Special Feature
Starbucks with no bucks
Miles Dean, Founder & Sally Brown, International Tax Associate at Milestone International Tax Partners
News that Starbucks (and other large multi-nationals) has been paying an “unfair” amount of UK tax has hit the headlines in the last few weeks. MPs have argued that paying just £8.6m tax on revenues of £3.1bn over thirteen years isn’t ‘right’ or ‘fair’. The suggestion is, of course, that Starbucks et al have engaged in tax avoidance to the detriment of the hardworking British taxpayer.
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ax avoidance is a minefield that is often mis-reported. The UK tax code allows a business a raft of tax deductions in calculating its taxable profit. It might seem obvious, but
where there isn’t any profit, there won’t be any tax. Starbucks reported a loss of almost £33 million in the year to 2 October 2011 and consequently has not paid any UK corporation tax. But, is it tax avoidance that creates this tax loss? Before we draw any conclusions, it is necessary to look at Starbucks’ financial statements as well as those of its UK competitors.
Costa reported pre-tax profits of £49mn with Café Nero reporting pre-tax profits of £17mn. Yet, this is not the whole picture. On a consolidated basis, Café Nero does not, in effect, pay UK corporation tax because its
operating profits are relieved against parent company losses that arise as a result of internal and external group borrowings.
Starbucks is by far the bigger brand, both globally and in terms of UK market share, so how have they made a loss when coffee is apparently such a profitable business? Troy Alstead, CFO of Starbucks argues that difficult trading conditions and over-aggressive expansion policies are to blame. The latest financial statements appear to back that up. Property costs eat up 25% of UK turnover, compared with 9% in the US and 12% in Japan. What about staffing costs? Starbucks has almost the same staffing costs (in the region of £124mn) as Café Nero and Costa combined. This is no surprise since Starbucks employed 8,763 people - more than both of Café Nero and Costa combined. Another
critical factor is administrative expenses. Both Starbucks and Café Nero have used group borrowings to support their UK expansion. What is interesting is that both parent companies have either recognised that the loans would not be repaid (Nero) or have converted that debt to equity (Starbucks). This supports the assertion that trading conditions are (and have been) difficult.
Starbucks is of course obliged to adhere to US tax and accounting formalities and it is this that will drive (to a certain extent) the tax profile and strategy adopted for the UK. By contrast, Costa and Café Nero are UK headquartered and will likely have adopted similar policies as regards their overseas interests.
This multi-national profile provides perhaps the biggest clue to Starbucks’ low rate of
www.finance-monthly.com
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