Hi Ron, and thanks for your comments and the reference to Reuters.
I'm going to leave aside the question of whether Starbucks are somehow deceiving their investors: that was not the issue I was addressing (though it may be valid, I don't know).
Ron Webb wrote:
Re: Starbucks --
Nick wrote:Taking the items in turn: I hope you'll accept that they have to buy coffee from abroad! They have been accused of diverting profits by buying through Switzerland. However, apparently some 75% of world coffee is traded through Switzerland. Not because of tax, but because it has established itself as the leading market, in just the same way as London has for marine insurance or fine wine.
According to Reuters
, the point was that they were buying their beans from their own subsidiary
in Switzerland; and the suspicion was that the internal price was set artificially high, in order to transfer profits to them. It's hard to prove that, however. The Swiss subsidiary was described as only "moderately profitable", but (remarkably!) "Swiss law does not require the unit to publish accounts".
There may be a "suspicion", but that is because people somehow think that Starbucks are getting away with something, rather than any actual figures or evidence. Checking the price of beans would be very easy. And though there is no need to publish separate accounts for every unit, (which is not actually remarkable) that does not preclude HMRC from asking (and receiving!) very detailed questions.There is specific UK legislation against artificial transfer pricing. Furthermore, this has already been officially investigated:
reuters wrote:Starbucks was the subject of a UK customs inquiry in 2009 and 2010 into the company's transfer pricing practices. This was "resolved without recourse to any further action or penalty", a Starbucks spokesman said. HMRC declined to comment on the probe.
So no. Beans are not being purchased at artificially high prices to transfer profits.
VAT: this is very high at 17%. In other words, 85% of the price of a cup of coffee is value added by Starbucks. Effectively the benefit of being able to supply you with a presumably acceptable cup of coffee at a desired location at the right time. So when we hear about Starbucks "paying no tax" on a historical turnover of £3 billion, we can see that that is complete nonsense.
Well, since the VAT is collected at the point of sale, it's hard to say whether the corporation or the consumer is actually paying the tax. Even so, do you really think that 17% is a reasonable tax rate for corporations? How much are personal tax rates in UK?
To go right back to the beginning, the accusation made go something like "Starbucks turned over £3 billion, but paid no tax". We can see, however, that Starbucks "paid" something like £500 million in VAT. So the idea that Starbucks generated no tax is ludicrous. But you are right to the extent that it is predominantly the customer who suffers the cost of VAT, even though Starbucks "writes the cheques". That is a matter of tax incidence, not legislation, avoidance, evasion or anything else.
But then you go on to say "do you really think that 17% is a reasonable tax rate for corporations?" Well, that 17% is on turnover, not profits. It is paid whether the company makes a profit or not. If you think it is not high enough, for some reason, just raise VAT to, say, 30%. Who would end up paying it? The consumer. The shareholders are not receiving any income to be taxed, are they? And any that they might receive in future are taxed at their highest rate, but taking account of corporation tax already paid. So corporation tax is just an advance payment of personal tax; the corporation, though a legal entity, is merely the organisation of a group of people, not a life itself.
Profit: This year they have made a profit, by closing loss-making outlets. Note also, that there is a difference between profits and taxable profits, which are always likely to be lower in a younger growing company. We see exactly the same will Ocado, who have only just started to make any profit at all. And, we hear, the swines are then sending profits back to the US. Is that a tax-dodge? Hardly! US corporation tax is a lot higher than in the UK.
Starbucks UK was paying substantial royalties on "intellectual property" to its European head office -- supposedly in Amsterdam, although the president of the parent company is actually in London. It's not clear where the money went after that, but (again from the Reuters article) "Professor Michael McIntyre at the Wayne State University Law School said it was rare for such fees to be repatriated to the United States."[/quote]If royalties are "substantial" it is because Starbucks operations are substantial. People will use Starbucks in a new town because they are familiar with it. If you think royalties are not valid, then be my guest: open a coffee shop next to Starbucks, charge the same prices, offer exactly the same service, and watch yourself go broke. And if HMRC believe that royalties are being used to shift profits artificially, they can just disallow some (or conceivably all) of them. More or less at the stroke of a pen. (Exactly the same applies to interest payments).
The fact that the president is in London is of no relevance. Any more than it would be if the parent company were in London, but the president lived in Monaco. You wouldn't insist that no tax was paid in London, would you?
As for repatriation of profits, this demonstrates the dead-weight cost of tax. If it is to go to US shareholders, then it will be taxed. But what incentive is there to deliberately move your money to somewhere you will have it taken off you, rather than investing it for the future? But in any case, the article says that overall, Starbucks paid 31% tax overall. When you consider that in some countries in which they operate, the UK for example, where tax rates are lower, at 20%, that is not exactly tax avoidance is it?
An finally, some comments on the Reuters report:
Accounts filed by its UK subsidiary show that since it opened in the UK in 1998 the company has racked up over 3 billion pounds ($4.8 billion) in coffee sales, and opened 735 outlets but paid only 8.6 million pounds in income taxes, largely due because the taxman disallowed some deductions.
Corporations don't pay tax on income, they pay tax on taxable profits, as defined by law. So we can see that the taxman has no problem in assessing the correct tax payable in the UK.
Over the past three years, Starbucks has reported no profit, and paid no income tax, on sales of 1.2 billion pounds in the UK. McDonald's, by comparison, had a tax bill of over 80 million pounds on 3.6 billion pounds of UK sales. Kentucky Fried Chicken, part of Yum Brands Inc., the no. 3 global restaurant or cafe chain by market capitalization, incurred taxes of 36 million pounds on 1.1 billion pounds in UK sales, according to the accounts of their UK units.
So what? Some car makers make profits, some make losses. So what?
Troy Alstead, Starbucks' Chief Financial Officer and one of the company officials quoted in the transcripts of calls Reuters reviewed, defended his past comments, saying the company strictly follows international accounting rules and pays the appropriate level of tax in all the countries where it operates. A spokeswoman said by email that: "We seek to be good taxpayers and to pay our fair share of taxes ... We don't write this tax code; we are obligated to comply with it. And we do."
There is no suggestion Starbucks has broken any laws.
Quite. If you want different laws, then pass them.