I gather the question of Starbucks' franchises was raised on Question Time last night - with the implication that targeting them was to target a tax paying company in the UK since they're not owned by Starbucks themselves.
Well, yes, that's true in theory. But only to a very limited degree at best, I suspect.
First, if Starbucks is unable to make money paying the price it does for coffee to its Dutch roaster who in turn pays the inflated price that seems to emanate from Switzerland then I doubt a franchise can either, especially as Starbucks say the franchisees pay the same 6% royalty that their stores do, which also contributes to their loss. So, in other words, I think the chance much tax is being paid by these franchisees is very low.
Secondly, let's recall that the reason why that is the case is that both the owned stores and the franchises alike are paying fees and charges that are stripping profit straight out of the UK system to the Netherlands and Switzerland. So the arrangement to which the franchisees are a party involves exactly the same stripping of the UK tax system of revenue that Starbucks themselves do. That means then that the franchisees are, in effect, as much a part of the problem as Starbucks owned stores.
So what we come down to when the franchisees plead their innocence is the perpetual argument that because they're creating jobs in the UK how the corporation tax is paid must be ignored. And I can't do that. These franchisees competitors on the High Street do not pay franchise fees and excessive coffe prices out of their profits to reduce their coirproation tax bills with an effective subsidy being given by the UK taxpayer as a result: they pay tax on their profits instead.
So we have an option here when choosing who to buy our coffee from: we can go to employers who are paying corporation tax in the UK and employers not paying tax in the UK (which Starbucks franchisees are unlikely to do because of the fees they pay) . And if we want future employment prospects in this country we need employers who pay tax to bear the cost of suplying the staff, the infrastructure, the health care system and everything else that their business models here in the UK are dependent upon.
Being a franchisee and making low profit here means that a corporation tax contribution is not or is at best unlikely to be made when a better option - buying coffee from a UK tax paying company - is available.
In other words, the choice to boycott remains completely valid whether or not a franchise is involved or not, I say. Franchise or directly owned, Starbucks are still screwing the Uk tax system.
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This doesn’t seem to take into account the fact that franchisees are by their nature independent businesses. So, for example, I could go and spend money to pay Starbucks for a franchise and see whether I could make a profit on running a Starbucks branch.
Starbucks has an interest in minimising the profits it books in the UK but its franchisees don’t, at least not when they are small businesses. Those small businesses already have the choice of setting up without the Starbucks brand, knowhow and inventory. They buy Starbucks franchises because they value them as a better way of making their coffee shop profitable than the alternative of being an independent.
Boycotting franchisees may work in hurting Starbucks if it means that the brand is devalued but the price will be paid more by franchisees who are likely not to be in a position to avoid UK tax and who have an incentive to make a profit in the UK.
If “take it or leave it” makes a franchisee an independent business, sure they are
You have not challenged my logic that we are better off buying from someone else
Your argument has no logic
Richard, should we also boycott Pizza Hut (part of US KFC)? They pay no corporation tax either. The last time they made a (small) profit was 2006 otherwise it’s been years of big losses. The good news is Pizza Express makes profits although they are fully sheltered by group relief.
I’ve avoided Pizza Hut for 25 or more years now
Crap pizzas!
Richard, is it really the cost of the coffee that is causing profits to be shifted overseas? They’ve said they apply 20% to the wholesale price of the coffee. You can buy a 227g of roasted Starbucks coffee in Tesco for £3.99 that makes 40 cups of coffee. That’s 10p a cup at retail prices or about 2p per cup profit at 20% mark up. Retail price will be way higher than the wholesale price they apply the mark up to.
On a turnover of £377m at an average price £2.75 a cup the number of cups sold can’t be more than 140m cups of coffee ignoring their food sales entirely. At retail prices that means that no more than £3m (140m x 2p) of profit is shifted assuming that the Swiss traders do nothing. They have losses of over £30m. Even ignoring the losses would they really go to this trouble to save tax of £480k of tax (£3m x 24% minus 8%)? I would have thought the Swiss traders would cost as much as this in salaries. (Royalties and interest payments are less than the losses too). Very happy to be persuaded otherwise but I couldn’t work out why the cost of coffee made much of a difference.
I think you’re extrapolating way beyond the boundaries of credibility
Really? Why? I’m not trying to suggest they haven’t avoided tax I am just trying to quantify it.
It seems a straight-forward analysis from known facts. We know their turnover, we know what they sell a cup of coffee for on average per their price list, we know the likely cost of coffee can’t be more than it sells for in a high street supermarket and we know that the mark up is 20% (on a price lower than it’s available for in a supermarket). The profit and tax flows from that information. Even if everyone has double expresso and there is loads of wastage the tax on any UK profit shift must be way less than £1m.
You ignore the mispricing out of Holland ….
Thank you but I’m not sure that is relevant to the analysis from a UK tax perspective. It would be good have some idea of the benefit they are supposed to be getting if we are going to boycott them.
I worked out what the (maximum) cost to the UK entity might be (which can’t be more than what Tesco are selling roasted coffee for) and showed that the cost of roasted coffee beans for Starbucks UK is actually a small fraction of the cost of a cup of coffee. It’s no more than £14m as a transfer price to Amsterdam and coffee will cost Amsterdam and Switzerland something. So that’s not all shifted profit. Certainly way less than the £123m they pay in salaries and the £100m they pay in property costs (per the accounts).
But those wages and other taxes would be paid anyway
Margaret Hodge got that spot on
I think your readership may like to consider this (but please spare me the, “they would say this wouldn’t they” comments):
http://starbucks.co.uk/blog/setting-the-record-straight-on-starbucks-uk-taxes-and-profitability/1241
I’ve read it
And treat it with the same contempt that the PAC did
Per their 10K about 9% of their operations are franchised. It may be different splits in different markets though.
My slight difficulty is who on earth is paying that kind of money for a cup of coffee? By any standard scoffing at Starbucks or places like them is conspicuous consumption and far removed from any notion of “essential” services. Eight to ten cups of their stuff buys you a very nice bottle of antiseptic.
4 “My slight difficulty is who on earth is paying that kind of money for a cup of coffee? By any standard scoffing at Starbucks or places like them is conspicuous consumption and far removed from any notion of “essential” services. Eight to ten cups of their stuff buys you a very nice bottle of antiseptic.”
Which would probably taste better ime, but perhaps, as I grew up on the taste of “Camp Coffee” (anyone remember that black, viscous concoction?), I may not be the best to judge.
I think the “expensive, lifestyle” nature of the product helps to make Richard’s point. If there were no Govt, if there were no expensively-maintained infrastructure, who’d have the lifestyle to buy their product ?
There is, by all accounts, no Govt whatsoever in Mali, at present. We don’t hear of many neo-liberals flocking there !
Oh no, they want the values of a welfare state without the cost. The definition of a corporate hypocrite.
Richard, I would say it is you who has no logic to their argument – you seem to be missing the point entirely about what a franchise is, and how franchising works.
Botzarelli is in fact entirely correct to state that a franchised outlet is its own SME; run by a local person under the umbrella of a larger brand. They have to pay their own taxes, corporation and otherwise, NI on employees etc. regardless of anything that Starbucks the parent company are doing. They pay money to open their business, and when it comes time for them to leave the network they can sell their business and keep the profit made from the business goodwill for however long it has been open. For all purposes, tax, employment and otherwise, the franchised outlet is its own entity.
His last paragraph sums up perfectly well why boycotting a franchised branch of Starbucks defeats the object; it is the local SME owner who will be damaged, not the bigger brand who will continue to do what they do. Starbucks franchisees ARE paying tax, the same as the SME next door is doing; they are not being subsidised by the UK taxpayer any more than an independent coffee shop is, and they receive no financial help from Starbucks HQ whatsoever.
I’m curious as to why you feel botzarelli’s very soundly put together argument holds “no logic”?? What part of this do you not get?! Your “secondly…” paragraph above is more applicable to any and every company-owned branch of every overseas brand in the UK, who funnel much of their profits back to head office; are you going to start boycotting every foreign-owned business on the high street and internet? No, I thought not. You really ought to research and understand what you are writing about before getting on that high horse of yours.
Wrong – they are paying Starbucks and getting tax releif and that is stripping profit from the UK
Same as Starbucks
Identically the same
Cost to the UK the same
Ergo, boycott
You claim is confusing the creation of employment with CT
Another coffee shop in same premises with same people would pay CT. A Starbucks franchise won’t. So, my logic flows. Yours does not
Richard, I too am having difficulty on this one. Surely Ryan and Botzarelli are right here?
The franchisees are willing to pay the royalty because they think the Starbucks brand is likely to generate more business for them than, say, a brand like Murphy Tax Compliant Coffee would or any other name for that matter. This may now have changed given the publicity. More customers should mean more revenue and the hope for them is this outweighs the cost of the royalty. They freely choose this option as they think it’s the best option for them to make the most money (and so pay tax). Surely we have to be careful persecuting small business people whose only mistake seems to be associating themselves with what was a good brand. Sorry I’m not being critical. As an ex-tax inspector with 30 odd years of experience I agree with the vast majority of stuff you write.
If we had withholding taxes on the royalties and what looked like proper transfer pricing I would agree with you.
But we don’t have withholding at least so whether it not these people make a good of bad bargain does not matter – we still have profit stripping from the UK
You are still trying to mislead. Tax is on profit.
Making a payment to Starbucks in terms of the francise agreement does not give tax relief at all.
The payment is real and reduces the francisee’s profit. Tax is on profit not as you seem to suggest on turnover and then less whatever tax relief the government is kind enough to offer the taxpayer.
Please do not patronise
Or mislead
My argument is technically correct – that Starbucks are stripping profit from the UK is obviously true in the case if franchises as well as their own stores
Of course, the desirable reintroduction of withholding taxes would solve this problem
Withholding tax on what – there cannot be WHT on royalties in the UK/Dutch treaty (as is the same for most OECD modelled treaties) where a UK resident pays to a Dutch resident who is the beneficial owner of the royalty.
Back to the drawing board.
So we need to redraw the drawing board
And don’t doubt – it can happen
The world has changed forever
So will tax
If it does not the world as we know it will collapse
Looking at the worldwide accounts Starbucks pays tax (563m) at 32% on global profits before tax (1811m). So how are they dodging tax my shifting profits back to a higher tax country? I see the tax rate in the uk is 24%. Surely they would want to leave profits in the UK opposed to paying at a higher rate in US? What am i missing?
US rate was 32.45%
Foreign rate 20.2%
The rest of foreign looks to be deferred
That’s what you were missing
If the franchisees are paying the same 20% coffee margin and 6%, and hence making a loss, why on earth does anyone buy a franchise? So either the franchisees are al mad or there is something other than the royalty and coffee beans that is responsible for the loss at the company level. That leaves the interest they are paying to the group, but then surely the franchisees are also paying interest as they usually get a loan from the franchisor. So it doesn’t seem to add up, unless there are significant non store level costs.
It would be great if a franchisee came forward and gave full details on the business model.
Seems quite a lot of franchises are asking that question….German one has just thrown it in, they said
Subway charges a royalty of 8% on sales and an advertising fee of 4.5% also on turnover.
Does one abuse excuse a potential another?
In your book very obviously yes
Whilst I am not sure John is right either, what do you quantify the benefit as Richard?
Give me 36 hours a day
There seems to be a lot of conflicting views on starbucks on various bloggs. If you could quantify the loss to uk and it was significant I would fully support a boycott? Surely this point is important and would help gather support for action
Tax on 6% of turnover = over £5 mil
Then the coffee price which I suspect I’d more than suggested here
And the loss on interest
I agree – the total does not change the world by itself
But this is a systemic issue and Starbucks is totemic – that’s its significance
Miss that and you miss the point
And all those adjustments don’t turn their loss into a profit. Just a smaller loss.
Then there are other reasons why they are still here then….
No one makes a loss for 14 years and stays
Reasons that no one seems to have identified. All expenses are fully disclosed to HMRC and they can challenge them. We have transfer pricing rules that prevent excessive charges as you know. All sales are recorded in the accounts.
Companies do make losses for long periods and stay (Pizza Hut as mentioned above). Why? They enter into 25 year institutional leases on properties. The losses are simply less carrying on than shutting up shop suffering high rents without any contribution to those lease costs. Liquidation of the UK business would not be an option for Starbucks I expect. Meanwhile they seak more profitable sites to cover their fixed costs and close the less profitable ones where they can. That’s what they’ve done.
We have an HMRC as you know that is under resourced
Your arguments ignore facts and excuse abuse
I think you’ve had your say here
Unless you have something constructive to add that is not an apology for tax abuse next time you’ll be heading for the bin
This comment deserved it as your argument is risible – as the world treated those of Starbucks earlier this week
Personally, I can think of many reasons to boycott Starbucks, but tax isn’t one of them and not one I particularly care about. How about the fact that they make expensive, mediocre coffee that doesn’t taste particularly nice?
That
And tax
The use of a “Royalty” here is just a profit extraction alternative to transfer pricing. Consumers buy because of Starbucks UK market predominance. The “Royalty” is earned in the UK and should be taxed here irrespective of where it ultimately ends up.
Belgarviadave – So is the conclusion is that any company that pays a royalty for use of its overseas brand and know how is stripping out profits and should be boycotted?
PS it is clearly within the transfer pricing rules that’s why HMRC challenged it and got it reduced from 6%.
No, they should be taxed at source
The conclusion is that the “Royalty”, if that’s what it is, should be taxed where it is earned. In this case that is the UK.
Thank you for bringing this to our attention.
I will be boycotting Amazon and Starbucks and any other firm you mention as being non-compliant.
I would appreciate it if you could please let us know via your blog when the time is right to end the boycott because I otherwise do like these companies, and the quality of their offerings.
I imagine one thing these tax avoiding companies have in common is being advised by the big 4 accounting firms who dream up these wheezes: KPMG, PWC, EY and Deloitte. Maybe we should boycott these firms AND all their clients. That would sort things out!
I notice today that Courageous State is still available on Amazon. Is there anything you can do to have this removed until the boycott is over?
That’s my publishers choice
I always promote it via their web site
This is the nonsense of last resort.
Why attack Murphy for wanting more fairness and transparency? Only hardline dogma can make you believe that the reining in of market controlling entities is somehow akin to whatever communist pastiche you can think of.
Seriously, what problem do you have with someone promoting a book about something that is at odds with the promoting agent?
Are you really putting that forward as an attack? Even Worstall would be ashamed of this.
You support blatant extremism. A growing number of people find that view obnoxious. If you have anything valid to say, make a difference.
Richard Murphy is.
Lawrence, what are you on about?
I don’t mind how Richard promotes his book, or who he associates with. It is his personal decision.
But I was simply inviting him to join in the boycott, and thereby see if he can have his book removed from Amazon. It seems (from his reply) it is not within his direct gift to do so.
Maybe he can consider whether he should continue to be associated with a publisher that uses Amazon. Yes, it would be a small but principled gesture when looked at in isolation, but presumably useful if part of a broader action. If publishers were pressured into withdrawing their books en masse, then maybe Amazon will sit up and take notice. That is the point of boycotts.
I think your suggestion is, candidly, bizarre
It is to say that the left should not sell their ideas to ensure moral purity
Nice desire on your part to suppress opinion
The invitation is not accepted
Bang on.