Tax

Angry U.K. Lawmakers Confront Starbucks CFO

The finance chief, Troy Alstead, scrambles to explain why the coffee company pays no corporate tax in Britain.
Andrew SawersNovember 19, 2012

A British parliamentary committee is investigating claims that several large U.S.-based companies have been underpaying corporate taxes. Starbucks’s global CFO, Troy Alstead, as well as senior executives from Google and Amazon, were called to testify amid public uproar over the matter.

Reuters reported in October that Starbucks had paid no U.K. corporate tax in the last three years on revenue that exceeded $3 billion over that period. Member of Parliament Austin Mitchell told Alstead, “You are either running the business very badly, or there is some fiddle going on.” Mitchell compared Starbucks’s tax record with that of its U.K. rival, Costa: “In the year ending 3 March 2011, Costa made a profit before tax of £49.5 million, and paid £15.5 million in corporation tax on that. You get away scot-free.”

Parliament is suspicious that the companies are trying to dodge the United Kingdom’s 24% corporate tax rate, which, for example, is twice as high as the 12% rate in Switzerland, where Starbucks operates its worldwide coffee-trading activities, and the 12.5% rate in Ireland, headquarters of Google’s European operations.

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Alstead, for his part, insisted that the U.K. coffee-shop market was “the single most competitive coffee and espresso market anywhere in the world” and that in 15 years of doing business in the country, Starbucks had only once been able to make a small profit.

That didn’t impress committee chair Margaret Hodge, who said, “That just doesn’t ring true, Mr. Alstead. That is what frustrates taxpayers in the U.K. You’ve got to give us a better explanation.” The CFO then specified that property costs were about two-and-a-half times higher than in the United States and that the company had made “strategic mistakes” in its choices of locations.

“I think the allegation is that the way in which you set charges against the U.K. business means that you manipulate the profits out of the U.K. into tax havens,” Hodge replied.

Alstead countered, “We have no tax havens in Bermuda, Cayman, or anywhere else around the world. We never have and never intend to.”

Starbucks pays a royalty of 4.7% on its U.K. revenue to its Amsterdam-based regional headquarters. It had been paying 6%, its standard royalty in Europe, until U.K. tax authorities stepped in and negotiated the lower rate. Alstead could not provide any data or calculations to explain the 6% figure. “There must be some figures underpinning [it],” said Hodge. Replied Alstead, “No, there are not. It is an all-in fee that we have triangulated over the years.”

When Alstead noted that there were innovation costs to pay for, one parliamentarian told him, “It’s a cup of coffee. It’s not an internal combustion engine. I take the point about branding and advertising, but the generic coffee-making process is not that difficult.”

The company’s Switzerland-based coffee-trading unit charges affiliates in the United Kingdom and elsewhere a 20% mark-up. Explaining what the trading organization does to justify the mark-up, Alstead said, “They run all our global buying operations, they run our sustainability programs, and they [run] all the agronomy offices that we operate around the world in the growing regions, where we work with farmers around sustainability, transparency, and social programmes – that is all run out of our global buying operation.”

He added that Switzerland is “a world-recognized coffee-buying place – 75% of the world’s coffee is traded through Switzerland.”

When pressed to further explain why the mark-up is 20%, he said, “That is benchmarked, based on transfer-pricing regulations in tax authorities all around the world.” Switzerland, he added, has always been profitable: “There has been an approximate net profit in the single-digit range – 7% or 8% – throughout all our history there.”

At the close of the proceedings, Alstead told the committee, “We sincerely believe that we are doing everything to an ethical standard – not just the legal standard, but exactly what we should be doing. We will continue to do our best to communicate that both here and with our customers.”

Closed Book
Appearing at the same hearings were Andrew Cecil, Brussels-based director of public policy for Amazon, and Matt Brittin, Google’s vice president of sales and operations for northern and central Europe.

Cecil came under fire for Amazon’s failure to disclose its U.K. revenue, other than £207 million for a subsidiary that provides fulfillment services. For its core online retail sales, the company operates in Europe through a single company, Luxembourg-based Amazon EU Sarl, that recorded Europe-wide revenue of €9.1 billion in its most recent fiscal year, on which Amazon made an after-tax profit of just €20 million.

On being challenged to provide a revenue split that reveals the U.K. sales figures, Cecil replied, “I am very happy, should the committee wish, to come back and see whether it is possible to disclose them privately to the committee.” Replied Member of Parliament Ian Swales, himself a former finance director, “That is totally evasive.”

Google’s U.K. revenues were £396 million last year, with an accounting profit of £31 million and a U.K. tax bill of £6 million. However, the U.K. business provides services to other Google units in Europe that are charged to the company’s European headquarters in Ireland. Brittin noted that the Ireland operations are administered in Bermuda, which also holds the intellectual property rights for the company’s non-U.S. sales.

“We comply with the law in the U.K.,” Brittin said. “It would be very hard for us to pay more tax here based on the way we are required to structure [the business] by the [tax] system. Tax is not a matter of personal choice, but a matter of following the law and the rules, which is what we do.”