Starbucks - coffee chain tax evasion

Starbucks Tax Evasion

Background

Late 2012, Starbucks was one of the multinational corporations that were under fierce attacks from the general public. Nationals from the UK were outraged by the fact that Starbucks had only paid £8.6 million in corporate tax for its 15 years of operation in the UK, while the company's sales in 2011 is close to £400 million. This doesn't sound good in spite the company's attempt to market itself green and sustainable-friendly.

Citizens are outraged by Starbuck's misconduct

June 2013, BBC reported Starbucks finally paid its first UK corporate tax since 2009. If you've been following the news, you should be aware of that Starbucks was not the only company evading tax, among it Microsoft, Google and Apple were also brought to the attention in media around that time.

How companies evade tax

By now, I know you've been asking yourselves, how do companies do that? Well, that's what I'm here to explain.

I am an high-achieving accounting merit scholar at Macquarie University (having achieved GPA 4 out of 4 so far! Yay, a nerd hey?), now is the time to put everything I've learnt into practice. There is a mechanism that corporations can use called Transfer Pricing. Transfer pricing was originally used to examine the profitability of each different business divisions within a large organisation. In other words, it is a performance monitoring and measurement tool especially benefiting multinational companies to monitor its performance in different geographic locations. 

This is how it works with the use of an example (yes, we all love examples). Company XYZ Group Limited, a mobile phone manufacturer operates in two countries Singapore and Australia. The Singapore company (S Ltd) runs a factory and produces mobile phones to be sold in Australia (A Ltd). The phones cost $50/unit and sells for $150/unit in Australia. The company tax rate in Australia is 30%, in Singapore 17%. If A Ltd sells 10000 mobile phones in Australia, how much tax will XYZ Group pay? Consider the following two scenarios.

1. S Ltd sells to A Ltd at cost, which is $50/each. S Ltd makes no profit. However, A Ltd buys the phones from S Ltd for $50/each and sells for $150/each, hence makes $100 profit per mobile phone. The amount of tax payable for the XYZ Group will be: 

$100 x 10000 phones x 30% tax = $300,000 tax to the Australian Government.

2. S Ltd sells to A Ltd at $150/each. It costs S Ltd $50/each to manufacture, but it sells to A Ltd for $150/each , hence S Ltd makes a profit of $100 per mobile phone shipped to Australia. A Ltd buys the phones from S Ltd $150/each and sells for $150/each, hence makes no profit in Australia. The amount of tax payable for the XYZ Group will be:

$100 x 10000 phones x 17% tax = $170,000 tax to the Singapore Government.

Starbucks and all other multinational corporations cleverly enacts international transfer pricing to shift profits between countries with higher tax rates to countries that attract lower tax rates to reduce their tax liabilities. Starbucks UK pays a high loyalty fee to its other international subsidiaries for the coffee and branding, hence, increasing the cost of operation in the UK and therefore paying less tax.

Below is an interesting video on Starbucks' tax evasion scandle:

References:

BBC 2014, Starbucks pays UK corporation tax for the first time since 2009, viewed 12 May 2014, <http://www.bbc.com/news/uk-politics-23019514>.

Transfer pricing example is from my own knowledge.

By Zhutian Cai (42880815)