Tall Tales about Starbucks

After being grilled by the MPs on the Public Accounts Committee (PAC) alongside Amazon and Google for paying little or no corporation tax in the UK, Starbucks has announced that it will pay £20m in corporation tax over the next two years.

Had it hoped to head off planned customer boycotts and bad publicity, Starbucks would be rather disappointed this morning with the reaction to this move. Instead of calming things down, it has had a Professor of Accounting at Essex University, Prem Sikka, say on Radio 4’s Today programme, that it is terrible that a company can be allowed to get away with deciding what tax it will pay rather than paying what it ought to.

However, despite the Professor’s professional expertise, he seems to have conveniently forgotten that in fact, Starbucks appears to have been paying exactly what it was obliged to pay in corporation tax these years past. It just seems “wrong” that that meant it did not owe any tax. Which is why other less expert commentators, like members of the PAC itself, have bemoaned the fact that apparently no tax was owed despite turnover over three years of £3bn. Even though corporation tax is levied on profit rather than turnover.

The mechanism by which Starbucks will pay £20m appears to be not by some whim of its own* but by declining to claim reliefs which it is entitled by law to claim. These seem to relate to royalty payments it makes to its Dutch business for use of branding and payments for coffee to its Swiss business.

A lot has been said about these payments being “dodges”. However, I’m not sure that this is entirely fair. After all, if you think about it, what is it that Starbucks Corporation actually has that is distinctive? It isn’t the running of coffee shops – lots do that.

What Starbucks has and has spent years building, is a brand. That brand consists of logos and design standards for the way its shops should look, the way the different coffee recipes should be mixed, the annoying policy of calling customers by their first name and so on. That is intellectual property (IP) and so needs to be owned and managed by somebody. It clearly has a value, otherwise Starbucks would not be able to find hundreds of small-scale business people who will pay for a franchise nor would it bother using it.

Regardless of tax rules and rates in different countries, it would make sense for that brand to be owned and licensed out by a single company if possible so that it could be managed consistently and efficiently rather than needing duplicate teams of licensing specialists in every country. When choosing the location of that brand licensing business, Starbucks would need to consider the availability of suitable staff, the strength of legal protection of IP and other reasonable factors. The tax treatment of IP licensing revenue would be one of those factors, but not necessarily determinative. It is quite possible that Somalia has zero tax on IP licensing revenue but it wouldn’t be an attractive location for any business to site its IP management company or indeed pretty much any other function. As soon as there is a centralised location for this sort of function, a lot of countries will lose out on the business done by Starbucks in licensing its brand.

Similarly, even though I think that Starbucks’ coffee is rather too close to dishwater, it and its customers clearly disagree. Centralised procurement of the buying and roasting of coffee beans to reach that perfectly anodyne state of tasting “really Starbucks” makes sense in preventing duplication and maintaining consistency.

Of course, one might argue that Starbucks shouldn’t get tax advantages from these normal business decisions but that is pretty unavoidable in a world where different countries levy different rates of tax. Maybe there is an argument for harmonised taxation globally or regionally, but that isn’t what we have and it isn’t consistent with the idea of taxes being set by governments at a rate that allows them to raise the money they need to do the things their people require of them. Switzerland, the Netherlands and the other major European bugbears, Luxembourg and Ireland, are countries with low rates of corporate taxation but all also have quite high levels of social provision and welfare. Raising their tax rates so that they did not offer any advantage would mean taking away their people and government’s decision-making about how they wanted to arrange their finances.

The alternative of lowering ours is treated with horror, but, if the reason Starbucks doesn’t have its central purchasing and branding businesses in the UK is that taxes are lower elsewhere, wouldn’t it be good to get them to pay more tax here naturally and in the course of running their business? Maybe those dastardly countries with comparable welfare state generosity but low levels of corporate taxation have got their priorities right! Moralising about how much Starbucks “ought” to pay here and presumably making NetherlandsUncut campaigners go livid at the loss of revenue to the Dutch Exchequer doesn’t really make a lot more sense.

HMRC should go after tax evaders who illegally evade the tax rules and “bad” tax avoiders – those who use legal means in ways which were unintended by Parliament in order to minimise their tax liabilities. The Treasury should carry on working to minimise the scope for reliefs and allowances to be used in ways which it did not intend. But, nothing very much is gained by urging HMRC to be allowed to moralise in its tax calculations and to take “what seems to be right” when businesses are avoiding tax using mechanisms in precisely the way that they were intended to operate and for precisely those purposes.

* The only element of whim comes from Starbucks stating that it will pay this amount even if it doesn’t make a profit even after excluding the transactions which enable it currently to claim certain reliefs so that no tax would be due at all.