Starbucks and the price of coffee beans

Despite the Gore Vidal quote in my page header I’d really be interested to know why this simple solution to the Starbucks corporation tax issue wouldn’t work.

This helpful article from Reuters explains three ways in which Starbucks eliminates profits from its UK operations and transfers them to low- or no-tax jurisdictions. Here’s one of them, a ruse involving so-called transfer pricing (the prices charged between different parts of the same company).

Starbucks buys their coffee beans globally through their Swiss company SCTC (Starbucks Coffee Trading Company) based in Lausanne, Switzerland. The coffee is then sold to a roasting company in the Netherlands at an undisclosed price, from where their various national operations including the UK buy the beans at an undislosed (but I’m guessing large) mark-up. According to Reuters over the past three years the Dutch company generated an annual average turnover of 154m euros from which it earned annual average profits of 1.6m euros, or 1%, which implies Starbucks don’t want profits in the Netherlands either. The article goes on

[Starbucks] declined to say what profit the Swiss coffee-buying unit makes, although … it was “moderately” profitable. Swiss law does not require the unit to publish accounts. Corporate profits are taxed at 24 percent in the UK and 25 percent in the Netherlands, whereas profits tied to international trade in commodities like coffee are taxed at rates as low as 5 percent in Switzerland.

If a small business tried to do the same, say through setting up a shell company in the Channel Islands to ‘supply’ all their stock at a large mark-up, HMRC would, I imagine, just refuse to recognise the arrangement and demand that the company’s transfer prices were a fair reflection of costs. Why can’t they do the same with Starbucks?

In fact HMRC have looked at this issue. Reuters says

Starbucks was the subject of a UK customs inquiry in 2009 and 2010 into the company’s transfer pricing practices. This was “resolved without recourse to any further action or penalty”, a Starbucks spokesman said. HMRC declined to comment on the probe.

So my question remains. Why doesn’t HMRC just refuse to accept Starbucks’ transfer pricing practices?

4 thoughts on “Starbucks and the price of coffee beans

  1. The answer to your question is very simple: because of the EU. Like most people you are unaware of the way that EU law controls almost every aspect of our lives. The EU has created a thing called a "european company" that is entitled to do all the things you are complaining about. Many people blame big corporations like Starbucks and Vodaphone for not paying tax but don't realize that the laws enabling them to do so are all passed by the EU. None of these companies are doing anything technically illegal. They are just taking advantage of EU company and tax law."
    So us lot who keep moaning about the EU are not as stupid or eccentric as some people imagine!

  2. Oh dear, Julia! "Like most people" I "am unaware of the way that EU law controls almost every aspect of our lives". You know nothing about me, what I know and don't know, so please don't patronise me.

    I'm afraid your reaction to the question in my piece above ("Why doesn't HMRC just refuse to accept Starbucks' transfer pricing practices?") is off the mark, though I thank you for drawing my attention to the existence of the strange entity that is a European Company, or SE (Societas europaea) I gather. Starbucks is of course American. Their Swiss coffee trading company is, well, Swiss, so nothing to do with the EU. The Dutch company I don't know. Given the restrictive rules imposed on SEs I would be very surprised if Starbucks UK is such a company. As you point out, nothing Starbucks has done is illegal, and I didn't suggest it was.

    There is nothing European in the decision by HMRC not to challenge more effectively the transfer pricing practices of companies like Starbucks, or to do sweetheart deals with Vodafone and other major companies. The anger that you seem to feel would, I suggest, be better directed at our own government (and I don't just mean the present one) and top HMRC officials.

    And no, of course Oxthreigh is not my real name. It's the name I choose to tweet and blog under as I try to minimise my exposure to online fraud and identity theft. I am though what I claim to be, a resident of Headington.

  3. Is it patronising you Tony, to tell you things that you do not understand? Because plainly you don't understand them. While Starbucks is American in origin it also has a European arm which operates as a unit and is subject to European laws. Switzerland is part of the European Economic Area which is covered by and included in a large number of laws made for tax purposes by the EU.
    When you say "there is nothing European" about this matter you are just wrong. The pricing of coffeebeans sold from one subsidiary to another does have to be considered as legal or illegal under European law – and so does everything else that we do. Our government cannot oppose the decision made by the EU. You are ill-informed and have got a know-it-all attitude that is not helping your understanding to enlarge. Like so many people you prefer to maintain a head-in-the-sand attitude and pretend that the EU does not exist or doesn't really have any impact on our lives. Denialism in fact.
    Are you sure it wasn't all made up by the Daily Mail?!!!

    NBc the rules of the Headington and Marston forum are supposed to be that everybody provides a real name and address.

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