Transfer Pricing Associates

Is Starbucks’ inability to pay taxes really due to its royalty fees?

Posted on Wednesday November 7, 2012

Starbucks is in great trouble as the streets of London echoes from protesters demanding that the coffee giant pay more in taxes. It has recently become public that Starbucks’ UK division did not pay taxes in the last three fiscal years on the grounds of negative income reported. However, there is no need for desperation; the company is not going bankrupt. According to the manager of the UK division, the company is prospering better than ever; so well, as the management is considering exporting the UK business strategy and model to its greatest market in the US.

Starbucks’ strategy to not pay taxes can be traced back to its reporting on intangibles and transfer pricing practices. In order to find out more about the ways in which they did it, read the article “Financial reporting on IP abused by multinationals?” The game which Starbucks, along with many other multinationals such as IKEA or eBay started carries a hidden risk which could seriously damage the company.  Due to the misunderstanding among non-professionals which surrounds transfer pricing practices, this aggressive strategy can negatively affect the value of the brand.

In your opinion, is it the royalty fee that reduces the profit of Starbucks’ UK division? Or is it due to some other business related costs such as the increased amount of rental costs coming from the expensive locations which it chooses for its cafes?

Sources: Reuters, Guardian, Guardian

For more on this topic, see the main article here.

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