Starbucks UK Tax Controversy: Ethics and PR Crisis

Introduction: The UK Tax Scandal

The United Kingdom is one of the largest markets in the world for Starbucks, with over 700 stores — by far the largest presence in Europe. The company ran into a scandal, however, when it was revealed that it was not paying taxes in the UK but was instead paying taxes in the Netherlands and Switzerland, both of which have much lower tax rates. Some politicians sought to make a name for themselves by attacking the foreign company — notably, Starbucks' major UK competitors, Costa and Caffè Nero, are both domestic British chains. The ensuing negative publicity hurt Starbucks' sales, which fell below £400 million for the first time since 1998 (Campbell, 2014).

The Case: EU Rules and Tax Structure

At issue is the fact that the UK is a member of the European Union. The EU established rules that allowed companies to headquarter in one European country and operate subsidiaries in another country from there. Starbucks therefore set up its European headquarters in Luxembourg, which has very low corporate taxes, even though the UK is the company's largest EU market. European laws were designed with the intent of providing this benefit to European companies, but when an American company took advantage of the same rules, an opportunity for controversy arose. The result was expensive for Starbucks. The company initially resisted the controversy, but when it did not die down, Starbucks was forced to capitulate and relocate its European headquarters to the UK (Titcomb, 2014). It was subsequently revealed that the company was still not in a profitable position in the country and therefore would not be making substantial tax payments (Campbell, 2014, 2).

The system by which Starbucks had previously operated involved the payment of royalties on UK operations. Specifically, Starbucks paid licensing royalties on its brand and logo to a subsidiary in the Netherlands, such that for every cup of coffee sold in the UK, 6% of the revenue went to this subsidiary. Furthermore, the company routed its coffee beans through Switzerland and applied an internal transfer price that allowed most of the profits to accrue in Switzerland, further lowering its UK tax liability (Campbell, 2014, 2). The company claims this model is common throughout the industry, which is quite likely. It is worth noting, however, that this benefit primarily accrues to foreign multinationals; domestic British companies would have greater difficulty constructing such a structure and would be more likely to pay taxes in the UK as a result. The fact that Starbucks' two major UK competitors are British companies was therefore not coincidental in making Starbucks the focal target of public criticism.

Disclosure Vehicle: How the Story Broke

Starbucks had the option of disclosing divisional profits in its annual report, but this was not something the company had generally done. UK operations fall within the broader EMEA division (Europe, Middle East, Africa), and UK results were not specifically broken out.

The disclosure was therefore not made by the company itself, but was instead exposed by a third party: Reuters. Investigative reporters had noticed that Starbucks was announcing in its press releases and investor conference calls that its UK business was profitable, despite the fact that it was not paying taxes in the UK. This led to a Reuters investigation, which revealed that the company had paid UK taxes only once since it entered the country (Bergin, 2012). There was no voluntary disclosure by Starbucks, and the allegations appeared to catch the company off guard. Reuters obtained some information from Companies House, a UK government register that records financial information for all companies operating in the UK. The Reuters reporter also spoke with Starbucks' CFO to obtain further information about the company's arrangements. As Starbucks had not broken any laws, it was willing to answer questions but still appeared to lack control over the public dialogue on this issue.

Conclusion

Starbucks did not handle the UK tax issue well, mainly because it did not understand the depth of the problem. The company believed that acting legally would be sufficient. This was not the case, and a public relations crisis ensued. It is worth noting that the voluntary taxes the company eventually paid were likely higher than the profits it lost from declining UK sales. Nevertheless, this was clearly a situation in which the company could have done more to defend its brand and to recognize that legal compliance and public sentiment are two very different things.

References

Bergin, T. (2012). How Starbucks avoids UK taxes. Reuters. Retrieved December 18, 2014, from http://uk.reuters.com/article/2012/10/15/us-britain-starbucks-tax-idUKBRE89E0EX20121015

Burnett, J. (1999). A strategic approach to managing crisis. Public Relations Review, 24(4), 475–488.

Campbell, P. (2014). Sales slide as Starbucks feels tax backlash. The Daily Mail. Retrieved December 18, 2014, from http://www.dailymail.co.uk/news/article-2612668/Sales-slide-Starbucks-feels-tax-backlash-Coffee-chain-axes-six-shops-14m-drop-business-past-year.html

Campbell, P. (2014, 2). Anger as Starbucks boss says may not pay UK tax for up to three years. Daily Mail. Retrieved December 18, 2014, from http://www.dailymail.co.uk/news/article-2856284/Starbucks-chief-reveals-coffee-giant-not-pay-normal-tax-THREE-YEARS.html

Starbucks 2013 Annual Report. Retrieved December 18, 2014, from http://news.starbucks.com/uploads/documents/Starbucks_Fiscal_2013_Annual_Report_-_FINAL.PDF

Titcomb, J. (2014). Starbucks to pay corporation tax on profits in the UK after HQ move. The Telegraph. Retrieved December 18, 2014, from http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/10769497/Starbucks-to-pay-corporation-tax-on-profits-in-the-UK-after-HQ-move.html