Vince Cable criticises Starbucks over ‘tax dodging’

In the Guardian today, Vince Cable  says that he understands why people are boycotting Starbucks.

The business secretary, when asked by the Guardian if he would consider boycotting their products, said:

I don’t shop at Starbucks so this doesn’t apply to me, but I can fully understand why people would vote with their feet as a result of their tax dodging.

It seems that the company has paid tax only once in the 14 years that it has been operating in the UK.

The good news is that Starbucks has announced that, after public disquiet, it is reconsidering how it operates, which means that they may start paying corporation tax.

Danny AlexanderOn Sunday, Danny Alexander was interviewed on Radio 4:

I am delighted they are taking this issue seriously and they are listening to the feedback from their UK taxpaying customers. I might be able to buy a coffee from Starbucks again soon.

That was before it emerged that Starbucks is cutting benefits to staff and keeping pay below the Living Wage threshold, presumably to pay for it.

Readers might like to sign the Fairer Tax petition.

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13 Comments

  • mike cobley 4th Dec '12 - 12:44pm

    I’d much rather hear that tax law is going to be changed so that these transnational corporations – who seem to think of themselves as money empires floating above the rest of the human race (which they reach down to use or plunder as they see fit) – pay tax on the actual profits they make in the UK. No getout clauses, no loopholes, no trapdoors, no getoutoftaxfree cards, just get these crass pillagers to fork out the tax they owe us for allowing them to trade in our country. End of.

  • Starbucks arrangements are not that complicated.

    They operate a centralsed global buying division from Switzerland for their worldwide business. Coffee bought in from producers is marked up by 20% and net income after overheads on the puchasing operation in Switzerland is arouns 7-8%.

    Royalties for intellectual property are paid to Starbucks in Holland where they have a favourable undisclosed tax arrangement with the Dutch authorities.

    In the UK, Starbucks has invested heavily in the acqusition and development of prime property sites, reinvesting profits in expanding the business and taking advantage of enhanced capital allowances.

    They do not use, to any significant degree, small Island tax havens.

    The solutions is there. At least for the EU, US and other G7/G8 countries. A common consolidated corporation tax base (including common double taxation agreements) and a minimum floor for corporation tax in the EU of 15%. (as with VAT). This would alllow for income of all types, and chargeable gains, to be taxed in the same way. Companies tax rates may be higher or lower than average depending on the strength or weakness of their other competitive advantages.

  • Richard Dean 4th Dec '12 - 1:55pm

    One problem is that the “actual profits” Starbucks make in the UK is not a clearly defined number.

    No sensible politician in the UK is going to challenge the right of patent holders to charge patent fees, because the UK holds many international patents and aims to be at the forefront of new industries and so new patents. If, as Joe writes, Starbucks pays royalties in Holland, then royalty fees are properly chargeable to UK operations and they reduce the “actual profits” made in the UK.

    The problem is in the valuation of those fees. The Holland office can charge whatever it likes, and in particular it can charge just the right amount to make the “actual profits” in the UK exactly zero, hence allowing the UK company to legally pay no coorporation tax.

    Now you may say, like Cable, that this is a bad thing, but that is because you believe the royalty fees are too high. That is your belief, and your belief has no special validity in preference to anyone else’s belief. In particular it has no special preference in comparison to Starbuck’s belief. Because if it did, we would have a whole host of other people challenging all the international patents owned by UK companies and individuals who charge people and companies abroad for the right to use their international patents.

    I suppose this is why the way forward is likely to be through community action rather than government action. Joe’sdea of a continent wide tax regime is a long long way off, and ruffles quite a few sovereignty feathers. It also probably annoys the Dutch, who appear to be benefitting from the arrangements.

    So essentially Cable is suggesting we boycot Starbucks, but is saying it in a way that he thinks in his naive way won’t get him into truble. Will we do it? Well, who are we? We are the drinkers of Starbuck’s coffee, and actually we don’t want their prices to go up. Anyway you are, since I can’t afford it. Maybe you won’t after all, you rich people?.

  • Richard Dean 4th Dec '12 - 2:14pm

    The idea that “Companies tax rates may be higher or lower than average depending on the strength or weakness of their other competitive advantages” seems to suggest that governments should adjust tax rates in accordance with their assessment of a company’s comptetive strength or weakness. If this is what is being suggested, it is ludicrous..

    It represents a misunderstanding and attack on the concept of a free market. Different companies compete in a free market and the competetion makes for efficiency if it is not too cruel. To compete effectively you do many things differently from other firms, and the differences create the competitive advantages or disadvantages. Having government interfere with this is to effectively ban competition, and so acquire all the problems of inefficiency, waste, and quality failures that that entails.

    The idea is also totally impractical because it means that civil servants would somehow need to measure the strength or weakness of a company’s competitive advantage. Incompetence and corruption are likely to abound in such a measurement process!

  • Brenda Lana Smith R. af D. 4th Dec '12 - 2:27pm

    As one who benefitted as director and employee of Tax Exempt Offshore Companies on the receiving state of Bermuda… who am I to condemn anyone or legal entity legitimately profiting from their own or any sending state’s human-rights-friendly tax loopholes… ergo… it’s up to each tax jurisdiction to legislatively close offending tax loopholes…

  • Richard,

    Starbucks royalty payments were reduced from 6% to 4,2% by agreement with HMRC’s tranfer pricing division. These companies have to be able to justify business deductions on a commercial arms length basis, so it is not a complete free for all.

    I would not suggest that countries attempt to adjust tax rates in accordance with individual companies competitive strenghts. States, however, do compete on tax rates and Ireland, for example, has been able to use a low rate of 12.5% to effectively attract multinational companies to base their European HQ there, even though the Irish domestic market is a comparitively small one in Europe.

  • Richard Dean 4th Dec '12 - 3:43pm

    Joe,

    If what you write is correct, then why are we criticising Starbucks?

    The Swiss markup is not unreasonable, and some might even say low. The royality payments are agreeed with HMRC. The investment strategy seems good for the UK. The non-use of havens seems like something we can support.

    So what is actually the problem that Cable is complaining about? To make higher profits, Starbucks will need to charge higher prices, so is he complaining Starbucks’ customers are the ones who are tax dodgers?

    That would be his holiness himeslef perhaps?

  • Richard,

    this blog gives a pretty good round-up of the issuesTax avoidance, albeit from an independent publishers viewpoint.

    Vince Cable has called for internatoinal cooperation to reduce the opportunities that exist for tax arbitrage across different jurisdictions and has previously advocated restricting capital allowance deductions for larger companies to the depreciation charged in the accounts.

    There is also the issue of interest deductions versus no comparable deduction for equity financing that drives high gearing ratios that produce low ratios of domestic profit to turnover.

    Public interest in the issue will abate. It is for our legislators to take the matter seriously and undetake the necessary reforms to ensure there is a level playing field between multi-nationals and domestic companies with respect to their liability for business taxes.

  • Richard Dean 4th Dec '12 - 8:39pm

    Joe,

    Yes, but that blog does not explain why Starbucks is being criticised. It says that Starbucks had sales of 400 million last year. Corporation tax is on PROFIT is not on sales, so the INNUEDNO (should we call it a Mail-on-sunday-ism?) is that Starbucks made huge profits. BUT, it is perfectly possible for a company to have no profit on sales that big. Much bigger companies do it too, and some of them go bust as a result.

    “Reinvesting profits in expanding the business” is good practice as well as good for the country, and “taking advantage of enhanced capital allowances” is what capital allowances are designed for – designed into law by government, So I ask again, why are we being asked to criticize Starbucks’ tax stance? That stance does not appear to offend either morality or law.

    Sorting out the international competitive position is worth pushing at, yes, but it’s not likely to succeed anytime soon. This thing is some kind of flim-flam from George in preparation for his upcoming announcements, isn’t it?

  • Richard,

    I would agree thst international companies structuring their operations in a tax efficient manner is neither abusive or immoral. What is at issue is why we EU states and other developed countries compete with each other to offer so called ‘competitive tax regimes’. This makes no more sense than ‘beggar thy neighbour’ protectionism that is antithetical to the Liberal committment to free trade.

    Just as we provide for tariff free movement of goods within the EU, so to should we co-ordinate corporate tax and VAT policy to eliminate the loopholes that engender tax arbitrage across the Union.

  • Richard Dean 4th Dec '12 - 10:33pm

    Joe,
    According to the data you provided, Starbucks appear to be doing more or less the right thing on tax. Their tax bill is low because of a thing we want to encourage – investment. What right do politicians have to pillory such companies? And how will that kind of irresponsible behaviour by Ministers attract new investment into the UK?

  • > why are we criticising Starbucks?

    A very good question, particularly as their corporate structure seems to be very simple compared to some other multinationals.

    I suggest because the majority of people (including MP’s and journalists) don’t understand the difference between sales, turnover, operating profit etc. and like bankers bonus’s it is something politicians can get all puffed up about that is aligned with the uninformed view of the masses, when in fact there is little they can do. As we’re now seeing all the rabble rousing about bankers bonus’s has resulted in a marked reduction in bonus’s (success) but at the cost of lower tax receipts from those bonus payments…

    I’m a little surprised that we haven’t seen any of the companies being harassed by the MP’s voluntarily doing a full UK tax disclosure of their total payments to HMRC, thereby putting the Corporation tax element into context. I don’t see any real reason why they shouldn’t give out annual totals for VAT, PAYE and NI paid.

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