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Companies Outwit the Tax Man, Yet Again

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How much is too much to pay in corporate tax? For Starbucks (NASDAQ: SBUX  ) , the answer used to be "any." The company managed to go five years without paying corporate tax in the U.K. because the business wasn't profitable. On Sunday, it broke the streak and forked over 5 million pounds in taxes to the British government.

The company released a statement with the payment, clarifying that it was the voice of customers, not the condemnations of the Prime Minister, that caused it to take such a generous view toward taxation. In fact, the company pointed out that it was really doing everyone a favor, since it "decided to forgo certain deductions" just so it could pay its loyal customers back. How sweet.

The tricks of the trade
The British coffee game has a decent number of players, and while Starbucks is a leader, it's by no means the out-and-out dominator that it seems to be in the United States. But that position isn't the reason Starbucks has had trouble being profitable. The problem is the European Economic Zone and the Netherlands.

Starbucks' British operation is a separate business, wholly owned by Starbucks. That U.K. business is overseen by Starbucks Coffee EMEA, based in the Netherlands. For Starbucks in the U.K. to use the Starbucks logo, name, and intellectual property, Starbucks EMEA charges Starbucks U.K. a royalty fee. As it turns out, that fee -- along with beans, milk, rent, and all the usual costs -- means that the U.K. business can't seem to turn a profit. Dang.

Now, as a complete coincidence, the Netherlands doesn't charge a withholding tax on royalty payments. So Starbucks EMEA can take all that cash from the U.K., and send it off to Starbucks global. It pays no tax in the U.K. because of the losses incurred for sending cash to the Netherlands, where is receives favorable tax treatment on the income that it then sends off to its parent.

The other players
The 10 million pounds that Starbucks is planning to pay this year in taxes to the U.K. will more than double the total tax paid by the company since it started operating in Britain. In the company's defense, it's been running this unprofitable business since only 1998 -- 15 years. Up to this point, the company has paid just 8.6 million pounds. The push from its customers finally put Starbucks over the edge, it seems, and the company has committed to paying another 10 million pounds next year. (NASDAQ: AMZN  ) and Google (NASDAQ: GOOGL  ) have also been named and shamed by the British government for their tax practices. Last month, it came to light that Amazon paid less in tax last year than it received in government grants -- 2.4 million pounds versus 2.5 million pounds. The small payout was due to the company's corporate structure, and the European business is based in Luxembourg, even though it employs 11 times as many people in the U.K.

Google has also been faulted, having made $18 billion in revenues over a five-year period and paying out only $16 million in taxes. Earlier this month, a U.K. watchdog organization said that Google should be "fully investigated" because of its low payments. 

The bottom line
As I mentioned, the problem isn't really the companies. Sure, they could pay more taxes voluntarily, but that doesn't make sense -- they are, after all is said and done, businesses. The problem is that Europe doesn't have anything approaching a common system for taxation, and the European Economic Zone makes it easy for companies based in one place to do business in another. Cash crosses borders with almost no resistance, and governments have no idea what's walking out the door.

I think Starbucks' recent move is a bit melodramatic, but in a way the company is fair to make the point. It's paying taxes because it chooses to, not because it has to. Until the U.K. can see that that is the underlying issue, companies are going to continue sending cash everywhere but to the tax man.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 25, 2013, at 4:02 AM, felixy wrote:

    As to European tax regimes, all non-taxpayers will find out soon that these days are gone.European governments got the issue, they need money and they will work - slowly, but shurely and finally brutally.

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