Original post
Starbucks’ UK sales in 2011 were worth £398m. Costa’s UK sales were worth £377m. But while Costa paid £15m in corporation tax in 2011/12, Starbucks paid nothing! In fact since opening its first coffee shop in the UK in 1998 it has paid just £8.6m in taxes on UK sales of £3bn.
How is this possible? Let’s look at Starbuck’s 2011 UK sales. Even though these were worth £398 million, its costs were recorded as £426.2m, giving a loss of £28.2m. Costa, by contrast, reported a taxable profit of £49.7m.
So is Starbucks a commercial failure in the UK, recording year after year of losses? Not at all. Starbucks regards the UK as a highly profitable part of its business. As the Independent article below states:
…in its briefings to stock market investors and analysts during the past 12 years, Seattle-based Starbucks has consistently stated that its UK unit is “profitable” and three years ago even promoted its UK head, Cliff Burrows, to run its vastly larger US operation.
So how can reported UK losses be reconciled with a profitable UK operation? The answer lies in transfer pricing.
Transfer pricing refers to the prices a company charges itself when goods or services are transferred within the company but from one country to another. By varying the transfer prices, a company can choose where to make its profits. Thus if Starbucks’ US operation charges high prices to its UK operation for various services, such as royalties for the use of branding or for management services, or lends money to its UK operation at high interest rates, Starbucks’ profits will rise in the USA and fall in the UK.
Companies employ tax advisers (see for example) and ‘transfer pricing managers’ to help them move their profits from high tax countries to low tax countries. In Starbuck’s case, by charging its UK operation high prices for such things as ‘use of its logo’ it has chosen to move all its profits out of the UK and thus avoid UK corporation tax.
Apart from denying the UK government tax revenues, the practice by Starbucks distorts competition as competing UK companies, such as Costa, AMT, Caffè Ritazza and the many small independents, do not have the same opportunity for transfer pricing and do pay UK corporation tax. As the Guardian article by Richard Murphy below states:
We do have homegrown coffee shops in the UK. A lot of them. And they have to pay their taxes in full here in the UK. They can’t make payments to offshore entities for the use of their logos or advice on how to add hot water to coffee just to avoid tax: they have to pay in full on what they earn in this country. What Starbucks is doing may be legal, but what it also shows is that business does not operate on a level playing field in the UK.
And, as some of the articles below demonstrate, it’s not just Starbucks. Amazon, Facebook and Google have also been accused of avoiding taxes in the UK by engaging in forms of transfer pricing.
Update
On 12 November senior executives from Starbucks, Google and Amazon appeared before the House of Commons Public Accounts Committee to give evidence on their non-payment of corporation tax and their apparent lack of profits in the UK. As you will see from the videos, the MPs were unimpressed by the answers they received.
At the G20 finance ministers meeting in Mexico the previous week, George Osborne, the UK Chancellor, and Wolfgang Schäuble, the German Finance Minister, called for “concerted international co-operation to strengthen international tax standards that at the minute may mean international companies can pay less tax than they would otherwise owe”.
There seems to be mounting international pressure on multinationals to cease using transfer pricing as a means of avoiding paying taxes. Whether it will be successful remains to be seen.
Further Update (June 2013)
In June 2013, After continuing criticism of its tax avoidance policies, Starbucks agreed to pay £10m in corporation tax tin 2013/14 and a further £10m in 2014/15.
Articles for original post
Starbucks UK tax bill comes under scrutiny The Telegraph, Helia Ebrahimi (15/10/12)
Good bean counters? Starbucks has paid no tax in UK since 2009 Independent, Martin Hickman (16/10/12)
Special Report: How Starbucks avoids UK taxes Reuters, Tom Bergin (15/10/12)
Business Starbucks ‘paid no UK income tax’ since 2009 Channel 4 News (16/10/12)
Starbucks ‘paid just £8.6m UK tax in 14 years’ BBC News, Vicki Young (16/10/12)
Starbucks’ tax payment is ‘unfair’ say independent cafes BBC News, Joe Lynam (16/10/12)
Starbucks ‘paid just £8.6m UK tax in 14 years’ BBC News (16/10/12)
What the Starbucks tax expose means for ordinary companies Tax Research UK, Richard Murphy (16/10/12)
Starbucks ‘pays £8.6m tax on £3bn sales’ The Guardian, Simon Neville (15/10/12)
How much tax do Starbucks, Facebook and the biggest US companies pay in the UK The Guardian Datablog (16/10/12)
Amazon: £7bn sales, no UK corporation tax The Guardian, Ian Griffiths (4/4/12)
Facebook criticised for £238,000 UK tax bill last year BBC Radio 1 Newsbeat, Dan Cairns (11/10/12)
U.S. Companies Dodge $60 Billion in Taxes With Global Odyssey Bloomberg, Jesse Drucker (13/5/10)
EBay ‘pays £1.2m in UK tax’ on sales of £800m BBC News (21/10/12)
Articles for update
Starbucks, Google and Amazon grilled over tax avoidance BBC News (12/11/12)
Companies have ‘social responsibility’ to pay tax BBC Today Programme (12/11/12)
MPs slam Starbucks, Amazon and Google on tax Reuters, Tom Bergin (12/11/12)
A highly taxing session for the men from Amazon, Google and Starbucks The Guardian, Simon Hoggart (12/11/12)
Starbucks is leeching tax revenue from UK The Telegraph, Lord Myners (12/11/12)
UK and Germany agree crackdown on tax loopholes for multinationals The Guardian, Patrick Wintour and Dan Milmo (5/11/12)
Britain, Germany target tax from multinationals Deutsche Welle (5/11/12)
HMRC unable to stop multinational tax avoidance accountancylive, Sharon Khin (6/11/12)
Starbucks ‘planning changes to tax policy’ BBC News (3/12/12)
Articles for further update
Starbucks pays UK corporation tax for first time since 2009 BBC News (22/6/13)
Starbucks pays corporation tax, promising the Exchequer £20m over two years IndependentHeather Saul (2/6/13)
Starbucks pays first tax since 2008 The Telegraph, Kamal Ahmed (22/6/13)
Report of Public Accounts Committee
Tax avoidance by multinational companies UK Parliament (3/12/12)
Questions
- Explain how a multinational company can use transfer pricing as a means of reducing its overall tax liability.
- Why may transfer pricing lead to an inefficient allocation of resources?
- What policies can governments adopt to clamp down on the use of transfer pricing to limit their tax liability in their country?
- What insights are shed by game theory in explaining why it may be very difficult to reach international agreement to clamp down on tax avoidance?
- Is it immoral for companies to seek to minimise their tax liability? What are the limits of economics as a discipline in establishing an answer to this question?
For some people, a pint of beer is a regular thing each week. Add all your pints of beer together, then add your friend’s pints, their friends’ pints and … you get the idea. Once you’ve done that for the entire population, you have an estimate of total beer consumption in the UK. This can then be compared with total consumption of beer in other countries and between continents.
Prior to 2007, Europe and the Americas were the biggest beer drinking continents, but since then, Asia has emerged as the leader of pints of beer consumed, drinking 67bn litres of beer compared with the Americas’ 57bn and Europe’s 51bn in 2011. In per capita terms, Asia is still some way off, with Japan leading the way as the highest Asian country in 41st place, consuming 64 litres of beer per year per capita of the population. So how is this relevant to economics and business?
Consumption of anything provides jobs – bar workers, manufacturers and in the case of beer, probably law enforcement! It probably also increases utility – after all, why consume it if it’s not going to give you some degree of satisfaction!
We can analyse the demand for beer and see how it varies with changes in price and income. Minimum prices for alcohol have been proposed as a means of reducing consumption, and tax and excise duties are always linked to alcoholic beverages and clearly have an effect on demand. In this case, however, we can also consider the emergence of Asia and how tastes have changed. It is the fastest growing beer market in the world; so what can we deduce from that? As the BBC News article states, it is ‘a sign of a young, upwardly mobile, and increasingly hedonistic population.’
Experts also say that the increased consumption of beer in Asian countries is closely correlated with growing incomes and prosperity. A consumer research analyst from Standard Chartered, Nirgunan Tiruchelvam, said:
“Beer has a clearer correlation with strong economic growth … People tend to drink beer in times of growth. They drink spirits when times are good and when times are bad.”
Data suggest that when a certain level of prosperity is reached in a nation, beer sales begin to rise. As many Asian economies begin to develop rapidly, beer sales have taken off. This could be regarded as a good thing for Europe. With stagnant Western economies, beer producers within Europe may be grateful for a growing demand in Asia. Indeed, many of the world’s biggest breweries are expanding rapidly, providing jobs and income. Consumers in Europe will also be happy to see that beer production remains profitable in other parts of the world. With unemployment still high and recession ongoing, a pint of beer will be a much needed pick-me-up for many people. At least, that’s what the evidence from the Great Depression of the 1930s suggested!!
It’s not good news for everyone, however. Beer production has also increased in Asian countries, most notably in China, which now leads the world as the largest beer producer. This clearly reduces the export potential for European beer producers.
Also, many argue that the growing consumption of beer in Asia is simply an illustration of growing Western influence and it is likely to create severe medical problems in the future. Binge drinking and under-age consumption is already a big problem in Western countries and this could soon begin to extend across the world. The following articles consider the growth in consumption of beer.
Brewers thirsty for expansion as taste for beer grows in emerging markets Guardian, Simon Neville (3/9/12)
Beer in Asia: the drink of economic growth BBC News, Saira Syed (6/9/12)
Study says world beer production hits new high Long Island Business News, Associated Press (8/8/12)
Global beer sales go up for 27th year running News Track India (9/8/12)
Questions
- Use a supply and demand diagram to analyse recent trends in beer consumption across the world.
- Which factors have caused demand in emerging markets to increase? Based on your answer to the previous question, how might that have affected equilibrium prices?
- How has growth in beer consumption throughout Asia benefited Western producers?
- What would you expect the price and income elasticities of demand to be for a product such as beer? Explain your answer.
- To what extent do you think this trend in beer production is a sign of globalisation?
- Evaluate the extent to which the growth in consumption and production of beer in Asia is a good thing. You should consider everyone who and everything might be affected!
With globalisation, more and more businesses have found it beneficial to ‘go global’. There are many reasons why a firm might choose to expand its production or market to other countries and one particular advantage is cutting costs in the manufacturing of products.
Countries such as China and India have become leaders in production. Look at many of the items you own – I’m sure you’ll see a ‘Made in China’ or ‘Made in India’ amongst them. These fast emerging countries were highly sought after as places to produce due to much cheaper production costs. This advantage led to Western companies outsourcing much of their manufacturing base to China, as a means of retaining a competitive advantage.
However, the cost advantages that China boasted are now less significant and we may be about to see the emergence of a new manufacturing hub. Other countries that are further behind the BRICS in the development process now have cost advantages over places like China and so we may see another transfer of manufacturing to other parts of the world.
When splitting up a supply chain to gain cost advantages a key consideration is the extent to which you lose control. Communication and co-ordination issues can emerge when design takes place in one country; production in another and then the products are sold around the world. When cost differences are huge, these problems can be overlooked, as what they might cost you in terms of lost time etc. is easily made up by savings through cheaper labour.
However, when the cost advantages of production in China shrink, companies are still left with the problems of communication and co-ordination. These now represent more significant costs that could be reduced were production to revert to the country of design or if production were to be moved to an even cheaper country.
The following article from BBC News considers the issues surrounding the supply chain and how businesses may benefit from more collaboration.
Better collaboration lets businesses take back the supply chain BBC News, Alastair Sorbie (15/6/12)
Questions
- What are the arguments for becoming a multinational?
- Why do host countries, such as the BRICS accept inward investment? What do they gain from it?
- Explain how the product life cycle can affect the profitability of a MNC and how the company might respond.
- What are the disadvantages to a MNC from ‘going global’?
- What are the problems faced by developing countries acting as host nations?
- How has technology affected both big and small businesses?
With the fall of communism in eastern Europe between 1989 and 1991, many hailed this as the victory of capitalism.
Even China, which is still governed by the Chinese Communist Party, has embraced the market and accepted growing levels of private ownership of capital. It is only one or two countries, such as North Korea and Cuba, that could be described as communist in the way the term was used to describe the centrally planned economies of eastern Europe before 1990.
But whilst market capitalism seemed to have emerged as the superior system in the 1990s, may are now questioning whether the market capitalism we have today is fit for the 21st century. Today much of the world’s capital in the hands of big business, with financial institutions holding a large proportion of shares in such companies. And the gap between rich and poor is ever widening
The market system of today, is very different from that of 100 years ago. In fact, as John Kay agues in his article “Let’s talk about the market economy” below, it would be wrong to describe it as ‘capitalism’ in the sense the term was used in the debates of the 19th and early 20th centuries. Nonetheless, the term is still used and generally refers to the market system we now have. And it is a market system that many see as failing and unfit for purpose. It is a system that coincided with the bubble of the 1990s and early 2000s, the credit crunch of 2007–9 and the recession of 2008/9, now seeming to return as a double-dip recession
With the political and business leaders of the world meeting at the World Economic Forum at Davos in Switzerland on 25–29 January 2012, a central theme of the forum has been the future of capitalism and whether it’s fit for the 21st century.
Is there a fairer and more compassionate capitalism that can be fostered? This has been a stated objective of all three political parties in the UK recently. Can we avoid another crisis of capitalism as seen in the late 2000s and which still continues today? What is the role of government in regulating the market system? Does the whole capitalist system need restructuring?
It’s becoming increasingly clear that we need to talk about capitalism. The following webcasts and articles do just that.
Webcasts and podcasts
Davos 2012 – TIME Davos Debate on Capitalism< World Economic Forum (25/01/12)
Can capitalism be ‘responsible’? BBC Newsnight, Paul Mason (19/01/12)
Capitalism ‘nothing to do with responsibility’ BBC Newsnight, Eric Hobsbawm (19/01/12)
Are there alternatives to capitalism? BBC Newsnight, Danny Finkelstein, Tristram Hunt and Julie Meyer (19/01/12)
America Beyond Capitalism The Real News on YouTube, Gar Alperovitz (27/12/11)
The future of capitalism CNBC, Warren Buffett and Bill Gates (12/11/09)
Capitalism Hits the Fan (excerpt) YouTube, Richard Wolff (2/1/12)
Panel Discussion “20 years after – Future of capitalism in CEE” Erste Group on YouTube, Andreas Treichl, Janusz Kulik, Jacques Chauvet, and media Adrian Sarbu (24/2/11)
The Future of Capitalism: Constructive Competition or Chaos? YouTube, Nathan Goetting, Tony Nelson, Craig Meurlin and Judd Bruce Bettinghaus (24/1/11)
Capitalism in Crisis Financial Times, Various videos (24/1/11)
Bill Gates: Capitalism a ‘phenomenal system’ BBC Today Programme, Bill Gates talks to Evan Davis (25/1/12)
Capitalism (See also) BBC The Bottom Line, Evan Davis and guests (28/1/12)
Articles
Meddle with the market at your peril Financial Times, Alan Greenspan (25/1/12)
The world’s hunger for public goods Financial Times, Martin Wolf (24/1/12)
When capitalism and corporate self-interest collide JohnKay.com, John Kay (25/1/12)
Let’s talk about the market economy JohnKay.com, John Kay (11/1/12)
A real market economy ensures that greed is good JohnKay.com, John Kay (18/1/12)
Seven ways to fix the system’s flaws Financial Times, Martin Wolf (22/1/12)
To the barricades, British defenders of open markets! The Economist, Bagehot’s Notebook (26/1/12)
Community reaction to doubts about capitalism in Davos CBC News (26/1/12)
Capitalism saw off USSR, now it needs to change or die The National (UAE), Frank Kane (26/1/12)
Words won’t change capitalism. So be daring and do something Observer, Will Hutton (22/1/12)
A political economy fit for purpose: what the UK could learn from Germany Our Kingdom, Alex Keynes (20/1/12)
Debate on State Capitalism The Economist (24/1/12)
Questions
- How has the nature of capitalism changed over recent decades?
- Can capitalism be made more ‘caring’ and, if so, how?
- What do you understand by the term a ‘fair allocation of resources’? Is capitalism fair? Can it be made fairer and, if so, what are the costs of making it so?
- Can greed ever be good?
- How does the ‘Anglo-Saxon’ model of capitalism differ from the European model?
- What do you understand by the term ‘crony capitalism’? Is crony capitalism on the increase?
- John Kay states that “Modern titans derive their authority and influence from their position in a hierarchy, not their ownership of capital.” Explain what this means and what its implications are for making capitalism meet social goals.
- In what ways can governments control markets? Have these instruments and their effectiveness changed in effectiveness over time?
- What are the costs and benefits to society of the increasing globalisation of capital?
- To what extent was the financial crisis and credit crunch the result of a flawed capitalist system and to what extent was it a failure of government intervention?
- Why is it important for the success of capitalism that companies should be allowed to fail? Consider whether this should also apply to banks. How is the concept of moral hazard relevant to your answer?
Ministers from around the world met in Durban in the first two weeks of December 2011 to hammer out a deal on tackling climate change. The aim was that this would replace the Kyoto Treaty, due to expire at the end of 2012.
International climate change agreements are particularly difficult to achieve, as there are several market failures involved. Also, there is considerable ‘gaming’, as each country seeks to negotiate a deal that benefits the world as a whole but which minimises the disadvantages to their own particular country.
The conference ended on the 11 December with a last-minute deal. Both developed and developing countries would for the first time work on a legally binding agreement to limit emissions. This would be drawn up by 2015 and to come into force after 2020. The following articles assess the significance of the agreement and whether it represents real progress or little more than a deal to work on a deal.
Articles
‘Modest’ gains as UN climate deal struck Independent (11/12/11)
Landmark deal saves climate talks Irish Examiner (11/12/11)
Durban climate change: the agreement explained The Telegraph, Louise Gray (11/12/11)
Durban climate conference agrees deal to do a deal – now comes the hard part Guardian, Fiona Harvey and Damian Carrington (13/12/11)
Climate deal: A guarantee our children will be worse off than us Guardian, Damian Carrington (11/12/11)
Durban climate deal: the verdict Guardian, Damian Carrington (12/12/11)
Australia hails Cop 17 agreement News 24 Australia (11/12/11)
Climate talks reach new global accord Financial Times, Andrew England and Pilita Clark (11/12/11)
Durban Climate Talks Produce Imperfect Deals Voice of America, Gabe Joselow (11/12/11)
Critics slam climate agreement t Sydney Morning Herald, Arthur Max (11/12/11)
Deal at last at UN climate change talks Euronews on YouTube (11/12/11)
World still in arrears on climate change pledges Reuters Africa, Barbara Lewis (11/12/11)
New UN climate deal struck, critics say gains modest Hindustan Times (11/12/11)
Climate change: ambition gap Guardian (12/12/11)
Canada leaves Kyoto to avoid heavy penalties Financial Times, Bernard Simon (13/12/11)
Durban Platform Leaves World Sleepwalking Towards Four Degrees Warming Middle East North Africa Financial Network, Ben Grossman-Cohen and Georgette Thomas (Oxfam) (13/12/11)
A deal in Durban The Economist (11/12/11)
Assessing the Climate Talks — Did Durban Succeed? Harvard University – Belfer Center for Science and International Affairs – An Economic View of the Environment, Robert Stavins (12/12/11)
Questions
- What was agreed at the Durban Climate Change Conference?
- Why is it difficult to get agreement on measures to tackle climate change? How is game theory relevant to explaining the difficulties in reaching an agreement?
- How would you set about establishing the ‘optimal’ amount of emissions reductions?
- Why will the market fail to provide the optimal amount of emissions reductions?
- Why was it felt not possible for a legally binding international agreement to come into force before 2020?
Apart from denying the UK government tax revenues, the practice by Starbucks distorts competition as competing UK companies, such as Costa, AMT, Caffè Ritazza and the many small independents, do not have the same opportunity for transfer pricing and do pay UK corporation tax. As the Guardian article by Richard Murphy below states:
