Case Study BUSI1311
The UK Starbucks tax scandal
(adopted from a Reuters 2012 article)
‘Starbucks’ coffee menu famously baffles some people. In Britain, it’s their accounts that are confusing. Starbucks has been telling investors the business was profitable, even as it consistently reported losses’ (Reuters 2012).
It is not uncommon for Multinationals (MNCs) to adopt legal tactics to avoid taxes and other business expenses. The Seattle-based group is the second-largest restaurant or cafe chain globally after McDonald’s. Accounts filed by its UK subsidiary show that since it opened in the UK in 1998 the company has racked up over 3 billion pounds ($4.8 billion) in coffee sales, and opened 735 outlets but paid only 8.6 million pounds in income taxes, largely due because the taxman disallowed some deductions.
Over the past three years, Starbucks has reported no profit, and paid no income tax, on sales of 1.2 billion pounds in the UK. McDonald’s, by comparison, had a tax bill of over 80 million pounds on 3.6 billion pounds of UK sales. Kentucky Fried Chicken, part of Yum Brands Inc., the no. 3 global restaurant or cafe chain by market capitalization, incurred taxes of 36 million pounds on 1.1 billion pounds in UK sales, according to the accounts of their UK units. Yet transcripts of investor and analyst calls over 12 years show Starbucks officials regularly talked about the UK business as “profitable”, said they were very pleased with it, or even cited it as an example to follow for operations back home in the United States.
Starbucks’ Chief Financial Officer and one of the company officials quoted in the transcripts of calls Reuters reviewed, defended his past comments, saying the company strictly follows international accounting rules and pays the appropriate level of tax in all the countries where it operates. A spokeswoman said by email that:
“We seek to be good taxpayers and to pay our fair share of taxes … We don’t write this tax code; we are obligated to comply with it. And we do.”
There is no suggestion Starbucks has broken any laws. Indeed, the group’s overall tax rate – including deferred taxes which may or may not be paid in the future – was 31 percent last year, much higher than the 18.5 percent average rate that campaign group Citizens for Tax Justice says large U.S. corporations paid in recent years. But on overseas income, Starbucks paid an average tax rate of 13 percent, one of the lowest in the consumer goods sector.
Starbucks’ CFO Alstead which version was accurate – Starbucks’ accounts for the UK taxman, or its comments to investors, he said: “The UK is very troubled, unfortunately. Historically it has performed a little bit better than it does now.” He did not explain why the UK business was so disappointing, but said Starbucks was “taking very aggressive actions” to improve its performance, including changing its cost structure.
On the other hand, politicians said Starbucks’ experience reflects broader problems in the UK system, which allows companies to pay less tax than they morally should. Tax campaigners say that failure is partly policy: successive governments have urged the tax authority to take a pro-business
stance. The UK is one of the few rich countries not to have general anti-avoidance legislation, which the government is preparing now.
Starbucks (2013) claims the following:
‘We’ve always believed that businesses can – and should – have a positive impact on the communities they serve.
So ever since we opened our first store in 1971, we’ve dedicated ourselves to earning the trust and respect of our customers, partners (employees) and neighbours. How? By being responsible and doing things that are good for the planet and each other’.
Your case study answer should cover the following themes/subheadings:
• a comparison of the contributions of the key business functions to the organisational changes: finance, marketing, operations and human resources
• the key stakeholders of the organisation, plotted on a power-interest grid
• the key issues in managing stakeholders
• a SWOT analysis for the organisation and an assessment of its prospects for the future
