When austerity -- a word that Europeans use to indicate that they're back on the right track no matter how much everyone hates it -- comes calling, everyone looks to the coffers to see how much they need to cut. Each new measure is like a tiny fiscal cliff, where spending and cuts ram into each other like tiny tectonic plates, birthing molehills, if not mountains. So, when the coffers run dry, countries like the U.K. start to wonder if everyone is paying their fair share. The answer is "of course not." -- or at least "probably not" -- or maybe just "yes," but only because the EU is kind of screwy in its business licensing.
Yesterday, Starbucks (SBUX +1.44%) bowed to public and political pressure, and offered to pay $32 million in taxes -- even though it denies that it made the kind of money that would require it to pay such a sum over the next two years. That puts a little extra peer pressure on Google (GOOG +2.53%), Amazon (AMZN +0.53%), and Apple (AAPL +1.18%), which have all been accused of not paying their fair share. Here are the implications for investors.
How to dodge some taxes
The move by Starbucks is not only sure to increase pressure on other companies, but it's also really odd. In early November, Starbucks appeared before a special committee in the U.K., which tried to figure out if the company was paying the right amount of tax. The first thing to note is that the committee wasn't, strictly speaking, accusing the coffee giant of not paying enough tax. Instead, it was more of a passive aggressive attack on Starbuck's accounting.
As CFO Troy Alstead maintained that Starbucks had been losing money in the U.K. for fifteen years -- even though it expanded and promoted U.K. managers -- MPs increasingly rolled their verbal-eyes in disbelief. Alstead tried to explain how and why the company was losing money, while the faces of the MPs increasingly turned sour.
And it's understandable, as Starbucks was trying to walk the fine corporate line of making fistfuls of cash for investors, while making nearly nothing for tax purposes. First, you have to be able to see Starbucks as a bunch of different companies that all make money for the same huge corporation. That means that the companies can lend to each other, and charge each other for things that one company wouldn't be able to. For instance, Alstead explained that U.K. Starbucks had to pay a 6% licensing fee to the regional headquarters in Amsterdam -- which, coincidentally, is in lower corporate tax Netherlands.
It also probably owes money to the U.S. corporate entity for loans that it took out when it first opened up. Each bit cuts into the bottom line, until eventually, the company hasn't really made any money, even though the corporation has made gobs of it. It's again important to note that this isn't illegal, and no one was accusing Starbucks of breaking the law; they just think that it's not paying its fair share.
The other players
Starbucks isn't alone in the British spotlight. Outside of the U.S., cash cow Apple paid only 2% in corporate taxes over its last year. That ended up being about $700 million in taxes on $37 billion in profit. Amazon and Google were both dragged in front of the same committee that Starbucks appeared in front of to stagger their way through similar explanations. Amazon's representative, in particular, was lambasted for not having the answers to questions asked by the committee.
Google was the most straightforward in its session, and freely admitted that it was using tax avoidance structuring, putting offices in Ireland and Bermuda in order to avoid higher rates. Matt Brittin, who appeared before the committee, even went so far as to admit that the Irish office paid different fees to an office in the Netherlands in order to drop its taxable income.
Should investors be worried?
Not in any way, shape, or form. The U.K. is getting hosed by its own poor corporate tax structure, and I'll say it again: no one is accused of doing anything illegal. That means that none of these companies are going to make extra payments to the U.K. Even the $32 million that Starbucks is going to fork out over the next two years will probably be offset by changing the charging structure of that business. In order for the U.K. to change the tax rates that the companies pay, it would have to rework its contracts with them, or change its tax structure. No one is going to have to pay back-taxes.
