post Wednesday November 7, 2012
Investors interested in Starbucks UK receive the feedback that the company is very profitable and that its UK division is so successful that the executives are planning to ship the ‘magic recipe’ to manage the company back to its originating continent, the United States. However, Starbucks failed to pay taxes in the last three years on its UK transactions on the grounds that it recorded annual losses in its financial reports. This obvious contradiction is the foundation of the turmoil which surrounds Starbucks and other multinationals as well.
The story has developed so far as crowds were protesting in the UK against multinational corporations and how they refuse to pay taxes.
Members of the parliament stood up against multinationals as well, the Liberal Democrat peer Lord Oakshott called for the CEO of Starbucks to appear in front of the parliamentary committee to explain their actions of not paying taxes. Furthermore, he also turned to the customers highlighting that an easy solution to the problem would be to punish these multinationals by choosing their competitors over them. Additionally, he pointed out the importance of stronger actions on behalf of the government in order to impede the multinationals’ attempt to avoid taxes.
But how did the multinationals manage to fool the tax authorities so boldly without breaching the law? The mixture of factors comprising the answer is to be found in the reporting of intangible assets.
First of all, Starbucks does not break down its group earnings by country. However, it is required to report in unit accounts in the UK, which in the last few years showed a loss.
A trick borrowed by tech giants is to place their intellectual property units in countries with favorable tax regulations and charge high royalties from parties using it. Therefore, Starbucks requires his subsidiaries to pay high royalties for the use of its intellectual property, such as brand and business processes, thus reducing its taxable income. Starbucks sends his royalties to the Netherlands and to Switzerland.
Another component relates to the use of arm’s length principle. In the UK it is allowed to deduct IP fees provided that the presence of an arm’s length transaction can be proved to exist. Starbucks declared that it abides by this principle but did not comment further on the issue.
Starbucks furthermore uses transfer pricing of its coffee beans to reduce its taxable income. Due to the fact that it is required to shift its beans from Switzerland (from where they are ordered from) to the Netherlands (where they are roasted) and then to the UK, it has to allocate part of its profits to these countries as well. When transfer pricing is put in the gunfire it can seriously damage the value of the brand. This is mainly due to the misunderstanding which surrounds transfer pricing among non-professionals.
Lastly, Starbucks makes use of inter-company loans, another tactic allowed in the UK. This implies an unreasonably high rate of interest to a creditor who resides in a country with low tax rates. The UK subsidiary of Starbucks is entirely funded by debt which further reduces its taxable income.
The Starbucks case shed light also on other multinational companies in the UK, such as eBay and Ikea, which by using similar techniques did not pay a reasonable amount of tax on their revenues.
Sources: Reuters, Guardian, Guardian
Image source: Free Digital Photos
Image: http://www.freedigitalphotos.net/images/Retail_and_Sales_g195-Hand_Holding_Tax_Free_Card_p62885.html
