Why is Starbucks paying more in UK taxes than it owes?

Caving to criticism
Caving to criticism
Image: AP Images / Matt Dunham
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Starbucks caved to public pressure today by agreeing to pay more corporate tax in the UK than it has to. Kris Engskov, managing director of Starbucks UK, said that in 2013 and 2014, the company will not claim tax deductions for things like royalties it pays or coffee it purchases—though it legally can—while agreeing to pay a significant amount in corporation tax over the next two years whether the company is profitable or not. Starbucks is still running the numbers, but it’s expected to prepay roughly an extra £10 million ($16.1 million) in each of the next two years.

The pledge, which was widely expected, follows scathing condemnation by lawmakers in a public hearing, and a beating in the press, for having generated more than £3 billion in UK sales since 1998, while paying less than 1% in corporation tax. It means Starbucks will pay a similar rate paid by UK-based Costa Coffee.

So why would Starbucks pay more than the law requires? It has not been dodging taxes: Its accounts simply showed low or no profits in the UK, thanks to a corporate structure with headquarters in the tax-friendly Netherlands, as permitted under EU rules. And the company has paid more than £160 million over the past three years in non-corporate taxes including National Insurance (i.e., social security) contributions, VAT and business rates.

And more to the point: Why don’t UK legislators just change the law? ”The solution must be simplifying the tax system, not simply hectoring from Westminster,” said Simon Walker, head of the Institute of Directors. “If these firms are immoral to take advantage of tax loopholes, then politicians are surely immoral for creating the loopholes in the first place. Taxes should be simpler, to cut down on avoidance and relieve the burden our complex tax code puts on companies who do try to do the right thing.”

Quite so. But lawmakers are in a bind. Because of the EU rules, companies can put their headquarters anywhere in the 27 countries. The Chancellor, George Osborne, evidently recognized this in his Autumn Statement (a kind of mini-budget) on Dec. 5. Many had expected him to follow up his tough talk about “coming after” multi-national firms for avoiding UK tax payments with measures to crack down on these firms. Instead, Osborne announced that corporation tax, which was reduced last March from 26% to 24% and was planned to drop to 22% in April 2014, will instead go down even further, to 21%.

Osborne even boasted that this made Britain’s corporate tax rate “the lowest rate of any major western economy,” and contrasted it to significantly higher rates in the US, Germany and France. As it happens, the rate now matches that of Luxembourg, where Amazon, another of the firms caught up in the UK tax row, has its headquarters. ”It is an advert for our country that says: come here; invest here; create jobs here; Britain is open for business,” said Osborne. The move will cost the Treasury £875 million a year from 2016, or 2% of last year’s corporation tax take of more than £43 billion, but if it encourages firms like Starbucks to base their operations in the UK and pay their taxes there, it may pay for itself.

In the meantime, though, it seems the company has decided that paying more tax than it needs to is a wise PR move. With 760 cafes in the UK and two million weekly customers, it can’t afford more bad press. A spokeswoman said that ”acting responsibly makes good business sense. After listening to valuable feedback from our customers it has become clear that they expect more from us than just to follow the letter of the law.” Shareholders seem to agree; so far today, the company’s stock is up around 2%.