Mention Starbucks in the U.K., and many people think of lattes, Macchiatos — and tax dodging. The coffee giant has faced boycotts, protests and general animosity from the British public since reports emerged in 2012 that Starbucks was paying little to no taxes in the U.K., despite having hundreds of stores in the country.
There was nothing illegal being done, just the usual aggressive tax planning that's become standard for multinationals around the world. The company was under so much pressure that last year it promised to pay the government $16.8 million in 2013 and another $16.8 million this year, all voluntarily.
Now, Starbucks has made another move in its effort to shore up relations. On Wednesday, Starbucks announced that it was moving its European headquarters from Amsterdam to London, adding a "modest number of senior executives" to the operation in London. The company also promises that the move will mean it pays higher taxes in the U.K. (although it's not clear what baseline the company is using for that assertion).
So did the boycotts cause Starbucks to really change its behavior? And why do the British get so much angrier about corporations dodging taxes than Americans, who seem relatively docile about the whole issue?
On the first question, there are real business reasons — aside from public relations — for Starbucks to move its headquarters to London. The company counts the U.K. as its fastest-growing market in Europe. It also has more stores there than anywhere else in the region.
But tax experts also suspect that Starbucks could ultimately end up paying less in taxes, not more, by going to London. To understand, it helps to walk through briefly how Starbucks was saving so much money in taxes in the first place — a good example of how companies everywhere have learned to work the system.
A quick guide to multinational tax arbitrage
In short, Starbucks' U.K. subsidiary was able to substantially reduce its taxable income by regularly paying a royalty fee to the company's Amsterdam headquarters. The royalties covered use of the company's intellectual property — in this case, Starbucks' brand and business techniques. Since the money was shifted to the company's Amsterdam unit, it faced a much lower rate of taxation relative to the U.K. (If you want more nitty gritty on this, you can't do better than Ed Kleinbard's paper, "Through a Latte, Darkly.")
Starbucks used a standard technique for companies with a fair amount of IP. The classic examples are tech and pharmaceutical firms that frequently shift income to countries with extremely low tax rates like Bermuda, Ireland and Switzerland. Think of firms like Google, Apple and Microsoft.
What does the move to London mean for Starbucks' tax planning? With headquarters no longer in Amsterdam, the company would likely no longer be shifting its U.K. income out of the country any more through royalty payments. So, in that way, the company's taxes would likely rise.
But there are other ways for Starbucks to reduce its overall tax bill in Europe. Oddly enough, even as British citizens have been howling at Starbucks' tax avoidance strategies, their government has added a slew of new ways for companies to lower their tax bills. This was seemingly an effort to make the country friendlier than ever to big businesses as a place to put their headquarters.
An introduction to the Patent Box
One of these new rules is called the Patent Box, which gives a special low tax rate to any royalty income received in the U.K., according to Kleinbard. The law is under review by the European Union, but if it holds up, it's not hard to imagine Starbucks' other units in Europe effectively shifting their royalty income to the U.K. to benefit from the low tax.
David Murphy, a British accountant and tax activist, says there's still another possibility. The new business-friendly tax policies pushed by George Osborne, the U.K.'s equivalent of U.S. Treasury Secretary Jack Lew, also allow companies to pay no taxes on dividends shared between different units within the same firm. Murphy imagines it's possible, as a result, for Starbucks to turn royalty income from other European units into dividends that could be passed to the U.K. subsidiary, entirely untaxed.
Both Kleinbard and Murphy caution that they're only speculating. There's no telling why exactly Starbucks is making the move to London: how much was driven by business strategy, public relations, or tax planning. The fundamental problem is that corporate taxes have become so opaque that it's nearly impossible to understand from the outside why companies make basic decisions, for instance, on where to put their headquarters.
Sorry, but protests aren't really going to fix the problem
Regardless of what Starbucks ends up doing, it's unlikely the move will appease unhappy British consumers, many of whom became even angrier after the company offered to pay the U.K. more money after the scandal broke.
"Politically we are more sensitive about it," said Murphy over the phone from London, when asked why those in the U.K. get so much more riled up than Americans over corporate taxes.
The British are seeing cuts to some of their cherished social safety net programs as the government tries to encourage austerity, said Murphy. And so the sight of big multinationals finding complex ways to lower their tax bills is particularly galling to many citizens. And politicians have picked up on the rage.
"It's become very easy for politicians to say, 'Look at these big nasty multinational companies. They aren't paying any taxes. You're suffering cuts. They're not,' " Murphy said.
Starbucks is also easy to boycott since there are plenty of alternatives to the U.S. brand in the U.K., said Murphy. The biggest coffee chain in the U.K. is Costa Coffee, and there are mom-and-pop coffee shops everywhere.
Murphy also noted that other companies are harder to create campaigns against. "How do you avoid Google?" said Murphy. "What are you going to use? Bing? Microsoft is no better in terms of avoiding taxes."
Partly inspired by the Starbucks movement in the U.K., an American writer said in Slate this week that she's avoiding Apple products because of the company's aggressive tax planning. "Perhaps you will say that’s not much; maybe so, but it’s a small thing I can do," writes Lisa Sanders. "And perhaps I can recruit others to my cause."
The truth is that while a protest here and there raises awareness, the issue of corporate tax avoidance is widespread enough that it will likely take a number of countries tackling it together to make any headway. The most promising signs have come lately not from London, but Paris, where the Organisation for Economic Co-operation and Development (OECD) has started proposing aggressive ways to deal with the issue.
The story of Starbucks shows that even if there are protests, and the company coughs up some extra money to smooth things over, countries like the U.K. that are desperate to attract business will perpetually create ways for companies to lower their tax bills. And firms will inevitably keep taking advantage.