(Star)*ucking the Economy

A guest post from the Green Bean Counter aka Rebecca Boden, Professor of Critical Accounting at the University of Roehampton.

Starbucks insinuates itself into the fabric of our lives, branded as everyone’s friendly fellow citizen – a coffee shop with a convivial atmosphere where you can hang out on sofas, or have a business meeting. Starbucks’ image as our ever-present and commercially successful friend is somewhat tarnished by the recent news that it pays virtually no UK corporation tax (the tax on corporate profits) on its 700 or so stores. In the world of accounting that I inhabit this is correct because Starbucks makes virtually no profit. You might think that they're really bad business people after all - but you'd be wrong.

In fact, Starbucks are very good to their shareholders, as they would claim they are legally obliged to be. They also have very good (coffee) bean counters who use two primary tactics to move profits out of the UK and into countries where the tax charge is lower.

First, they buy the coffee they sell to us from themselves. The bit of Starbucks that sells the coffee to other bits is a separate legal entity based in Switzerland. Even though it's selling to itself, it doesn't sell cheaply: the coffee traders make a healthy 20% profit on their transactions with the rest of Starbucks. This increases the expenses of the UK coffee shops, reducing their UK profits. Whilst this makes a big profit appear in the Swiss company, the advantage is that there is a much lower rate of tax on corporate profits there.

All of this is just bookkeeping - the coffee never actually goes near Switzerland, although it is bought and sold through there. Such 'transfer pricing' manoeuvres move money (and, usually, profit) from one country to another by fixing a sale price that has little to do with open markets and everything to do with paying as little tax as possible.

The UK tax authority - Her Majesty's Revenues and Customs - does have powers to tackle transfer pricing by adjusting companies' taxable profits, substituting a fair market (arm's length) price for the selling-to-yourself price. But this is complex and the arguments fraught - companies like Starbucks might argue that they pay over the odds to guarantee security of supply or superior quality. These can be difficult arguments to dislodge because open market prices are inherently subjective.

Second, Starbucks asserts that it is its branding that lets it sell so much coffee. The brand is owned by another Starbucks company - this time based in the Netherlands. This collects profit-reducing royalty payments equivalent to 6% of turnover from the coffee shops and moves them to the Netherlands where, again, they seem to enjoy very favourable tax treatment. Again, this manoeuvre can, in principle, be attacked by HMRC. But you could also have endless, and irresolvable, arguments about the value of a brand in selling a cup of coffee.

Starbucks argues that they do pay over a lot of tax to HMRC. True – but the overwhelming majority of that is not tax on Starbucks but tax which falls on others that it collects on the government’s behalf. This includes the personal income taxes and national insurance contributions payable by employees (which are deducted at source in the UK). Starbucks does also pay national insurance contributions itself in respect of its employees. But it’s important to remember that these pay for workers’ benefits, like pensions or sick pay, and therefore relieve employers’ costs. Then there is Value Added Tax, the final incidence of which falls on the end consumer but which is collected by the seller - Starbucks. And Starbucks does pay fairly minor local property taxes - but this is to provide all of the services like street cleaning etc. that help make Starbucks profitable in the first place, so could really be seen as business costs. Local property taxes are property-related, not profit-related. This puts Starbucks, with its economies of scale, at a significant advantage over more local and smaller-scale businesses which would pay the same taxes for the same premises.

What Starbucks doesn’t pay much, if any, of is tax on is its underlying profit – the profit it would make it its transactions were all at arm’s length rather than to itself. The routing of coffee ownership through Switzerland and the paying of royalties to the Netherlands are mere strokes of the keyboard, yet they create an accounting reality which leads to the entire surplus value of the business being spirited abroad. And the opportunity cost is even greater than the tax loss – the decimation of locally-owned (and therefore locally responsible) business and the creation of clone-town Britain.
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