Starbuck tax-avoidance hits bottom line as rival gloats


by Sunny Hundal    
9:41 am - December 13th 2012

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Coffee chain Starbucks has already taken a big hit on its reputation by avoiding tax in the UK, but now even its competitors are gloating.

Rival chain Costa Coffee has seen its sales boosted by a whopping 6.8% recently while Starbucks has become mired in controversy.

Andy Harrison, chief executive of Costa owner Whitbread, told the Financial Times this week:

It is difficult to define the impact of [the Starbucks tax issues] into the figures, but we remain the UK taxman’s favourite coffee shop… Starbucks has taken a bit of a knock.

It was recently revealed that Starbucks paid no corporation tax in the UK over the past three years, and just £8.6m in corporation tax in 14 years of trading in Britain.

Industry insiders say Costa is even mulling over using the fact that it pays British taxes in full as an advertising strategy.

It looks like Britons are increasingly getting fed up of tax avoiders too.

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About the author
Sunny Hundal is editor of LC. Also: on Twitter, at Pickled Politics and Guardian CIF.
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Reader comments


Costa played this story brilliantly.

The day it came out that Starbucks were dodging taxes, Whitbread hit the phones to the press and told them they were paying plenty of tax (and told people the figures).

As such, very quickly, alongside every story about starbucks not paying tax was a wonderful reference to Costa paying plenty.

Which is great because it took the pain of boycotting away from consumers. They didn’t have to not have nice coffee. And they need not be complacently cynical in assuming all companies are the same.

So well played to Whitbread – and I hope other companies learn from them when their rivals are revealed to be paying little or no tax.

Oh dear. Life is complicated for lefty moral high-grounders.

Does this mean that all the Liberal Conspirators who have been boycotting Whitbread, owners of Costa Coffee, since Liberal Conspiracy called for a boycott of on 10th October 2010, are now having to un-boycott Costa Coffee?

http://liberalconspiracy.org/2010/10/24/why-im-boycotting-the-35-businesses-who-support-the-cuts/

“Last week, 35 deluded business leaders wrote to the Telegraph to praise George Osborne’s vicious spending review.

I’m joining those who have decide to boycott every single company that those business leaders represent.”

Those business leaders included, er:

“Anthony Habgood
Chairman, Whitbread”.

http://www.telegraph.co.uk/comment/letters/8069609/Osbornes-cuts-will-strengthen-Britains-economy-by-allowing-the-private-sector-to-generate-more-jobs.html

Those who live by the stunt…

1. Margin4Error

Spot on.

“Coffee chain Starbucks has already taken a big hit on its reputation by avoiding tax in the UK,”

That’s an interesting claim really. FT Alphaville has been rootling through the accounts.

And when you add back in the royalties going to Holland, the interest going to the US parent company and the 20% margin on the coffee to Switzerland, (those being the alleged tax dodges) then Starbucks UK *still* doesn’t make a profit. So no corporation tax is due.

This is another one of those UKUncut mistakes I fear. Oh, I agree, lovely campaigning. But the actual details of the case show that there’s not actually been any tax dodging.

@ Tim W

But the actual details of the case show that there’s not actually been any tax dodging.

No point whispering facts to a lynch mob- they can’t hear you.

They don’t want to.

It’s interesting that, when they give you a tax rebate, HMRC allow you the option to donate the funds to charity but there is no option to return it to HMRC.

You might have thought, with the massive number of people and companies clamouring for the opportunity to pay more tax than is actually being demanded from them, that this would have been amended by now?

Maybe they just expect you to tear up the rebate cheques.

Tim is misquoting the FT piece. They found that if you add in the royalties, the margin *and* the interest, then Starbucks UK is profitable. Which you might expect, as the FT notes, from the shareholder briefings where Starbucks told shareholders that under UK tax law Starbucks UK was profitable.

Costa’s PR here is extremely funny, but could backfire – the Uncut link above is a great example; more generally, airlines try to avoid advertising based on safety, because there-but-for-grace-of-god. Whitbread now need to be whiter than, erm, white bread or they’re open to utter crucifixion.

(which – in terms of hippyliberal positioning – was the rod Starbucks originally made for themselves. What go round come round, as they say)

Starbucks are doing nothing wrong. It is called “capitalism”. If they are doing something wrong, the law/rules need to be changed otherwise all those non-highstreet-brandname companies we never head about will just keep on doing it over and over again.

Starbucks used US tax law, not UK tax law, to determine the UK unit’s profitability for the briefings in question.

Guess we should be fed up of tax avoiders like the Guardian, Margeret Hodge, Polly Toynbee and Richard Murphy as well then…?

….though I suspect many people already are fed up of this bunch of hypocrites.

JohnB. Nope, no misquoting:

http://ftalphaville.ft.com/2012/12/11/1304382/losing-for-tax-purposes-a-diagram/

“Unfortunately, we don’t know how much of the £319m cost of sales is down to the 20 per cent mark-up on coffee from Switzerland, so we can’t say whether Starbucks UK would actually pay tax if the mark-up went away, and the royalties weren’t paid to the Netherlands, and the interest was lower on the loan from the mothership.

So that’s a £33m loss less £26m of royalties less £2m of interest, which gets one to a figure of £5m… which is still a loss. Some of the mark-up from the Swiss bought coffee would have to go too to get the company near profitable in the UK.”

And we can try and work out what that 20% margin to Switzerland was as well. Coffee is, reasonably accurately, $1 a lb. You get 32 cups (apparently) out of a lb.

If all Starbucks sales were coffee at, say, £2 a cup? OK, not the right figures but close to being of the right magnitude at least.

200 million coffees a year, divide by 32, call it 6 million lbs of coffee. Or $6 million’s worth of coffee. A 20% margin on that (yes, please note, it’s a margin on the coffee beans, not a 20% cut out of total sales) is $1.2 million, or around £800k, £900k.

They’re still losing £4 million a year: no corporation tax is due.

What tax dodging?

Starbucks are doing nothing wrong. It is called “capitalism”.

Nor are UKUncut. It’s called “free market”.

If people were agitating for Starbucks staff to be carted off and shot, or for their assets to be retrospectively expropriated, then that would be wrong.

If people say “don’t buy coffee from Starbucks, because they (completely legally) don’t pay tax in a way that we don’t like and you might not either”, and then other people decide that this is a good reason to not buy coffee from Starbucks, then that’s all to the good.

If Starbucks think they’ll defuse this by giving the taxman a random quantity of money, then that’s all to the good too.

If right-wing people want to have a homophobes-on-Chick-Fil-A style Starbucksathon where they drink coffee until everyone gets overexcited, then that’s all to the good too.

Bitching out Starbucks for not paying as much tax as we’d like them to (irrespective of what they’re legally obliged to – that is completely irrelevant) is completely legitimate free market free speech. Pretending otherwise makes you the worst kind of corporate-fascist scumbag.

Tim: no, you’re way off on the pricing. The farm price in Kenya is $2 for a kilo of raw coffee cherries, so yup, a a dollar an lb is about right. But coffee that’s been imported and roasted wholesales for $15-20 a kilo, and that’s the figure on which the Swiss company’s margin when selling roasted beans to the UK company is based (presumably they pay some money to the Dutch company for roasting the beans on their behalf).

Oh John, please.

“But coffee that’s been imported and roasted wholesales for $15-20 a kilo,”

Don’t embarrass yourself so.

http://www.mysupermarket.co.uk/shelves/ground_coffee_in_sainsburys.html

The *retail* price of coffee in 100 gramme lots goes below £1 a kg.

Someone buying 6 million lbs a year is going to pay a lot less than that.

Dude, erm, don’t embarrass yourself. Those prices are per 100g. The most super-discount coffee sold in UK supermarkets is GBP10 ($15) a kilo.

I accept that’s lower than I’d suggested, but knowing supermarket pricing, the loss-leader aspects of super-discount brands, and the fact that Starbucks don’t go for the cheapest robusta occurring, I’m still far closer to the mark than you, and a GBP5/kg wholesale for roasted would still tip Starbucks well into the “profit” side of the envelope.

“The *retail* price of coffee in 100 gramme lots goes below £1 a kg.”

Sigh, yes, below £10 per kg. My typo.

But even if we say £5 per kg. We still don’t in fact get Starbucks into profit, do we? £2.08 a lb, 6 million lbs, £12 million quid, 20% margin, £2.4 million say?

So they’re *still* losing £2.6 million a year.

For 2011, the toughest year in ages for British retailers with excessively overpriced real estate, yes, absolutely. But not by a huge margin.

This seems to match the company’s take when talking to shareholders, again according to Alphaville – they admit that under sensible measurements, they made plenty of quids in 2007, and then are cagey about what happened since.

Whereas they never made no money nohow, not even when it was good, according to the HMRC numbers.

Aside from enjoying pedantry, I really don’t care very much about this one. I’m sure Costa are no more moral than Starbucks, but if they’re going to use this in marketing then good luck to them; I’m sure anyone who picks a coffee chain over a local coffee shop due to ethics unless their local coffee shop is actually run by the KKK is a very silly person.

But I do enjoy the pedantry, and unlike abortion or marriage, at least this one doesn’t really matter.

17. Dave Jackson

@john_b I am not sure how Starbucks used US tax law to avoid UK tax … what you pay in the UK is not affected by US tax law.

AFAIK it is plain old ‘transfer pricing’. Their Luxembourg subsidiary charges the Uk subsidiary over the odds for its coffee. Thus Luxembourg makes loads of profit and pays its local corporation tax rate … and the UK office makes no profit and pays no tax. Tax avoided!

Dave, go and read the FT piece before you make stupid comments.

The FT confirms that Starbucks UK was classed as profitable under US accounting law in the years when the parent company told shareholders that Starbucks UK was profitable.

This is because US accounting law bars the kind of shenanigans regarding transfer and royalty payments that are being discussed here.

The fact that the parent company said publicly the UK business was profitable on these occasions is quite important, because it answers the question of “are these people tax-dodging bastards or shareholder-fleecing fraudsters”?

The answer is a, which is not libellous, helpfully.

19. Derek Hattons Tailor

Even assuming there can be such a thing as “ethical businesses” (the profit motive always requires exploiting something/someone) what were Starbucks’ ethics even before the tax scandal ?
I’m amazed at the number of otherwise intelligent, well informed people who seem to be fooled by some trendy décor, hip staff and a vague ethical mission into believing that Starbucks has ever been anything other than a multi national money-making machine. It’s difficult to believe that these people genuinely don’t know this, so I can only assume that some brands have such a strong normative power in some demo-graphs, that they are prepared to ignore it, which is utter hypocrisy.
However much tax they do/don’t pay, the reality is drinking Starbucks coffee is not, and never has been, any more ethical than eating a big mac. It’s just class hatred dressed in the clothes of the socially concerned middle class metropolitan plutocrat.

@17. It is basically transfer pricing but with Intellectual Property (the brand license)being used to re-patriate profits instead of physical goods. The EU made this loophole easier to exploit by allowing Plcs trading anywhere in Europe to incorporate in any EU state they liked, failing to realise we don’t (yet) have an EU wide corporation tax rate. Still I’m sure they only chose Luxemburg because they like the weather, and Ireland because they like the Guiness….

So if Starbucks don’t make money in the UK, but make tons of money in Holland, why do they keep their shops open in the UK? Surely it makes more sense to abandon the UK market to people who actually care about this Country, and throw everything they have at Holland? If they hate the UK so much, why don’t they fuck off to somewhere they like? Either that or they are lying through their blood sucking mouthparts.

21. Derek Hattons Tailor

They clearly are making money in the UK – I couldn’t find any segment report but the Starbucks corporation made an operating profit of $2.4BN in the past year. It’s difficult to see how none of that came from the UK, and if they really weren’t making any profit, they wouldn’t operate here. Realistically how can you fail to make money by charging £2+ for a cup of coffee flavoured milk froth at those sort of volumes ?
You make an interesting point though, every time people defend this sort of corporate behaviour on the grounds that we don’t want to scare off employers, you should ask why not. There is clearly a demand for the product so the free market says someone else – who pays tax – will emerge to meet it.

Pagar is right.
No one cares about the facts.
Only John has bothered to engage on them.
Though his point on tough 2011 would only be valid if their sales were down (were they?) since they would have had the expensive real estate from at least 2007/8 which is when values peaked.

Can someone please throw Pagar and Tyler down a flight of steps.

24. margin4error

Tim and John

Just thought I’d flag up that unless I’ve missed something in what has been reported, you have both gotten side-tracked about an irrelevent estimate of coffee prices.

Coffee markets have coffee selling at about 50 cents per kilo on the international market.

But that is not the cost of coffee buying. One would assume that some cost is invoked in signing legal contracts, in the process of trading, in the transport of the coffee and so on and so forth.

The price of the coffee itself is negligible compared to the possible costs of coffee trading.

And of course while we have seen reported that starbucks in the UK pays a premium to Starbucks’ Swisss coffee trading operation – we also don’t know what mark ups and fees the Swiss coffee trading operation pays to Starbucks headquarters for its legal backing, or for debt interest, and so on – which constitutes costs that the UK is then having to pay a mark up on when it deals with Switzerland.

The mark up is presumably paid on the Swiss firm’s costs. (Unless some one has said otherwise). And those costs will include highly paid traders, transport, legal functions, its payments to headquarters in the USA, scouting of coffee sources, its cost of servicing debts, its license to trade, its premises, and so on and so forth.

The UK could be paying a mark up of a few million or of fifty million in any given year. We don’t know.

However, it seems unlikely that Starbucks in the UK has run a pretty consistent loss for 14 years. More likely is that it is being used as a loss leader to generate profits for the trading company and the roasting company and for the branding company.

What’s interesting though, is that this is not a difficult problem for tax law to sort out. Anti-compeitive pricing is already illegal.


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