Starbucks Corp said it decided to move its European headquarters to the United Kingdom from the Netherlands following criticism over its low tax payments in Britain last year, The Times reported.
The world's largest coffee chain said the relocation was primarily to get closer to Britain, its biggest and fastest-growing market in Europe, the British daily reported, quoting Starbucks' president of Europe, the Middle East and Africa, Kris Engskov.
The obvious question is, why would Starbucks want to do that? Thankfully, there are some obvious answers, but not if you don't know little bit about the changes that George Osborne has made to the UK tax system since he came into office.
First, of course, is the fact that Osborne has cut the UK corporation tax rate from 28% to 21%: the UK now offers a lower tax rate than the Netherlands. Some journalists who have phoned me have presumed that this is the motive for Starbucks, but let me assure you, it is almost irrelevant.
The real reason, I'm sure, why Starbucks moving is because George Osborne has changed the UK from having a corporation tax system that charged UK-based companies to tax on their worldwide profits to one where he only charges UK companies to tax on the profits that they earn in this country. This is the so-called territorial basis for taxation. This has enormous advantage to a company like Starbucks. That is firstly because one of the major functions of its European head office is to route the royalties earned on the use of the Starbucks name from each operating country through to Starbucks in the USA. Because of the UK's new territorial tax system all the royalties now received in London from every country in Europe will now be entirely tax-free in the UK because of George Osborne's largesse. Although the Netherlands is generous with regard to its treatment of royalties for taxation purposes, nothing is as generous as to be not charging tax at all, and yet that is the offer that the UK now makes to any multinational company who wishes to use London as its headquarters location.
Second, we know that Starbucks' Netherlands operation had a forward pricing agreement with Switzerland with regard to the price paid for coffee. Recent evidence is that the UK is willing to sign similar such deals with companies that have a record of apparent tax avoidance. The Daily Mail recently highlighted the fact that Microsoft has signed such a deal to which the UK has acquiesced. I am fairly sure that however generous the deal the Netherlands offered to Starbucks was, similar arrangements will have now been agreed with HMRC to ensure that no more taxes paid here that it was Holland. All in all, that means it highly unlikely that any significant tax will be paid on the margins made on coffee sales in the UK.
So, why does Starbucks say that it might pay more tax in the UK? The obvious answer to that is that this relocation would seem to give rise to a tax charge in the UK on the profits previously paid as royalties to the Netherlands, but otherwise I think it unlikely that any additional tax to be paid. My guess is that the additional tax paid in the UK will be less than the overall tax paid to date in the Netherlands: I'm presuming that Starbucks are being nothing less than coldly rational about this move, whatever their PR hype says.
I'm also told by journalist that Starbucks has said that no more than 10 employees will be relocated to the UK as a consequence of this move: let's not celebrate any massive coup with regard to additional PAYE for the UK as a consequence of this relocation.
Instead this deal represents Osborne's deliberate achievement, about which most were sceptical when I had a few others said that it was his objective to turn the UK into a tax haven, which is exactly what he has done. Where once a multinational company would have had to locate in a place like the Netherlands and Switzerland, which deliberately exploited their small size to create a corporation tax system that had all the characteristics of an offshore haven, the UK now offers a system that is even more abusive in what otherwise appears to be a respectable trading location.
That, I am sure, is why Starbucks are moving to London.
And let's not celebrate this: what it represents is outright tax abuse promoted by George Osborne the benefit of multinational companies at cost to all the rest of us.
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I’m genuinely puzzled how something can be considered ‘tax avoidance’ or even ‘tax abuse’ if it is actively promoted by an elected government.
It seems you are just applying these concepts to anything you don’t like.
I have always said tax havens can abuse, even if they had elected governments
So therefore can the UK
Internationally this has always been accepted to be true e.g. by the OECD and EU
I am being entirely consistent and commenting within accepted international parameters
So what should Starbucks do to satisfy you? Stay where they are? Move to the UK? Pay £Xm to the treasury direct? What would their “fair tax” amount be? What do you want from them?
Starbucks routing royalties to the US is now tax avoidance, whereas Apple, Google, et al NOT routing royalties to the US is avoidance as well?
Small size of the Netherlands and Switzerland? 17th and 20th largest GDP makes them small?
Your post is full of “I guess”, “I think”, “I’m told”, “would seem” – nothing much concrete there then.
No – I quoted fact: Osborne has made the Uk a tax haven and companies are going to use that opportunity
I want Starbucks to pay tax in all countries where it makes profit
Isn’t that a reasonable desire? If not, why not?
Starbucks doesn’t make a profit in the UK – and analysis of the accounts by others has shown a few % payment around the group for use of name, coffee, etc makes little difference.
Starbucks are creating a thousand new jobs in the UK
They would only do that if they made money
As they told their shareholders they do
I’ll settle for their word on it, not yours
“I want Starbucks to pay tax in all countries where it makes profit ”
But your analysis of Starbucks UK seemed to be that you wanted them to pay UK tax when they weren’t making a profit too.
They do make a profit in the UK
They say so, to their shareholders
I believe them
Better call HMRC then if they are lying, details here:
http://search2.hmrc.gov.uk/kb5/hmrc/contactus/view.page?record=tRNNy6edopA
I think they already know
Starbuck’s not making a profit-shops close when that happens in real capitalism-unfortunately Starbucks seem to be open when I last looked.
That’s not necessarily true.
In the short/medium term companies can make losses because they’re setting themselves up for profits in the future. Amazon (when viewed globally) are a prominent example. Starbucks have spent a lot of money trying to establish themselves in the UK. They’ve not done particularly well at that. They have thrown money at securing the best shop locations etc, but they’ve not sold enough coffee to justify it. If they didn’t have the might of their global business behind them, and obviously determined to be successful in the UK, they’d have gone bust, but they’re still trying.
If you want a comparison then look at Tesco in the USA. They spent lots of money, over many years, trying to establish themselves over there. They’ve now given up, but not before losing ten years and a few billion quid.
Having said that, we do know that the Starbucks picture is muddied by the profits they make elsewhere in the group from charing their UK business for using the brand. Whether that should be allowed has been covered in great lengths elsewhere, but we do know that even if they weren’t doing those things, their UK business would still not be particularly successful.
The truth is, we Brits just aren’t all that impressed with what they’re selling, and their attempts to build a dominant position like they have in other countries have failed. Time will tell whether that changes, or whether they decide to scale back their ambitions.
They’ve been here for 15 years
That’s plenty long enough for them to work out this market generates positive cash flows for them, which is the only explanation for them continuing to invest in it
It’s either that or they’re seriously incompetent, and I doubt that
Yes, it’s a long time and I find it hard to believe that they don’t think their business here is worthwhile. Tesco spent ten years trying to make it an America though, and endured far greater (and undisputed) losses than Starbucks have here where they’re not all that far from breaking even by any measure.
Remember that Starbucks business does involve long term commitments on site leases which, absent someone willing to take them off their hands, they have to pay regardless of whether they keep the shop open. As property is their biggest cost, they’d often be doing the rational thing to keep a site open even if, when including the ‘sunk’ costs, it’s not doing very well. So bad property agreements signed up for in the earlier years (which were property boom years) will take time to wash through the numbers.
A site-by-site analysis of their profitability (coupled with when those sites were opened) would be an illuminating read (for an accountant), but even your desire for greater disclosure doesn’t go that far 😉
So I do agree with you, but the commercial reality is much more complex than Simon’s comment appeared to appreciate.
From my understanding, maybe I have had too much coffee, there will be more people employed in the Euro head office which at present is the UK office.
As for George causing all this I am sure there are more reasons to be based in the UK other than some small tax reasons. They seem to know their way around tax at present.
We don’t make enough widgets in the UK. We need more professional people employed. This is starting to happen, as today’s figures show. Now where is our new runway and lower APD.
Maybe 8 new people
Indeed, a Dutch newspaper reports that ‘in the next year and a half, presumably only a few European team leaders will move to London.’ Meaning that Starbucks operations in the Netherlands will not experience any other job losses.
Which may mean the Netherlands may sill play a role in tax structuring
Slightly batters your idea that companies don’t make location decisions on the basis of tax.
This is not a location decision
It makes no difference to the presence of a Starbuck shop, at all
This is purely a tax decision in which a tiny number of people are involved – fewer than 10 jobs
Why not deal in facts?
But – you’ve said that locating the Starbucks HO in the UK IS a tax decision. i.e. you say they will pay less tax by locating here.
Or have I misunderstood?
Overall they say it is maybe neutral
In think we can safely read that as there will be a saving
But let’s be clear – this is a case of substance and form – it is form and not substance that is changing and you deliberately miss that point
Richard, you seem to be picking up a lot of serious, if, from what I can tell, largely ill-informed challenge here now. That’s great. Testament to the fact that you are a voice that must be listened to. Keep it up.
It somewhat baffles me how people can instinctively side with companies that have a long and very well documented history of tax theft (forget the avoidance/evasion distinction – that’s a distraction in the grand scheme of things). How long does a pattern of behaviour need to be seen before the basic intent of companies like Starbucks to game the international system is taken as red? It’s a very simple equation – finance is global, governance is not, so companies can swap and switch their tax affairs to reduce the amount they contribute to any society. They are in the driving seat. Now, if people want unelected businessmen influencing tax policy to their advantage to the tune of $trillions globally, then they should say that and we can have a nice heated debate about governance rather than quibbling over individual cases after individual case. If not, and the idea of democratic governance still holds some water, we must get to the point where elected authorities are back in control. It’s a question of where power and authority lies, and each case of corporate tax avoidance is just a symptom, albeit a painful one for people who pay all their tax and see austerity imposed in a world where lack of cash is hardly the problem.
I am struck by this line:-
“Because of the UK’s new territorial tax system all the royalties now received in London from every country in Europe will now be entirely tax-free in the UK because of George Osborne’s largesse.”
This comes as news to me (the tax-free royalties point, I’m entirely aware of the more territorial tax rules!). Please could you point me to where I can verify this? I assume you are talking about more than just withholding taxes i.e. that royalties received in the UK escape corporation tax altogether. How so?
Note comments made to others: it is unlikely, I entirely agree, that this will be achieved solely by a UK structure, but put a UK structure holding another non UK structure into this arrangement and this outcome can be achieved, I am quite sure – and I find it very hard to think this is not the goal
If the IP rights for the brand are in the UK, then won’t income arising from them be UK income? Doesn’t this become the relevant territory?
I’m not challenging your interpretation. It’s all outside my area of knowledge. Bit if the IP is here, and the royalties paid to use it are sent here, then do Osborne’s rules really allow it to be untaxed? There’s no overseas branch or operation at play.. it’s a UK business licensing it’s brand around the common market. Under EU rules nobody else is allowed to tax it, so it would be peculiar if we had devised a system where by we excluded it entirely from the tax base (as opposed to just levying a low tax, like the Dutch do).
I am, I admit, presuming a multi company and multi state structure to exploit this environment but I really cannot see how it is not in play here
OK, Thanks.
It will be interesting to see how this pans out. I’m sure you’ll be one of many that keep a close eye on things.
Indeed
And I may be proved wrong
It has happened before
More likely will have just not guessed correctly uite how they will achieve their goal. But if so it will only mean I have failed to consider some other laxness Osborne has provided. His massive relaxation of CFC rules is another pitential factor I have not refered to, if course
Please advise of the relevant section in the UK tax code that exempts UK companies from tax on foreign royalty income. You can’t, because it doesn’t exist – s5 CTA 09 clearly states that a UK resident company is chargeable to corporation tax on all it’s profits wherever arising. UK companies are subject to tax on their worldwide profits. The only exceptions to this basic rule include exemption of foreign branch (not subsidiary!) profits, dividends and gains on disposal of substantial shareholdings – exceptions that the Netherlands and most territories have.
Oh come on – you know full well such structures can now be created
It is not admittedly a single company structure but of course such an outcome is entirely feasible when we have territorial taxation – and I have no doubt that this new structure will exploit that opportunity
You’re not seriously saying otherwise, are you?
Richard, please explain how a UK company that receives foreign income eg royalties from subsidiaries, sister companies or an unrelated third party will not pay UK tax, as your article above claims to be the case?
Of course, if that UK company had a foreign sub, which received that royalty income, then potentially there is no UK tax, subject to application of the UK CFC rules. However, you were not talking about this structure in your article above. You state that the UK operates a territorial basis of taxation and that UK companies are not taxable on their worldwide profits. As I said in my original comment this is not correct.
UK companies are taxable on worldwide profits, per s5, with the few exceptions I’ve listed above. It seems to me that you are simply conflating the exemption for foreign branch profits with a full territorial system. For clarity on what a territorial basis of tax is perhaps look to the tax systems of HK, Panama, Uruguay or Singapore. For clarity on how UK tax applies please refer to the UK tax code.
If you still maintain that you’re correct please walk me through how this works.
I have already addressed this issue in a blog this morning and why your assumption about what I wrote is wrong
We use the term company in very different ways
Attack of the neo-liberal apologist sock puppets. Top marks for patience, Richard.
For the sake iof eliminating doubt: it seems I should add two comments to the above
First, in case it is not clear I have told all journalists I have spoken to that I presume Starbucks will pay more tax in the UK because royalties from UK previously paid to Netherlands will now likely be subject to tax here
Second, when exploiting territorial tax I have assumed use if a multi-company structure so royalties reach UK in a non-taxable form e.g. as a dividend. I think it would he naive to assume otherwise – though many seem to be taking that view
If that was not clear I apologise
Without these assumptions the Starbucks claim that this will be tax neutral cannot, I think, be achieved so I cannot see how I can be far wrong saying this
Other ways of achieving that outcome can be suggested, of course
But the chance that Osborne’s territorial tax and the opprtunities it provides for effectively using the UK as a tax haven are I think key to this – and are a theme we will come back to time and again in the next few years