots group that targets companies that it accuses of tax dodging in the United Kingdom, called on the government to change the law to stop what it described as “unfair and unjust behavior.” Other multinationals, including Google and Amazon, had also been attacked for using arrangements that channeled profits to European subsidiaries based in countries where taxes were lower. Sources: “Starbucks to Pay £20m in Tax Over Next Two Year After Customer Revolt,” https://www.guardian.co.uk, accessed Jan- uary 14, 2013; “Starbucks ‘pays £8.6m Tax on £3bn Sales,’” https:// www.guardian.co.uk, accessed January 14, 2013; “Starbucks Pays Up to Avoid Boycott,” https://www.ft.com, accessed January 14, 2013.
In December 2012, surprised by the public outcry, Starbucks UK announced that it would volunteer to pay £10 million in taxes in each of the coming 2 years even if the coffee chain failed to make any profits. Kris Engskov, man- aging director of Starbucks UK, stated in an announcement made at the London Chamber of Commerce: “I am announc- ing changes which will result in Starbucks paying higher cor- porate tax in the United Kingdom—above what is currently required by law. Specifically, in 2013 and 2014, Starbucks will not claim tax deductions for royalties or payments related to our intercompany charges. In addition, we are making a com- mitment that we will propose to pay a significant amount of corporation tax during 2013 and 2014 regardless of whether our company is profitable during these years.”
UK Uncut was not pleased however. It claimed that the voluntary tax Starbucks offered to pay was still far less than the taxes paid by the chain’s closest competitor, Costa Coffee. It vowed to continue organizing a protest action planned in Starbucks stores around the country in December 2012. According to the organization’s spokesperson: “People will be transforming Starbucks stores into refuges, crèches, and other services which the government are cutting with their unjust and unnecessary austerity plans.”
DISCUSSION QUESTIONS
1. Explain why transfer pricing is so complicated especially for a company like Starbucks.
2. The case mentions that Starbucks UK’s decided to pay a voluntary tax of £10 million per year in 2013 and 2014 in wake of the protests and tax dodging allegations. Google and Amazon, who were also accused of dodging taxes, declined to follow Starbuck’s example, insisting that they paid the correct level of tax. Evaluate Starbucks’s decision vis-à-vis Google’s or Amazon’s.