Tax Dodgers Database

Estimated Dodge: £150 million*

Starbucks is the world's leading coffeehouse, selling around 10 million cups of the stuff every day. It all began in Seattle back in 1971, with just one store. Fast-forward to 2013 and they're running over 20 thousand stores in 62 countries, 806 of which are in the United Kingdom. Their tax affairs came under attack last year, after a Reuters investigation revealed that they'd paid just £8.6 million of corporation tax in 15 years of UK operation - despite generating gigantic sales of £3 billion in the same period.

Starbucks

What the customers think

How they dodge

Of all the big multinational companies implicated in the recent public outcry against corporate tax avoidance, Starbucks were the ones who faced the most criticism. Which isn't surprising when you consider that they paid no tax in the UK at all between 2009 - 2011. Their UK subsidiary has consistently posted eyebrow raising losses in 14 of the 15 years it has been in operation. This is considered by many to be a sign that Starbucks are shielding their actual profits and as a result hiding their true taxable income.
Despite the heavy losses reported to the tax man, the message to the company's global investors has been rather different;

In 2007, Chief Operating Officer Martin Coles told analysts that profits from the UK were being used to pay for expansion in foreign markets. The same year Starbucks UK posted its tenth consecutive annual loss.
In 2008, Starbucks filed a loss of £26 million in the UK. Yet CEO and original founder Schultz told investors that the UK operation was so successful that he'd apply lessons learned within Blighty's shores to the corporation's biggest market; the United States. Cliff Burrows, the suit who oversaw this heavy loss was subsequently promoted to head up the US business.
In 2009, UK accounts showed that the company had reported a record loss of £52 million. Despite this record-breaking bungle, the company's Chief Financial Officer Troy Alstead assuredly informed investors that the UK business was "profitable".
In 2011, the company reported losses of £33 million to HMRC, with Alstead this time in apparently less chirpy spirits, groaning "We are not at all pleased about our financial performance (in the UK)". At the same time, John Culver, then head of Starbucks International, boasted that "We are very pleased with the performance in the UK".

It's incredible for a corporation of Starbucks' business acumen to allow a subsidiary company to consistently post such losses and then reward the employees who presided over them with promotions. Clearly, something's amiss here.

Activism

Starbucks have faced lots of opposition to their tax schemes, most notably that orchestrated by campaign group UK Uncut, who led a nationwide boycott against the company in December.

In numbers

There's three ways that Starbucks UK are able to post huge losses and yet still remain a viable business operation in the eyes of the Starbucks boardroom. And all of these are carefully planned tax avoidance tactics that utilise;

Transfer pricing
Intellectual property rights
Inter-company loans

Take a deep breath, this is where it gets complicated. Starbucks use a trading company in Switzerland and a coffee bean roasting facility in Holland to secretly divert their profits away from the UK. Starbucks Coffe Trading Co (Swiss unit) sell the beans that are roasted at Starbucks Manufacturing EMEA B.V. (Dutch unit) to the UK Starbucks. Most importantly, Starbucks UK pays for these beans at a premium rate (99% likely to be at a price inflated way above their true value) adding to their tax deductions (how much tax HMRC will remove from their bill due to mitigating circumstances) in the UK and adding to the Swiss-based Starbucks Coffee Trading Co's profits, which surprisingly enough, are taxed at a much lower rate than they would be in the UK. Starbucks' ace in the hole here is that Swiss laws don't ask companies to publish their business accounts, meaning that there is no evidence of how much money Starbucks Coffee Trading Co are raking in. It also makes it very difficult to gauge how much of the UK company's profits are being syphoned off.

Another dodging tactic employed by Starbucks is to force its UK company to pay large royalties on intellectual property to another Dutch subsidiary, the supposed European 'head office', Starbucks Coffee EMEA BV. Intellectual property entails non-physical assets, such as the Starbucks brand, logo and recipes. As these assets are exceedingly difficult to value in monetary terms (think of Mastercard's 'priceless' advert), it is difficult for HMRC to argue with Starbucks Amsterdam Unit charging high amounts to the UK company for use of them. Once the Amsterdam head office receives these royalties, it then pays them off to a variety of other Starbucks units, most damningly to yet another Swiss subsidiary, leaving HMRC out of pocket and unable to touch any of the tax that it should be receiving.

Reuters also uncovered a third way that Starbucks were able to mess with their balance sheets in the UK. Starbucks UK is wholly funded by loans from other Starbucks subsidiaries. These loans command excessively high interest rates (Libor plus 4%), meaning that around £2 million of Starbucks UK's pre-tax profits are payed to the other Starbucks creditors each year. This £2 million cannot be claimed by HMRC as any interest paid on company loans is tax deductible. There is little need for Starbucks UK to be funded in this way and the figures suggest that the corporation deliberately set up its UK unit like this to reduce its tax bill.

Starbucks recently announced that they would voluntarily pay £20 million to HMRC over 2013 and 2014 in an unprecedented tax arrangement. Whilst this is welcomed, many experts and politicians argue that it makes a mockery of the UK tax system, allowing powerful companies to pay what they like when they like. It looks likely that Starbucks are simply protecting their brand, rather than suddenly transforming into tax evangelists. We'll have to wait and see how their tax operations pan out post-2014.

Joe Lynam reports for the BBC on the mystery surrounding Starbucks' UK profits...

*Dodge estimated over 15 years of Starbucks operation, from Starbucks' own proposed "right" contributions for 2013 and 2014.

Infographic courtesy of The Metro