Reuters: Starbucks Finds Clever Ways to Sidestep U.K. Taxes

A special investigative report by Reuters has offered a glimpse into the peculiar way Starbucks (NASDAQ:SBUX) pays its taxes in the U.K. – or, more accurately, how it doesn’t pay its taxes.

The Reuters report focuses on apparent contradictions between recorded incomes from the coffee chain’s U.K. sector and comments made by company leadership regarding the sector’s profitability.  Reuters uncovered multiple instances of Starbucks executives assuring investors that U.K. business was good – in fact, even worthy of being a model for U.S. markets – while the company was simultaneously filing losses of millions.

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Starbucks U.K. accounts show that since opening in Britain in 1998, the company has done almost 3 billion pounds ($4.8 billion) in coffee sales, yet has paid a mere 8.6 million pounds in income taxes. Moreover, Reuters reports that Starbucks’s U.K. subsidiary has reported no profits and paid no income taxes in the last three years, despite sales of 1.2 billion pounds.

So, how can this be? How can Starbucks generate so much in sales yet still not be turning a profit? And how can leaders like Chief Executive Howard Schultz continue to tell investors and analysts on earnings calls how “pleased” they are with U.K. performance?

In its report, Reuters identifies at least three very cunning – although legal – methods by which Starbucks has been able to avoid paying taxes to Her Majesty’s Revenue & Customs (HMRC), Britain’s tax authority. The crafty maneuvers involve payments between companies that all fall under the greater Starbucks corporate group. By charging subsidiaries high-priced royalty fees on intellectual property, requiring chunks of funds be allocated to other subsidiaries in the supply chain, and shifting money to low-tax areas via inter-company loans, Starbucks has been able to essentially make its reported profits in the U.K. vanish into the foggy London air.

The practice of charging royalties on intellectual property is a method pioneered by tech companies like Google (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT), and is used by Starbucks to drastically reduce the amount of taxable income it must report. Starbucks charges its international operations, including its U.K. unit, fees in order to use various elements of the corporation’s intellectual property, such as its brand and business processes, according to Reuters. The royalty payments then deduct from the units’ taxable income and can be paid to locations where tax rates are far lower.

The re-allocation of funds along the corporate supply chain and inter-company loaning work in similar ways, and all contribute to the over-arching effort on Starbucks’s part to move money around amongst the company’s subsidiary units to pay as little in income taxes as possible. Again, the moves aren’t illegal – but are they moral?

Michael Meacher, a member of the British Parliament whose party is active in the fight against tax avoidance by multinational corporations like Starbucks, says absolutely not.

He told Reuters after being shown the exclusive report that such tax tricks are “certainly profoundly against the interest of the countries where [the tax avoiding companies] operate and is extremely unfair…they are trying to play the taxman, game him. It is disgraceful.”

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