The real Starbucks accounts story

Here.

And as HMRC says:

In broad terms, companies are required to pay corporation tax in the country where they carry on the economic activity that generates their profits, not where their customers are located. Many elements contribute to a multinational business’s economic activities including: sales, employees, technology, physical assets and intellectual property. Tax rules need to establish how much of a business’s overall activities should be treated as ‘belonging’ in a particular country. This is different from VAT, which normally depends on the location of the customer.

Oh, and would it surprise you to find out that Ritchie helped with the Reuters investigation?

22 thoughts on “The real Starbucks accounts story”

  1. Yes. In this case, Starbucks has very little in the Netherlands (IIRC a fair few outlets in touristy parts of the Dam, but not much luck in selling swill to the Cloggies), a big shiny HQ in the UK where the European CEO’s main office is, and pays a franchise royalty that’s 1.5x that charged by its competitors for a business that didn’t exist in Europe until the UK unit was set up.

    The vast majority of the economic activity here is in the UK. Some (the basic IP – coffee names, graphic design, and so on – rather than the branding created by the UK business’s marketing spending) will be in the US. None is anywhere else.

    So yes, it would indeed surprise me to learn that Ritchie was involved with the investigation, because unlike most of his work, it’s been done extremely well and has got Starbucks bang to rights (he’s not credited or quoted in the piece, which would be unusual practice for Reuters).

    Also, the PwC partner’s quote is key here – if the unit never makes a profit, then the royalty agreement is unlikely to be judged as arms’ length….

  2. Meanwhile, in a boardroom at BT after a small coup in the finance department, the newly installed finance director makes his report…
    MD: “Well, Murphy, let’s have a butcher’s at the latest accounts then.”
    “I have,” said RM (for it is he), “some good news and some bad news. In the first quarter we made £500 million pounds profit. The bad news is that we paid £5 billion pounds in taxes.”
    MD: “WTF! How is that possible?!”
    RM: “I paid a bit of corporation tax in every country we do business in.”
    MD: “Why FFS?!”
    RM: “To keep certain people happy.”
    MD: “Oh, crooked governments eh?”
    RM: “No, the governments are a bit upset really, they can see that at this rate we go bust in Q3 and they lose all the employment, all the payroll taxes and VAT that we contribute to their economy.”
    MD: “So who are we keeping happy?”
    RM “Err, Rickard Murphmeister in Germany, Ricard Murphee in France, Ricardio Murphioso in Italy….

  3. I’d have thought logistics was the main economic activity of Starbucks, i.e. getting the product from the tropics to British streets. Is this organised and managed from the UK?

  4. Perhaps RM should try starting up a coffee shop of his own brand next to a Starbucks, and see how his sales compare with those of the global brand shop next door, and then decide whether paying handsomely for the use of that brand is a good idea or not.

  5. I’d have thought logistics was the main economic activity of Starbucks

    No, raw materials costs are barely a few % of revenue. Think of relative beer prices pub/Tesco. Starbucks would still make an operating profit if it sent out the new kid every morning to buy grounds at Tesco.

    Perhaps RM should try starting up a coffee shop of his own brand next to a Starbucks, and see how his sales compare with those of the global brand shop next door

    Not quite.

    There’s no noticeable difference in margins or brand equity between the national brand, Costa, and the global brand, Starbucks.

    Most people who drink coffee in the UK are Brits who’ve only ever lived in the UK; while they watch American films and TV, they do so on British channels and in British cinemas. The vast majority of work in establishing Starbucks as a brand in the UK was done in the UK, not by the fact that there are also Starbucks from Alaska to Zagreb.

    That investment in establishing brand equity was made by Starbucks UK and was registered as an operating loss, just as it would be for any startup business. It wasn’t made by Starbucks Inc and then paid for by Starbucks UK, as would be the case for RM as putative franchisee in your example.

    This is the most crucial point here – the company has ascribed its marketing expenses to startup losses on the UK business, but has ascribed the value of the brand those expenses built to the Dutch business that ‘owns the IP’.

  6. No, raw materials costs are barely a few % of revenue.,

    I’m talking about the cost of the logistics – e.g. organisation, procurement, storage, customs clearance, certification, transport, etc. – not the payment for the raw materials. I’d not be surprised if Starbuck’s operation is more one of logistics than coffee selling; I’ve long suspected this about MacDonald’s, who never set up in Russian cities with crap logistics arrangements (i.e. on an island, crooked customs officials, bad roads, etc.). Certainly size wasn’t the driving factor.

  7. John b

    “This is the most crucial point here – the company has ascribed its marketing expenses to startup losses on the UK business, but has ascribed the value of the brand those expenses built to the Dutch business that ‘owns the IP’.”

    Interesting that you in the other thread claim that there are very limited start-up costs to a coffee chain whereas you here claim that they are substantial…

  8. Johnb: presumably you can’t market something you don’t have the right to use. Starbucks UK can’t just start using the the Starbucks name in the UK without the say so of the parent company. The actual costs of making the Starbucks name well known in the UK are of course attributable to the Uk operation, why wouldn’t they be? But they still have to pay for the right to use the name in the first place.

    Otherwise I think I’ll start a UK chain of restaurants called Taco Bell. But I won’t pay the US company a penny in copyright. After all why should I pay a US company for the right to the name of something I’m going to have to market here in the UK from scratch?

  9. “Otherwise I think I’ll start a UK chain of restaurants called Taco Bell. But I won’t pay the US company a penny in copyright.”

    Good luck, they’ve been registering their trademarks actively in the UK despite not trading there 😉

  10. From memory Starbucks bought a British chain, The Seattle Coffee Shop (?) as the basis of its UK operation, so I agree with John B that the global Starbucks brand has little to do with its UK success. The coffee shops in Fraser and Friends were probably more important.

  11. Luke, that’s interesting because John B elsewhere claimed that there was no investment required in setting up Starbucks so that depreciation and capex should be off-setting each other. Now there is not only marketing start-up investment but also the investment into buying an existing chain. No doubt some of this (not goodwill but the material assets acquired) will have to be amortised over time. Ergo, capex is very likely to be significantly lower than depreciation in the last couple of years which again means that cash flow is very different from net profit…

  12. Fred>

    If I remember rightly there are a few Taco Bells over here. According to their website, three in various shopping centres, but there are also quite a few on US airbases in this country – which is the only place I’ve ever eaten a TB.

  13. First Vodafone, then Amazon, now Starbucks. I see a pattern here.

    Go after multinationals and complain and whine that the poor UK is not getting it’s fair share of the tax it needs to pay to all the scoungers who need it to keep them in the lifestyle they have been accustomed to. Ignore all facts and proper accountancy procedures even though you are an accountant because the ends justify the means. Being a Christian is just a bonus because you can then hide behind your religion just like Muslims hide behind their religion to get away with murder.

    Have I just slagged off an innumerate accountant? 🙂

  14. tory boys never grow up

    I wonder how the US tax authorities would consider a royalty payment equal to 6% of revenues paid to a Dutch entity for a brand held by a UK company. The GlaxoSmithKline case suggests that they would have a somewhat tougher line than HMRC and the UK Government . I think in that case the IRS were able to argue that most of the brand was actually developed in the US because that was where the marketing was carried out – though of course HMRC are probaly not creative enough or too short staffed to apply that argument to Starbucks UK – or alternatively they might want to disallow all of Starbuck UK’s marketing spend on the grounds that most of it is being used to develop a brand that is held offshore.

    Personally I have always felt that their coffee is vile and way overpriced.!

  15. Hmm… plenty of brands held offshore. Doesn’t prevent them being marketed here. How else can you trade here except marketing rigged for the particular market? Besides the different prices.

  16. It seems to me that if what Starbucks UK is paying for branding rights causes it persistently to operate at a loss, then by definition the branding rights are not worth that much. So Starbucks is indeed manipulating the numbers to avoid UK corporation tax.

    Perhaps the right inference from this is that we can’t in practice extract corporation tax from global corporations, so we should abolish it, or at least reduce it to a few percent. Or perhaps we should just try harder to prevent this sort of manipulation.

  17. Jim: yes, hence why I’ve repeatedly made the point that the value created by Starbucks in the US is non-zero but far less than the UK company is paying.

    Emil: the SCC acquisition was *14 years ago*. I’ve always been happy with the concept that Starbucks UK made no money in 2000, maybe even 2005, and that during its aggressive expansion there’d be a divergence between cashflow and P&L. But it’s now 2012, and none of the things you’re saying have any relevance at all.

    Tory Boys: good call on IRS vs GSK (case written up here). Exactly what we’re talking about here. It’d be interesting to see how Diageo squares things with the US taxman, from memory it holds its brand rights for Smirnoff, Gordons etc in Netherlands companies.

    Paul: yup, exactly that.

  18. John B

    “during its aggressive expansion there’d be a divergence between cashflow and P&L.”

    You really don’t understand the difference between net profit and cash flow do you?

    The point is that:
    – during a growth phase with heavy investment we would expect cash flow to be below net profit (as investments will then likely be higher than depreciations)
    – during the subsequent stable phase we would however expect exactly the opposite. This is the very point of the depreciation / ammortisation regime… Furthermore we would also expect this second phase in which investments are recovered to be longer than the growth phase (this is again by design of the system)

    FTAOD: the issue of whether the IP rights paid to the group are motivated or not is a separate issue to the above but it is important to understand that for the group these payments rightly represent a positive cash flow (regardless of whether they are taxed or not) as it is represents a way for the group to recover its investment in building the brand globally. Thus, Starbucks can rightly state that it has a positive cash flow from the UK even if it paid the taxes it should which was what you contested…

  19. tory boys never grow up

    Given that the Starbucks brand is based overseas and paid for by the Starbucks UK – I wonder whether HMRC have got around to disallowing all Starbucks UK marketing spend which I presume is aimed at maintining the value of said brand – would seem only fair. Or don’t HMRC ask such obvious questions and/or dont understand what brands are about?

  20. @PaulB ‘Perhaps the right inference from this is that we can’t in practice extract corporation tax from global corporations, so we should abolish it, or at least reduce it to a few percent.’

    Even a stopped clock etc.

    In today’s DT:

    Kris Engskov, managing director of Starbucks UK & Ireland said: “We were investigated in 2010 and found to be compliant. If HMRC wants to take a look again we would welcome that.”

    “We don’t see paying taxes as a bad thing. We believe strongly in paying our share and although our lack of profits have meant we haven’t paid much corporate tax, we have contributed £160m, in the last three years alone, in terms of national insurance, VAT, and business taxes.

    Mr Engskov… said that the company had created 5,000 UK jobs, was working towards providing 1,000 apprenticeships and contributed to numerous UK charities and social entrepreneurship programmes.

    (‘Y)ou have to sell a lot of lattes to run Oxford Street because the cost of business here is very high…’

    Personally, I am looking forward to the day when Starbucks, Top Shop and all the rest say, ‘Fuck it, we’ve had enough of Richard Murphy, Sewotka, Harman and Monbiot, we’re closing down and retiring with our cash. You can make your own coffee, clothes etc.’

    I will be able to emigrate, as of course with the above-named and PaulB (JohnB already has) but the people they all claim to speak on behalf of will be properly fucked, which will tickle me no end.

  21. tory boys never grow up

    “Personally, I am looking forward to the day when Starbucks, Top Shop and all the rest say, ‘Fuck it, we’ve had enough of Richard Murphy, Sewotka, Harman and Monbiot, we’re closing down and retiring with our cash. You can make your own coffee, clothes etc.’”

    Might I suggest that you first compare Starbucks coffee with that offered by many privately owned coffee shops in the UK before suggesting that this is a bad thing. There are plenty of blogs written by those with an interest in coffee and I have yet to find one that has a good thing to say about Starbucks.

    Emil

    Starbucks did not build its brand in the UK globally – it did it by (tax allowable) marketing and advertising in the UK. This is just a pretence that HMRC have allowed Starbucks to get away with – unlike the IRS which took a rather different view with GlaxoSmithKline. You also ignore the little nicety that the Starbucks Global brand has located itself in a nice tax friendly Dutch company.

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