Setting the Record Straight on Starbucks UK Taxes and Profitability
Following reports about how Starbucks pays tax and reports profit in the UK, some of you may have been left with the wrong impression of Starbucks commitment to the UK.
For 14 years, Starbucks has been honored to serve you. During that time we have grown to more than 750 stores and today we employ nearly 8,500 partners (employees) here. With every visit to your country over the years, I have been personally touched by the warm reception I have received from our customers and partners, and I have the deepest respect for the millions of people with whom Starbucks connects directly and indirectly across the UK.
This is why I would like to address three misconceptions that have circulated about Starbucks during the past 10 days, and provide you with greater visibility into our business.
First, Starbucks has never avoided paying taxes in the UK. Let me be clear: Starbucks has always paid taxes in the UK despite recent suggestions to the contrary. In every country where we do business, Starbucks adheres to both the letter and spirit of the law regarding our business practices, and the UK is no exception. In fact, since we entered the UK market in 1998, we have consistently paid all taxes as required. Over the last three years alone, our company has paid more than 160 million pounds in various taxes, including National Insurance contributions, VAT and business rates.
We have always worked closely with the appropriate tax authorities in the UK, U.S. and Netherlands – where our Europe, Middle East and Africa (EMEA) business is headquartered – to ensure mutual agreement and transparency regarding our tax obligations, including corporate income tax, which is based on taxable profits. Regrettably, Starbucks has only recorded a profit for UK tax purposes three times in the past 14 years (2006-2008). We will continue to respectfully engage in any dialogue HMRC officials would like to have with us.
Secondly, Starbucks consistently adheres to the local accounting rules and tax laws everywhere we do business. As a U.S. based publicly traded corporation, Starbucks is obliged to follow U.S. securities law and Generally Accepted Accounting Principles (GAAP) when speaking with our shareholders. U.S. accounting rules stipulate that our taxable income in regional markets, such as the UK, be calculated before accounting for the impact of intercompany license and interest payments.
At the same time, we are committed to respecting and complying with the tax laws of each of the 61 countries where we do business. In the UK, tax law requires that Starbucks and other companies calculate their taxable income after accounting for the impact of intercompany license and interest charges. As a result of the differences in these reporting requirements, there have been past instances when we have communicated to shareholders that the UK has been profitable, albeit a small profit, while at the same time in the UK we had no taxable income to report, and thus no corporate income taxes to pay. Even if we excluded all intercompany license fees and interest payments, our UK margins in our most profitable year were in the mid-single digits, well below our targets and our most profitable markets. Our low profitability in the UK is completely unrelated to any kind of license fees or intercompany payments, it is unfortunately due to a number of historical operating and cost challenges, which we are working hard to change.
Thirdly, Starbucks European structure has no impact on our taxable profit in the UK. 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.
The license fees incurred across these markets are nearly the same (regardless of whether a licensee is company-owned or a third party) and do not affect regional differences in profitability. Additionally, when you combine the license fees and marketing contributions required by many other multinational retailers, Starbucks license fees are the same or less than our competitors.
As a final point of comparison regarding tax payments, it is worth mentioning that Starbucks global effective tax rate was 32.3% for the first nine months of our fiscal year 2012 compared to the 18.5% average for other large, U.S. multinational companies.
Starbucks remains committed to the UK market for the long term. We have always believed that to be successful we must do our best to strike a balance between profitability and social responsibility, and we will continue to strive to meet our own high ethical standards for how we care for our people, source our coffee, serve communities and operate in the countries where we do business.
chairman, president and chief executive officer
Starbucks Coffee Company