Starbucks Corporation: Tax Avoidance Controversies in the United Kingdom

Published by admin2 at January 11, 2019

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Tax Avoidance Controversies in the United Kingdom

Case
“Starbucks’ coffee menu famously baffles some people. In Britain, it’s their accounts
that are confusing. Starbucks has been telling investors the business was profitable,
even as it consistently reported losses.”1
Introduction
On October 15, 2012, Reuters released a special report titled “How Starbucks avoids UK
Taxes.” The investigative reporters at Reuters compared legal filings in the English company
register, Companies House, with Starbucks’ own group reports and 46 transcripts of
conference calls with investors and analysts over a 12 year period. What they turned up were
stark differences in how Starbucks viewed its UK subsidiary internally and how it was
portrayed to the UK government, specifically the tax authority, Her Majesty’s Revenue and
Customs.
Starbucks officials internally gushed praise on their UK business unit. On multiple occasions
it was referred to as “profitable” and a model for other regions to follow. In November 2007,
the Chief Operating Officer Martin Coles told analysts that the UK unit’s profits were funding
Starbucks’ expansion in other overseas markets. However, the unit’s accounts showed a tenth
consecutive annual loss. The Reuters report went on to cite multiple instances when
Starbucks provided positive news to analysts yet showed operating losses to the UK
government:
“For 2008, Starbucks filed a 26 million pounds loss in the UK. Yet CEO Schultz told
an analysts’ call that the UK business had been so successful he planned to take the
lessons he had learnt there and apply them to the company’s largest market – the
United States. He also promoted Cliff Burrows, former head of the UK and Europe, to
head the U.S. business.”2
As soon as the newspaper hits newsstands and the Reuters website, there was an immediate
public and political outcry. UK Uncut, an activist organization, planned boycotts and sit-ins.
Several Members of Parliament (MPs) voiced outrage and quickly summoned Starbucks Chief
Financial Officer Troy Alstead to testify before committee.
Starbucks History and Image
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Starbucks Corporation
In 1971, Starbucks was founded in Seattle as a coffee bean roaster and retailer. The location
sold high-quality coffee beans and equipment. The company started serving espresso coffee,
the first drink that Starbucks sold, in 1986. The next year, the original owners sold the
fledgling chain to former employee and current CEO Howard Schultz, who began an
aggressive expansion campaign. Since 1986, the company has opened, on average, two
stores per day.
Starbucks issued its Initial Public Offering in June 1992. At the time the company owned or
licensed 140 outlets and booked annual revenue of $75 million. In 2012, the total number of
stores in operation numbered more than 18,000 and were spread over 60 countries. For the
fiscal year, Starbucks’ consolidated revenues reached a record $13.3 billion. Companyoperated stores accounted for 79 percent of total net revenues during the 2012 fiscal year.3
Coffee is no longer the only item sold through Starbucks locations. This excerpt from the 2012
10-K filing with the United States Securities and Exchange Commission summarizes the
extent of their offerings:
“Starbucks stores offer a choice of coffee and tea beverages, distinctively packaged
roasted whole bean and ground coffees, a variety of premium single serve products,
juices and bottled water. Starbucks stores also offer an assortment of fresh food
offerings, including selections focusing on high-quality ingredients, nutritional value
and great flavor. A focused selection of beverage-making equipment and accessories
are also sold in our stores.”4
Starbucks has also spun off a unique tea bar concept called Teavana Fine Teas and Tea Bar.
They are also expanding their juice line, Evolution Fresh, with an aggressive growth strategy
with the goal of further increasing their market share in the super-premium juice category. The
company has also begun exploring handcrafted carbonated beverages to offer for sale in its
existing locations.
Howard Schultz
Howard Schultz is the Chairman, President, and Chief Executive Officer of Starbucks. Before
joining the company he was the general manager for a Swedish drip coffee maker
manufacturer called Hammarplast.5 Starbucks was a client of Hammarplast and Schultz was
impressed by the company’s knowledge of coffee and the amount of business that they were
conducting, even as a small outfit. A couple of years after his first encounter with Starbucks,
Schultz joined the company in 1983 as the Director of Marketing.
While visiting Milan on a buying trip, Schultz was struck by the presence of a coffee bar on
virtually every street corner. Not only were they serving countless espresso drinks, they also
acted as meeting places or public squares, providing a sense of community and
belongingness. He took this newfound knowledge back with him and tried to convince the
owners to start offering hot brewed beverages in addition to the coffee beans and leaf teas
that they already offered. The owners resisted and, after a brief stint trying to start his own
coffee company, Schultz bought the retail unit of Starbucks for $3.8 million.6
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Social Responsibility
Howard Schultz is considered the “soul” of the company. His passion and business savvy
have made the company into what it is today. He also brought to the company “a distinctive
set of values that has and continually shapes how the company engages their customers,
their employees, and the communities where they do business.”7 The company continually
monitors its adherence to the norms of social responsibility, noting in a CRS report:
“We have been building a company with a conscience for more than four decades,
intent on the fair and humane treatment of our people as well as the communities
where we do business, and the global environment we all share.”
—CEO Howard Schultz, 2012 Global Responsibility Report Message.8
Starbucks provides full benefits for all of its employees, which it refers to as “partners.” They
also established a business practices goal: All of their coffee would be “ethically sourced” by
2015. The cornerstone of this approach is their Coffee and Farmer Equity (C.A.F.E.) Practices,
“a comprehensive coffee buying program that ensures coffee quality while promoting social,
economic and environmental standards.” Through 2012, the company purchased 93 percent
of their coffee in this manner.9
International Taxation
Typical International Tax Methods
Most governments tax individuals and/or corporations on income or profits, respectively. These
taxes are used to pay for everything from national defense and transportation infrastructure to
food stamps and farm subsidies. These taxation systems vary widely by government and
there are few broad, general rules. However, it is possible to understand the general
corporate tax environment by understanding a few choices that each government must make
when it comes to their corporate tax policy.
Countries usually pick between two systems: territorial or residential. In a territorial system,
only the income from a source inside the country is taxed. For example, an American
company with locations in Canada would only have to pay Canadian taxes on the portion of
sales that are within Canadian borders. In a residential system, the residents of a country are
taxed on their worldwide income, not just local income. The residential system is geared more
toward personal income tax and does not affect corporations.
Corporate tax rates also vary widely by country. Every country has different funding needs
based on their size, the extent to which the government operates social welfare programs,
and numerous other factors. Those looking to increase investment within their borders may
offer lower tax rates and those with large infrastructures to maintain may have higher tax
rates. These varied tax rates provide an unintended incentive for companies to attempt to
transfer revenues and profits from countries with higher tax rates to those with lower tax rates,
thereby retaining more net income for shareholders and managers.
Several tax avoidance strategies exist. Some companies charge subsidiaries for the use of
“intellectual property” such as the brand name and their business practices. These types of
arrangements typically charge 4% of revenue. Other companies that are vertically integrated
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upstream and downstream charge units in high tax jurisdictions higher prices in order to move
money to lower-taxed countries. Transfer-pricing regulations allow this practice and
companies can then allocate profits to high-charging subsidiaries in low tax rate areas.
Starbucks Money Trail
Starbucks employs various legal methods in order to minimize their tax liability within the UK.
The corporate tax rate in the UK in 2011 was 26%. Each step along the money trail is
designed so that in the end, the Starbucks subsidiary in the UK shows no profits on paper.
This effectively reduces their tax bill in that jurisdiction to zero even though that market may
be very profitable for them.
The Starbucks subsidiary in the UK is heavily debt-financed. Even for a company with positive
net cash flows, the UK subsidiary still has large amounts of debt and large interest bills. All of
these loans are from the Starbucks headquarters in Seattle. The interest on these loans is
higher than the interest rate on the average Starbucks bond, at the LIBOR rate plus 4%
versus the LIBOR rate plus 1.3%. While this moves profits to the United States where there is
a relatively high tax rate, the interest stays within the company instead of being paid out to
banks or investors who purchase their bonds.
Starbucks also charges the UK unit a royalty and licensing fee of 6%. This is higher than the
4% that a typical arrangement of this sort would charge. Starbucks claims that it has some
independent licensees who also pay 6%, so they are within their legal right to charge their
own subsidiary the higher rate, as well.10
The final method that Starbucks employs is how it pays for its main product
a tax bill of £15 million during the 2011-12 reporting period. While the UK coffee shop market
appears strong and close competitor Costa Coffee reports growing profits, Starbucks claims
that it is not generating profits within the UK. Global CFO Troy Alstead reports that Starbucks
has recorded profits in only three years since they entered the UK in 1998 and that 25% of
their UK stores run at a loss.15
High rents and space costs within UK cities were proposed as reasons for Starbucks’ failure to
generate profits; however, Costa Coffee has been able to achieve an operating margin of
14.3% with a similar retail footprint and comparable labor costs.16 Chief executive of Costa
Coffee, Andy Harrison, appeared to enjoy Starbucks tax avoidance controversy, commenting
“Costa has been the UK’s favourite coffee shop for quite some time and we remain the
taxman’s favourite coffee shop, too.”17
HMRC, Parliament & Public Opinion
The taxman within the United Kingdom is Her Majesty’s Revenue and Customs (HMRC),
which is responsible for the collection of both personal and corporate income taxes, among
other duties. Formed in 2005 as a merger of two previous tax entities, the HMRC outlined its
purpose and vision by stating “We make sure that the money is available to fund the UK’s
public services” and “We will close the tax gap, our customers will feel that the tax system is
simple for them and even-handed, and we will be seen as a highly professional
organisation.”18 In the HMRC charter, it is further laid out that the public can expect the
HMRC to “tackle people who deliberately break the rules and challenge those who bend the
rules.”19
The HMRC received help in their mission from Reuters in publishing their special report on
Starbucks, as well as from several other media investigations in 2012. A Guardian report on
Amazon showed the online retail giant paid no corporation tax on more than £3 billion in sales
within the United Kingdom,20 while the Telegraph reported that Google paid just £6 million in
tax on £395 million of UK turnover.21 Following these reports, representatives from all of the
firms were summoned to Parliament to speak to the Publics Account Committee. Corporate
tax avoidance had become a hot button issue for both the media and government, with
Michael Meacher, an MP for the Labour Party, stating specifically that Starbucks’ tax
behaviour “is certainly profoundly against the interests of the countries where they operate
and is extremely unfair…. they are trying to play the taxman, game him. It is disgraceful.”22
While several corporations were the subject of media tax avoidance investigations and
summoned to Parliament, Starbucks faced the brunt of the public uproar. According to the
YouGov BrandIndex, which measures the strength of a company’s brand perception,
Starbucks dropped to a record low score of −28.6 following the release of the Reuters special
report. In the month leading up to the Parliament summons, Starbucks’ score remained
around −16.7, which is in sharp contrast to its score from 2011 of +3.1.23 In contrast, the
BrandIndex scores for Google and Amazon barely dropped due to their media reports and
Parliament summons. The UK director for BrandIndex, Sarah Murphy commented:
“A brand’s buzz score typically recovers following a spate of bad press, but we aren’t
seeing that with Starbucks, which is quite unusual. Its scores started to level out
around the end of last month, but whatever modest recovery Starbucks has made
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1.
2.
3.
4.
could well be in jeopardy if this story flares up again in the media.” 24
UK Uncut
The continued negative public backlash against Starbucks could have something to do with
the actions of the organization UK Uncut. While it started as a simple hashtag, UK Uncut
grew during the recession into an organized movement with protests and boycotts in over fifty
UK cities.25
UK Uncut campaigned against the government’s austerity plans to cut public services and
reduce the deficit, claiming the deficit could be reduced and welfare services maintained if the
government collected all the tax revenue it was due. A UK Uncut FAQ says, “It is estimated
that £25bn a year is lost through tax avoidance – money that could fund the refuges, rape
crisis centres, sure start centres and child benefit payments that are currently being axed by
the government.”26
One of the first UK Uncut targets, Vodafone, was forced to close nearly thirty stores around
the country due to protests and sit-ins.27 Since 2010, banks such as Barclays, RBS and
HSBC, and retailers like Boots and Tesco have come under fire from UK Uncut.
Following the release of the Reuters report in October 2012, UK Uncut began to target
Starbucks with protests and boycotts. On November 11, 2012, the date that Starbucks CFO
Troy Alstead was scheduled to meet with Parliament, UK Uncut announced a new campaign
against Starbucks, titled “Refuge from the Cuts.” The intent of the campaign was to turn
dozens of Starbucks locations on a Saturday in December 2012 into services that were being
cut by the government, such as refuges, homeless shelters and crèches.28 A UK Uncut
activist was quoted as saying “Starbucks is a really great target because it is on every high
street across the country and that’s what UK Uncut finds really important: people can take
action in their local areas

Based on a real world case attached write a case study-report that:

1. Critically analyse the ethical issues surrounding tax avoidance and tax evasion.

2. Critically evaluate the measures and actions that HMRC apply for tax compliance.
(Connect these measures and actions with tax avoidance and evasion ethical dilemma)

Sample Solution

Lesbianism and the problems of identification in contemporary Britain In Britain, lesbian women may not have had to campaign to have their sexual activities decriminalised, as homosexual had needed to do; yet their lives were not free of problems. However, men even homosexual men had more social, economic, and political power and status than British women did as a whole have. Men had a greater control of and over their own bodies than either heterosexual or lesbian women had in the immediate post-war period, and indeed before then as well. British lesbian women would have to campaign for greater rights as both women do, and as lesbians to challenge the discrimination and expected gender roles from a patriarchal and heterosexual dominated society. In other words, British lesbians had to counter sexual discrimination as well as orientation discrimination before they were able to feel fully secure in publicising their sexual orientation and identification. Changing public perceptions of their different gender roles and sexual orientation was, as the main lesbian rights groups realised was not going to be easy, as their experiences during the 1970s proved.[8] In Britain the 1960s was a decade that brought about some wide-ranging social changes and promised further changes for the future. Lesbian women could certainly regard the availability of the contraceptive pill and the legalisation of abortion as being an improvement for the choices that all women were able to make in relation to their own bodies. During the 1960s expectations about the gender roles of women began to change, as feminism meant that fewer women were prepared to become wives and mothers without having a career first. Lesbian women also realised they did not have to put up with marriage and children just because it was expected of them to do so. The decriminalisation of male homosexual acts at the end of the 1960s could also be viewed as a demonstration that British society was slowly becoming less illiberal in its attitudes towards people that embraced alternative lifestyles. For the more radical lesbians the social changes in the 1960s were the start of the process of fighting discrimination, rather than the end of the process. British lesbian women and gay men were encouraged to start gay pride movements by the apparent success such groups in the United States were having in altering social attitudes, especially in cities like New York and San Francisco.[9] British lesbian and gay pride organisations began in earnest during the early 1970s with the objectives of enabling their members to have pride in their orientation identification, as well as aiming to reduce the level of social discrimination which their own members had to endure. The hope was that reduced social discrimination and reduced fear of such prejudices would allow all lesbian women to readily admit their sexuality with pride. These lesbian pride organisations as a whole found that changing social attitudes towards them and their sexual orientation was a slow process, after all generations of social prejudices could not be expected to vanish overnight.[10] The effectiveness or otherwise of lesbian and gay pride movements since the 1970s has been an area of much debate. Depending on which criteria are used to judge the gay pride movements the achievements of these organisations will alter.[11] If judging the achievements of the lesbian and gay pride movements solely in terms of their ability to have anti-discrimination legislation passed these movements were undoubtedly a failure before the election of the New Labour government in 1997.[12] The only lesbian women to gain from anti-discrimination legislation between the early 1970s and 1997 did so because they also came under gender equality, race relations and disability legislation. Governments from the early 1970s did not believe that legislation was needed to prevent homophobic discrimination, leaving lesbian and gay pride organisations on their own to lower such prejudice aimed at their members. New Labour has taken more steps than any previous governments to pass legislation to reduce homophobic prejudices and promote the rights of all lesbians and gays. New Labour legislation has included passing legislation to end discrimination upon the grounds of sexual orientation to enhance the opportunities for all lesbians and gays to be openly identified as such without fear of homophobic discrimination. Besides specific legislation to protect lesbian and gay rights, lesbians can also use the Human Rights Act of 1998 to make sure that their orientation being publicly identifiable is not detrimental to their rights or their safety.[13] Under New Labour, lesbian women have finally received legal equality with heterosexual men and women. For instance, lesbian women and gay men are no longer dismissed from Britain’s armed forces if they openly admit their sexuality. Lesbian women and gay men now also have the right to ‘marry’ each other in civil partnerships. The introduction of civil partnerships means that lesbian women in long term partnerships have the same rights as married and co-habitant heterosexual couples in terms of property, taxation and inheritance rights, as well as the same benefit and pension entitlements. Lesbian women now have the same rights as heterosexual women when it comes to the custody or adoption of children.[14] In respect of the lesbian pride movements they probably had a more immediate impact on changing social attitudes towards them than they did in influencing governments to pass legislation which tackled discrimination against them. Lesbian and gay pride organisations did not use the same tactics to publicise their sexual orientation. The more radical lesbian and gay pride organisations were happy to shock heterosexuals in British society with the tone and the methods in which they demonstrated their identifications of sexual orientations. More radical groups were even prepared to ‘out’ famous people to make headlines and raise public awareness of lesbian and gay issues.[15] Other more moderate lesbian and gay pride groups were less keen on showing their sexual orientation and identification in such an ostentatious manner. The more moderate lesbian pride groups would have preferred to be open about their sexual orientation and identification without using over the top publicity stunts. Moderate lesbian groups would have fitted in with insider pressure groups, which attempt to achieve their objectives behind closed doors, rather than in public. Radical lesbian and gay pride groups are examples of outsider groups that have little influence with governments and rely on publicity to bring their objectives to public attention.[16] The campaigns of lesbian pride groups were not as successful in changing public perceptions of lesbian women as a majority of those groups would have hoped from the early 1970s. This was especially the case during the period of Conservative governments between 1979 to 1997. The Conservative party more than the Labour and Liberal/Liberal Democrats parties like to represent traditional family values instead of promoting the rights and the lifestyles of lesbian and gay pride groups. When in office the Conservatives prevented lesbian and gay groups’ form educating school pupils about their sexual orientations and identification through the infamous section 28. Lesbian and gay groups lobbied New Labour to have the section removed as soon as possible. The media did not always help lesbian and gay groups convey the messages to the public that they wanted to be sent out, especially right wing newspapers did not want to change public perceptions of lesbian women. The right wing newspapers often portrayed the objectives of lesbian and gay groups in the most negative perspective possible.[17] Despite the efforts of some politicians, religious groups, and parts of the media the number of people who happen to be publicly prepared to be known as being lesbian and gay in Britain has increased noticeably since the 1970s. It is harder to argue out right that such a situation is entirely due to the attempts of lesbian and gay pride groups to alter the attitudes of British society. After all changed reactions towards their orientation and gender identification could have resulted from the campaigning of such groups, or alternatively could just have been a continuation of increasing indifference to how other people chose to live their lives.[18] Thus in conclusion, lesbian women in Britain have not always felt comfortable or able to openly display their sexual orientation, and their gender identification due to the nature of British society. The immediate post-war society in Britain has remained predominantly patriarchal and heterosexual in terms of social and gender relationships as well as expected behaviours, roles, and identifications. That situation meant lesbianism did exist in Britain, it was just well hidden. The 1960s were a decade that kick started the process of altering British society, and provided the stimulus for lesbian and gay pride groups to emerge during the early 1970s. The legacies, influence, and success of such groups are highly debatable. Although these groups certainly raised the profile of lesbians and gays in Britain they actually had little affect on the mainstream political agenda prior to New Labour gaining office in 1997. Lesbian and gay pride groups may have attempted to increase acceptance of their lifestyles and their alternative identifications, yet changing public perceptions of lesbian women has not been universal or overwhelmingly favourable. The way in socialisation operates in such a haphazard way means that the predominantly heterosexual and patriarchal nature of British society will continue for a considerable amount of time, even if the acceptance of lesbian women should continue to improve, and more fluid gender roles should develop further.>

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