In the comments at Ritchie’s

by the same logic, Starbucks selling coffee beans to themselves at extortionate prices from a low tax jurisdiction (Switzerland iirc) isn’t tax avoidance. it might be legal, but it’s very obviously a rouse for avoiding tax. the right-wing seem to think that because HMRC are hopelessly inept at identifying and tackling tax avoidance, it doesn’t exist. they wish! because then all they would have to do is get the right people on side at HMRC and everything they do will be justifiable… oh wait a minute….

Isn’t it amazing how some people can get completely the wrong end of the stick?

As a detail, the margins on those coffee beans were 20%. And coffee is a very small part of the cost of a coffee chain (less than 5p a cup of coffee). So there ain’t much “tax avoidance” going on there. But more importantly, not to pay a margin over cost price on those beans would be illegal.

How are company subsidiaries supposed to deal with each other over tax jurisdiction boundaries? That’s right, they’re supposed to do deals at prices that reflect the prices that unrelated entities would do the same deals at. How many international coffee brokers do deals at zero margin? No, not zero profit, but zero margin over cost price?

None, right? So for Starbucks Switzerland to do zero margin over cost price deals for coffee beans with Starbucks UK would be a flagrant breach of those transfer pricing rules, wouldn’t it?

As I say, amazing how people manage to get the wrong end of the stick. They’re complaining, shouting about, something that they themselves would complain about if it didn’t happen. Insisting that some is tax avoiding when they’d be shouting about tax avoidance if they didn’t do it.

Mad as a box of frogs.

23 comments on “In the comments at Ritchie’s

  1. From the explanation above it seems to me that transfer pricing rules do two things:

    1. Helps protect native businesses from the economies of scale a big foreign competitor might have.

    2. Helps tax economic activity where it occurs.

    And Dickie is against this?

  2. If I recall from the PAC evidence, Troy Alstead, Global CFO of Starbucks said that the price for coffee beans paid by their subsidiaries was exactly the same as it was for unconnected franchisees.

    That is, the price of the coffee beans was exactly what an unconnected third party was willing to pay in reality, let alone a hypothetical unconnected third party.

    Not only is that within the letter of the law, it’s squarely within the “spirit of the law” too.

  3. That quoted comment is incomplete and probably in contravention of the Murphy comments policy.

    At minimum, there is no reference to Tories, neoliberal, global elite, Westminster bubble, global warming, Green Party and (a recent addition) counting irregularities/fraud in the Scottish referendum.

  4. “counting irregularities/fraud in the Scottish referendum”

    Oh god, don’t tell me it’s spread there as well. I shouldn’t be surprised. I overheard two people who should know better seriously discussing this today, so the loony-tunes at Ritchie’s will have lapped the conspiracies right up.

  5. How long before he claims the high rents Starbucks pays for their shops is them in conspiracy with landlords to reduce their tax?

  6. To be a pendant, Ben, the franchisees are not disinterested third parties, in most franchise F&B ops the franchisees are obliged to buy most if not all of their supplies from the brand supplier. This always applies to the core product (burgers and buns for McD, coffee for $tarbuck$). And we know what restricting competition among suppliers does to price. Or is there some magick by which restricting competition does not increase price when it isn’t conducive to one’s argument?

    Furthermore, the Swiss bean seller might only charge a 20% margin, but that’s on what they pay. If there is a further intermediary there is further scope for margin hiding.

    I really think both sides of this argument are wrong, but about different things. Murph hasn’t the first idea what he is talking about and contradicts his own arguments through ignorance, while Tim is defending practices that the OECD, G20, and the White House are trying to take down because they are transparently unfair to ordinary people who hand over half or more of their income to those clowns.

  7. “To be a pendant, Ben, the franchisees are not disinterested third parties, in most franchise F&B ops the franchisees are obliged to buy most if not all of their supplies from the brand supplier. This always applies to the core product (burgers and buns for McD, coffee for $tarbuck$). And we know what restricting competition among suppliers does to price. Or is there some magick by which restricting competition does not increase price when it isn’t conducive to one’s argument?”

    The question of whether franchising and buying all your supplies from McD’s is or isn’t a superior business model to running your own burger stand and buying your supplies on the open market is kind of beside the point. The issue is that McD’s can’t sell burgers to the independent franchises at 50p apiece and then turn around and sell the same burgers to the stores it owns at marginal cost – say, 40p apiece. Which is essentially what this guy is wanting Starbucks to do.

  8. Off topic, but the point about landlords got me thinking.

    If business rates were reduced (as some high street retailers seem to be asking), wouldn’t rents tend to rise? Eg if Starbucks are now prepared to pay £x for rent *plus* rates, wouldn’t their landlord jack the rent up to £x if the rates were zero?

  9. @Luke, it’s a similar argument to whether consumer prices would drop 20% if VAT were abolished tomorrow or whether the vatman is just taking the lion’s share of the actual value added. The answer is probably somewhere in the middle. High-street shopfront rents should be very low in most places at the moment, given that in your average British town the only non boarded-up shops are occupied by charities, poundland, Iceland, bookmakers, and fly-by-night pop-ups (that probably don’t pay the rent in any case).

  10. Surely, Richie contradicts himself. (this’ll be a first, of course)
    If Starbucks is selling itself coffee at above market price then Starbucks’ coffee houses are uncompetitive against other coffee houses buying coffee at market price. That they’re not going out of business indicates it’s the Starbucks brand draws the customers & compensates for the higher price. But Richie’s already told us the intellectual property of the name has no value.
    Colour me confused (with a dash of milk, please)

  11. “To be a pendant, Ben…”

    Pedant.

    Unless you’re into some kind of kinky jewellery-roleplay I haven’t come across. I’ve had a sheltered life.

  12. Oink, you’ve led a sheltered life and probably not read Tim’s blog for very long. Its something from the long and distant past of this blog. Look at the left in the categories for Pendantry to see that it is a recognised term on this blog.

  13. Or on the right under ‘vainglory’ – third in the list.

    Correcting someone for writing ‘pendantry’ seems to be a rite of passage around here.

  14. If 20% is an extortionate margin, what about the government taking margins of 30%, 40% and 50% out of the income of companies or individuals?

    The real crux of the matter is this notion of “paying one’s fair share of tax”. Most people believe that fair involves others paying more and them paying less. I certainly want to pay less, but do not want that to be achieved by others paying more, I want the government to spend much, much less than it does. But even if the government did spend less, there still would be debate about what constitutes a fair taxation system. If you ask a politician you’ll probably get nothing more detailed than: it’s a tax system in which the tax burden is fairly distributed.

  15. In my local free – paper was a letter, given the headline “No place for petty pedantry”. Yet in his letter the writer had actually referred to “moronic pedantry”.
    I put the editor right I can tell you!

  16. ukliberty,

    Thanks for that. Roughly as you’d expect. I think the capital value of EZ properties also tends to rise because of the tax relief.

  17. @ DocBud

    “Fair” has no useful meaning when it comes to tax.

    As you rightly imply: is that my definition of fair, or my neighbours, or that nice gentleman from the hippie commune.

    We live in a liberal democracy, and rule of law is what matters when it comes to paying “the right amount of tax”.

    And it is elected politicians who have the mandate to change the law. So when it’s those same imbeciles that then try to use emotive language such as “paying one’s fair share”…

  18. Bloke in Germany, I don’t think you were pendantic enough… 😉

    The franchisees are disinterested third parties when they decide whether to operate the franchise or not. And the price of coffee beans is fixed as part of that franchise arrangement. Coffee being a core product for a chain of coffee shops…

    At the point in time that they decide to agree to those terms, they aren’t subject to the monopoly you describe. That makes it an arms length price.

    Starbucks franchisees are indeed not allowed to use coffee beans other than Starbucks’. The 20% margin is set in the contract and the price can only vary with the price of green coffee beans, I believe.

    Sure, there are other ways they could screw their franchisees with the price of coffee beans but they’re still free to walk away from the entire arrangement if they want to.

    Given that a lot of them choose not to, you have to feel that the terms of the franchise are fairly commercial.

  19. BiG,

    > the franchisees are obliged to buy most if not all of their supplies from the brand supplier. This always applies to the core product (burgers and buns for McD, coffee for $tarbuck$). And we know what restricting competition among suppliers does to price.

    You’re using McDonald’s as an example of high prices?

  20. I’m not sure why there’s such surprise about sourcing coffee in Switzerland. It’s not like it’s one of their top consumer exports or anything…. oh wait… it is…..

  21. Indeed, abacab. IIRC, 75% of world coffee passes through Switzerland. For some reason, it has become a world centre for coffee dealing. As London has for wine and marine insurance etc. It has nothing to do with tax.

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