I find there are 10 Starbucks coffee shops within an energetic walk of where I live. That’s quite a lot, since apparently they make not a jot out of having so many shops across the UK. Starbucks has been operating in the UK for 13 years, but apparently we’re a sadly unprofitable country, according to their CEO Howard Schultz, who says
“We don’t pay income tax because we are not making money there.”
Today (20th October 2012) hundreds of thousands marched in London, Glasgow, and Belfast for a future that works. Ed Miliband got up and argued the Tory case in Hyde Park, apparently feeling he should give David Cameron’s speech since Cameron himself wouldn’t be there.
I’m being sarcastic of course, but why must all of the main party leaders at Westminister be so sure that the problem of reflating a staggering economy can’t possibly be done by ensuring that freeloading companies like Starbucks are told “No, pay up” when they claim they are just opening coffee shops out of pure charity and kindness, since the wee souls apparently run at a loss across the UK?
Marchers setting out in Glasgow with the UNISON Kinneil Band
Miliband, Ed Byrne and George “Faredodger” Osborne and David Cameron: all agree that the way forward is to cut public spending – creating a stagnant economy and high unemployment. None of them seem to think that a future that worked would be one where when Starbucks claims that it runs at a loss in the UK for so many years, HMRC investigate and make them pay up.
- Short – In 2007, from April to end-September, Starbucks’ UK unit’s accounts showed its tenth consecutive annual loss. Sad, no?
- Biscotti Frappucino – In November 2007, two senior Starbucks executives, Martin Coles and Peter Bocian, told analysts on the fourth-quarter earnings call that the UK unit’s profits were funding Starbucks’ expansion in other overseas markets: that the UK made-a-loss unit was somehow also managing to have operating profit margins of almost 15% in 2007 – that is, a profit of almost £50 million.
- Tall – in 2008, Starbucks UK filed a £26 million loss in the UK. The generosity of the American coffee makers just slays me when you think they were here with coffee for us and losing money on every latte.
- Chocolate Cream Frappuccino – But 2008 was the year George “we don’t make money in the UK” Schultz promoted Cliff Burrows, head of Starbucks UK, to run Starbucks US, and declared business in the UK had been so successful the lessons learned in the UK should be applied across the United States.
- Grande – In 2009, Starbucks UK told the Inland Revenue that it had made a record loss of 52 million pounds between April and September.
- Crunch Berry Frappuccino – But in 2009, Troy Alstead, Starbucks’ Chief Financial Officer, told would-be investors over the phone that the UK unit was “profitable.”
- Venti – in 2010, though Starbucks claimed to investors that UK sales continued to grow, the Inland Revenue were told that there was a £34m loss: between April and September 2011 Starbucks UK showed HMRC a £33M loss.
- Zebra Mocha – But the President of Starbucks’ International division, John Culver, claimed to analysts that “we are very pleased with the performance in the UK.”
This is from an investigation carried out by Reuters. Reuters asked Troy Alstead, Starbucks’ CFO, which version was actually true – the openly-sized and consistent losses or the secret menu of profit, he said:
“The UK is very troubled, unfortunately. Historically it has performed a little bit better than it does now.”
He did not explain why the UK business was so disappointing, but said Starbucks was “taking very aggressive actions” to improve its performance, including changing its cost structure.
So, for 13 years Starbucks have been kindly – ever so kindly – selling us complicated coffee and comfy chairs to sit in while we drink it, entirely at a loss?
Well, not quite. Starbucks UK is entirely funded by debt. That’s the choice of their parent company, who set the interest rate at which Starbucks UK repays its loans to Starbucks elsewhere.
Such loans bring a double tax benefit to multinationals: the borrower can set any interest paid against taxable income, and the creditor can be based in a place that doesn’t tax interest.
Starbucks hardly cuts its UK subsidiary a good deal. Its group bonds carry a coupon of Libor plus 1.3 percent. Libor, the London Inter-Bank Offered Rate, is an international interest rate benchmark frequently used in commercial lending. Starbucks charges its UK unit interest at Libor plus 4 percentage points. For comparison, KFC charges its subsidiaries around Libor plus 2 percentage points and the UK units of McDonald’s pay affiliates interest at or below the Libor rate.
All of the Starbucks “image” – the logo, the silly names for size of coffee cup and type of drink, so on and so forth – is Starbucks intellectual property, and Starbucks UK must pay a royalty to its parent company (which just happens to be in Switzerland, oddly enough) for the privilege of using it. Also, Starbucks UK are required to buy all of their coffee beans from a specific Starbucks-owned outlet – also in Switzerland – that can charge Starbucks UK whatever they like.
Curiously enough, the interest on that debt – fixed by Starbucks, paid to Starbucks; the intellectual property royalties – fixed by Starbucks, paid to Starbucks; and the cost of coffee beans – fixed by Starbucks, bought from Starbucks – all of it wipes out every penny of profit that Starbucks UK makes, and means that Starbucks UK doesn’t owe the Inland Revenue a thing.
Howard Schultz isn’t worried about Starbucks being investigated. Everything that Starbucks has done to avoid paying their share of tax in the UK is totally legal. That’s how it works when you’re a multinational and can afford to hire the best and most creative tax lawyers and have Blairite Labour and the Conservative Party on your side against the small independent coffee shops.
And there are serious questions to be raised at this level [tax policy making], targeted most heavily at the current government. The last Labour government made a policy mistake by excluding the dividends received by UK companies from their overseas subsidiaries from tax, which at a stroke made the use of tax havens much more attractive. But this government has exacerbated that, considerably. It has made clear that almost no questions will now be asked about the use of tax havens by multinational companies by virtually abandoning the UK’s controlled foreign company rules and it has actively encouraged multinational companies in the UK to move their treasury functions out of the UK and into tax havens. At the same time it has made sure that the barriers to smaller companies doing this remain in place. The charge that can be levelled against this government is then that it has deliberately widened this gap between large and small companies and national and multinational companies so that the small and nationally based companies are always penalised. They’ve even shifted corporate tax rates for large companies to ensure that this is the case too.
Questions remain to be asked about why the Inland Revenue failed to investigate this astonishing 13-year run of total loss, and why Starbucks thinks it’s somehow magically entitled to operate in the UK, benefiting from UK public services, while declining like anything to pay their share towards the cost of those services.
Starbucks may be an unusually crass example of a multinational company that thinks itself entitled to take our money and use our services
but not pay for what it uses (even McDonalds and Subway, not your usual examples of an ethical corporations, pay more tax on their profits in the UK than Starbucks does).
But in the meantime: if Starbucks won’t pay their taxes and claims it’s because they’re operating in the UK out of purest charity to this “troubled” nation, well, thanks so much, guys, don’t let the door hit you on the way out: shut down your coffee shops and you can stop losing money here. Win.