For Starbucks in Britain, a skinny tax bill?

LONDON — The Great British Boycott of Starbucks had nothing to do with whole milk in the skinny lattes or ice chunks in the mocha Frappuccinos. Instead, in a country where the use of creative accounting by U.S. corporations has enraged the public, the Seattle-based American icon was allegedly paying single-shot taxes on Venti-size sales.

Across Europe, austerity-driven cuts during hard economic times are shedding light on a culture of tax evasion by the rich. Nearly broke Greece is gripped by a drama over a mysterious data stick purported to hold the names of more than 2,000 well-off locals with secret Swiss bank accounts. Italian financial authorities, meanwhile, have launched a hunt for Ferrari owners who declared Kia-level incomes.

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But here in Britain, the tax furor has gone corporate, with politicians, the media and the public savaging foreign companies — mostly American — that ring up big British sales while using internationally negotiated tax standards to legally minimize what they pay back in local corporate tax.

Rising British wrath has led to a two-month-old national boycott of Starbucks for allegedly diverting profits to lower its taxable income, with the call to avoid the company’s coffee shops promoted even by leading lawmakers and top government officials. Under intense pressure, Starbucks — though it denies dodging taxes — announced a major deal with the British government Thursday to overhaul its tax policy here, forgoing legal loopholes and agreeing to pay millions more in corporate taxes over the next two years.

The debate here could propel the issue of how and where corporate taxes are paid toward the top of the international agenda. Along with the Germans, the Conservative-led British government — which takes over the presidency of the Group of Eight leading world economies next year — launched a push last month for far tougher tax standards on global companies, with the first draft of an action plan set to be presented at a meeting of the world’s 20 leading economies in February.

In the United States, corporate taxes have been heatedly discussed amid the looming fiscal cliff and a more sweeping overall of U.S. tax codes planned for next year. With U.S. multinationals holding an estimated $1.7 trillion in earnings abroad to avoid the relatively high U.S. corporate tax rate of 35 percent, calls are growing to effectively mirror at least some of what Britain has set out to do: lower legal rates, while cracking down on ploys used by companies to avoid paying corporate tax.

On Wednesday, the British government announced a $123 million boost in funding for Her Majesty’s Revenue & Customs service that would, among other things, mean more personnel scouring corporate tax filings in search of fudges and fraud. Even as the government is moving to slash the corporate tax rate to encourage honest reporting, calls are growing to “name and shame” foreign companies seen as tax code manipulators.

“We want these large multinational companies to pay proper taxes here in the U.K.,” Prime Minister David Cameron said Wednesday on the floor of Parliament. He added that “some companies have been pursuing rather strange practices to pretend that their revenues” are lower in Britain than they really are.

Executives from Starbucks, Amazon.com and Google were hauled before a parliamentary committee here last month to face a grilling over allegedly “immoral” — though not illegal — ax practices after a series of exposés in the British press.

Multinationals — through a network of more than 3,000 international treaties — are granted a series of tools to avoid double taxation. But critics say the rise of increasingly complex income reporting and digital commerce has allowed companies to shift profits to lower tax jurisdictions.

Aided by a maze of deals with other company subsidiaries, Starbucks, for instance, has paid only $13.76 million in British corporate taxes on nearly $5 billion in British sales since 1998. During those years, the company has transferred as much as 6 percent of its annual revenues in Britain to a Starbucks subsidiary in the Netherlands — where it had reached a preferential tax deal — in exchange for brand rights and marketing.

Employing similar methods, Amazon and Google last year paid corporate tax on only a tiny fraction of their British sales — $2.56 million and $9.6 million respectively, according to the committee report.

Outraged coffee drinkers here launched a highly public boycott against the most visible of the three: Starbucks. Despite the deal struck Thursday, an activist consumer group — UK Uncut — has called for a takeover this weekend of at least 34 Starbucks branches across Britain, turning them into mock homeless shelters to highlight corporate tax avoidance.

“Offering to pay some tax if and when it suits you doesn’t stop you being a tax dodger,” said Hannah Pearce, a spokeswoman for the group.

Just as in the United States, the British view large U.S. chains like Starbucks through the prism of personal taste, with some consumers long choosing to avoid industrial-style coffee assembly lines in favor of mom and pop shops. But in a nation that harbors a complex relationship with their American cousins — at times seeming superior, at others downright worshipful — retail experts call the company’s “Americanness” something of a plus, with its loyal consumers embracing the chain as the embodiment of widely held stereotypes of Americans as “friendly, warm and informal,” said Professor Jeremy Baker of the ESCP Europe Business School in London.

“We are pro-American,” Baker said. “That’s why Starbucks is insulting us in a way. It’s a shame because we’re completely on their side.”

A corporate cautionary tale

The problems for Starbucks in Britain offer a cautionary tale for companies seeking to maximize profits and minimize taxes in countries where tough austerity has made every penny count.

The company, according to the parliamentary report issued last week, said the driving reason for its low corporate tax payments has been poor financial results. It said it has posted a loss on its British operations in 14 of 15 years since launching here in 1998.

In addition to its branding deal with its subsidiary in the Netherlands, Starbucks Chief Financial Officer Troy Alstead said, the company’s British operation is paying a premium of more than 20 percent on coffee beans to its Amsterdam-based roasters, which in turn is buying from low-taxed traders in Switzerland.

“Charging a royalty payment for the right to use a global brand and for services provided is standard business practice for multinationals,” Alstead wrote in a recent blog post. “When marketing fees are included, our royalty rate compares quite favourably to other multi-national licensors.”

But British critics allege those deals were instead meant to artificially drive down profits at their London-based subsidiary, where corporate taxes stand at roughly 24 percent.

“Is it really legitimate to shift profits by charging your head office which you’ve located in a tax haven?” said Margaret Hodge, a member of Parliament who chairs the Public Accounts Committee and has joined boycotts of Starbucks and Amazon. “I say, no.”

‘Something strange’

The boycott apparently so impacted Starbucks’s British sales and corporate image — it now has 750 British locations — that this week it pledged to alter its policy, saying it would no longer claim a host of deductions including branding payments to its subsidiaries. As a result, the company estimated it would pay about $16 million in taxes in both 2013 and 2014, compared with no corporate tax paid in 2011.

“We’ve learned it is vital to listen closely to our customers — and that acting responsibly makes good business sense,” Kris Engskov, managing director of Starbucks UK, told the London Chamber of Commerce on Thursday.

Starbucks officials have declined to disclose how deeply the two-month-old boycott had cut into business. Speaking on the condition of anonymity because of the sensitivity of the issue, a representative of a major U.S. corporation operating in Britain described official criticisms as a “witch hunt,” adding that British multinationals operating overseas employ many of the same accounting tools.

Google and Amazon — which is also facing a $252 million back-tax claim from the French government — have both declined to revisit their practices, saying they are doing nothing wrong. But the revelations have infuriated smaller British competitors.

Carol Charlton, 68, owner the quaint CC’s Cake Shop in northwest London, for instance, opened three years ago, at the height of the global recession that started in the United States. Despite running a business in a tough economy and facing increasingly high taxes, Charlton says the shop has not been able to increase prices because “we can’t make our coffee more expensive than Starbucks.”

“We’ve always assumed there was something strange about the fact that Starbucks were able to maintain all these shops in London,” Charlton said. “I’m delighted that it’s come to light, and I hope they will start paying the full whack that everyone else has to pay.”

Eliza Mackintosh contributed to this report.

 
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