Starbucks attends Public Accounts Committee hearing
This afternoon, I am representing Starbucks at a meeting called by the Public Accounts Committee in the UK to examine the tax practices of a number of multinational companies. For context, I have been a partner (employee) at Starbucks for more than 20 years, and have served in my current role as the company's chief financial officer / chief administrative officer since 2008, so it was important for me to attend the meeting and share as much information as possible on behalf of Starbucks.
While the subject of tax law can be extraordinarily complex, I assure you that Starbucks Coffee Company respects and complies with tax laws and accounting rules in each of the 61 countries where we do business, including the UK – a market that we remain committed to for the long term. It’s also important to emphasize that Starbucks overall corporate tax rate for 2012 is approximately 33%, nearly double the median effective tax rate of 18.5% for other multinational U.S. companies.
Going before the Public Accounts Committee and taking their questions is allowing me to address specific points about tax payment and reporting. It also gives me the chance to share more about Starbucks contributions and commitment to the UK, as well as how we’re positioning ourselves for the future. And that’s what I’d like to provide here:
* Starbucks entered the UK market in 1998 with the acquisition of The Seattle Coffee Company, which then operated 60 stores in the UK. We now operate more than 700 stores and employ nearly 8,500 partners (employees) here. In December 2011 we announced that Starbucks would be creating 5,000 new jobs over the next five years, as we directly and in conjunction with our licensees open 300 new stores up and down the country.
* Starbucks is proud to be making a net positive contribution to the UK. Our presence in the UK has created benefit to the Exchequer. For example, we directly contribute more than £25m - £30m per year to the Exchequer in various taxes, including Employers National Insurance contributions and business rates taxes. This does not include any VAT payments.
* However, Starbucks economic impact in the UK spans far beyond our stores and partners. We have spent hundreds of millions of pounds with local suppliers on milk, cakes and sandwiches, and on store design and renovations. When you take into account the indirect employment created by Starbucks investments in the UK, the company’s extended economic impact to the UK economy exceeds £80 m annually.
* In addition to the thousands of new jobs which will be created through our operations over the next few years, we recently committed to creating 1,000 apprenticeships to give young people the opportunity for great careers in retail. This program complements our partnership with UK Youth, a nationwide youth charity, and our ongoing partnership with the Prince’s Trust to provide work experience and life skills to young people Not in Education Employment or Training (NEET).
* It is true that over the last 14 years we have paid £8.6m of corporate income tax in the UK. Corporate income tax is a tax on profits and the simple fact is that it has been difficult for us to make a profit in the UK under any measure. Under the rules we are required to follow when reporting our US results, which exclude royalty payments and interest expense, our most profitable year (2007) in the UK produced an operating margin of only 6%. It has been stated several times in the press recently that our UK operating margin using our US reporting method has reached 15%. This is categorically incorrect and we have never stated publicly or in our internal records that our UK profit margin has been near 15%.
*Our lack of profitability in the UK is a source of concern to us as a business. Many of the struggles we have experienced in the UK are of a self-induced nature. One significant example is the cost of leasing property in the UK. In the US, property costs amount to around 10% of sales revenue, whereas in the UK they represent around 25% of sales revenues. These are decisions we made, and own, and are working hard to correct. Our business in the UK is improving and we are restructuring our property portfolio significantly to counteract this.
*Finally, I wanted to clarify our European structure. We have country operations in the UK, our European Regional headquarters and blending and roasting operation in Amsterdam, and our global coffee buying unit in Switzerland where 75% of the world’s coffee is traded. The primary reason we selected Amsterdam for our EMEA headquarters is because it provides a central location and a skilled multi-language labour force. It manages operations in 33 countries. Also in Amsterdam is our roasting facility which roasts all coffee beans used in Europe before distributing them to the various markets.
Starbucks pays a royalty payment of 6% to our EMEA headquarters in Amsterdam. Charging a royalty payment for the right to use a global brand and for services provided is standard business practice for multinationals. When marketing fees are included, our royalty rate compares quite favourably to other multi-national licensors. As noted above, the royalty also reflects the services provided to Starbucks UK and includes product development, marketing, brand development and trademark enforcement and protection as well as IT and accounting functions in the regional and global headquarters. Were these services not provided to Starbucks UK internally we would have to fund them locally, at much greater cost which would further impair Starbucks UK’s ability to be profitable.
Despite what has been implied, Starbucks European structure has no impact on our taxable profit in the UK. In fact, the license fees we deduct for UK tax purposes are frequently negotiated and renegotiated between Starbucks and local country tax authorities.
If you are interested in obtaining additional information on what we submitted to the Public Accounts Committee, I would encourage you to review the detailed written submission we sent to the Committee last week. We will be sharing a link to that submission once the PAC has posted it publicly. We will continue to work with the Committee, the HMRC and others as requested.
The information I am sharing today reflects the transparent and open stance Starbucks has historically taken about the entirety of our business, including our response to recent questions about our tax payments and reporting. Our chairman, president and ceo Howard Schultz posted a message in October on Starbucks tax and profitability in the UK, which I would invite you to read here for additional context.
In closing, on behalf of Starbucks, I want to emphasize that we’ve always believed that to be successful we must strive to strike a balance between profitability and social responsibility, and we will continue to endeavor to meet our own high ethical standards for how we care for our people, source our coffee, serve communities and operate in the UK and all countries where we do business.
chief financial officer/chief administrative officer