Tax Analysts Blog

Starbucks Pays More Tax Than It Owes

Posted on Dec 18, 2012

Is it possible for a multinational corporation to be too good at tax planning? Recent events suggest the answer is yes.

Starbucks' British subsidiary has promised to contribute £20 million to the UK tax authorities during 2013 and 2014. We say "contribute" because the proposed transfer of funds is a voluntary act. How can that be? The defining hallmark of taxation is that it is a compulsory payment to the state. One of my first law school professors would lecture us: "If you can choose not to pay it, then it's not a tax." Thus we're taught to never confuse taxes with gratuitous payments. The sovereign is not a charity.

Okay, so then what's up with Starbucks?

The Seattle-based coffee peddler has operated in the United Kingdom since 1998. Over the course of its first 10 years it earned profit and paid roughly £8.5 million in UK corporate tax. For the last four years, however, the company has reported losses for tax purposes despite running a booming business. The firm has been unusually adept at benefitting from cross-border tax planning, principally the practice known as transfer pricing. As it turns out, Starbucks' tax advisers were so proficient at transfer pricing that things backfired.

The company's business model requires that its UK subsidiary pay royalties and fees to overseas affiliates in places like Switzerland or the Netherlands. Sometimes these outbound payments to related parties are for physical goods like coffee beans, but often they're for less tangible things. The payments are deductible against domestic income. That offset has the effect of stripping out otherwise taxable earnings from the UK tax base. This process allows Starbucks to approach Her Majesty's Revenue and Customs — the British counterpart to the IRS — with a straight face and claim that it owes no UK tax because it has no UK income.

Yes, Starbucks made plenty of money in Britain, but the income was transferred elsewhere. Another country's tax administrators might eventually get around to taxing the shifted profits — or not. The profits' final destination is often a tax haven. The specific location where the profits end up is basically immaterial. The UK now has a territorial corporate tax system that reaches only domestic income. Parliament approved the territorial regime just a few years ago, largely in response to concerns that the British tax environment wasn't sufficiently competitive.

Strictly speaking, Starbucks did nothing illegal. It took advantage of favorable tax laws that were enacted by a democratic legislative process. Like other for-profit enterprises, the company owes a duty to shareholders to maximize profits and minimize costs. Taxes are just one of those costs. That's why we describe this affair as a case of (legal) tax avoidance rather than (illegal) tax evasion.

Why, then, is the company promising to pay £20 million to HMRC over the next two years? The answer has nothing to do with the tax code, but everything to do with reputational risk. Social justice groups were outraged by news of the company's nonpayment of taxes — especially at a time of budgetary austerity. The activist group UK Uncut organized a series of sit-ins at 34 Starbucks locations on December 8 and 9. The protests featured mock homeless shelters inside the coffee shops. The intention was to encourage consumers to shop elsewhere for their frothy espresso drinks.

You can view a series of photos from the protests here.

Some folks don't mind stepping over the downtrodden and disenfranchised en route to a venti hazelnut macchiato. [Full disclosure: It's not such a good idea to come between me and my morning cup of joe]. But British consumers thought differently and stayed away in droves. Facing two days of empty stores, senior management was forced to respond. And in moments of crisis a firm's public relations department usually trumps the tax guys.

Let's be clear about what actually happened. The promise to throw millions of pounds at HMRC is a PR expenditure. It was not a payment of tax in the true sense. There was no determination of under-reported income. There was no assessment for unpaid taxes, interest, or penalties. Heck, there isn't even an amended return. Nor is there reason for one. Starbucks stands by the accuracy and legitimacy of its original position (i.e., zero taxable income in Britain). To date, the UK government has never hinted that Starbucks is in the wrong.

Who knows whether Starbucks' unilateral promise is enforceable in the event of subsequent nonperformance? Probably not, as there is nothing in the way of consideration. This brings us back to the fundamental notion that taxes are not gifts to the state. Donors can renege on a promised gratuity, but taxpayers cannot renege on their duty to pay taxes. The difference is meaningful.

Read Comments (1)

von gneisenauFeb 9, 2013

My, are they full of beans - nothing like mob rule to set tax policy.

And why skew the reporting? - if you search elsewhere the headlines give more,
let's say, flavor:

"Labour Party activists close down Starbucks in Euston" or something like
that. So how does a Labour Party riot at 93 Euston Road translate into
international tax news?

(separately, what does that say? "Women did not cause the crisis and we will
not pay"? - it appears cut off. Has the Queen ordered women to pay for
lattes? No wonder they're going all wobbly)

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