Report on HMRC's 2011-2012 Accounts - written evidence

Written evidence from Starbucks

Starbucks Coffee Company respects and complies with tax laws and accounting rules in each of the 61 countries where we do business, including the United Kingdom – a market that we remain committed to for the long term. As a company, 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.

Starbucks in the UK

1. Starbucks entered the UK market in 1998 with the acquisition of The Seattle Coffee Company which then operated 60 stores in the UK. We now operate more than 700 stores and through our licensees provide the rights to operate a further 200 stores in the UK and Ireland; as such we employ nearly 8,500 partners (employees) here. In December of last year we announced that Starbucks would be creating 5,000 new jobs over the next five years, as we directly and in conjunction with our licensees open 300 new stores up and down the country.

2. Starbucks is proud to be making a net positive contribution to the UK. Our presence in the UK has created benefit to the Exchequer. For example, over the last three years we have contributed more than £160m to the Exchequer in various taxes, including National Insurance contributions, Stamp Duty, Insurance Premium Tax, VAT and business rates.

3. However, Starbucks economic impact in the UK spans far beyond our stores and partners. We have spent hundreds of millions of pounds with local suppliers on milk, cakes and sandwiches, and on store design and renovations. In fact, when you consider the indirect employment created by Starbucks investments in the UK, the company’s extended economic impact directly to the UK economy is even more significant and exceeds £80 m annually.

4. In addition to the thousands of new jobs which will be created through our operations over the next few years, we recently committed to creating 1,000 apprenticeships to give young people the opportunity for great careers in retail. This program complements our partnership with UK Youth, a nationwide youth charity, to provide seed funding for young people to undertake community improvement projects in their local communities. We also have an ongoing partnership with the Prince’s Trust to provide work experience and life skills to young people Not in Education Employment or Training (NEET).

Our EMEA and UK Business Structures

5. Our EMEA (Europe, Middle East & Africa) business is headquartered in Amsterdam which provides a central location and a skilled multi-language labour force. It manages operations in 33 countries. Also in Amsterdam is our roasting facility which roasts all coffee beans used in Europe before distributing them to the various markets – the primary reason we selected Amsterdam for our EMEA headquarters.

6. In Lausanne, Switzerland, a global hub for commodity trading, we operate a global coffee buying business. Coffee beans are currently the second most traded commodity in the world and we achieve major economies of scale from centralising this activity in one place. It is also important to note that 75% of the world’s coffee is traded through Switzerland and Starbucks represents less than 5% of the annual coffee trade.

7. We rightly pay a premium for the beans in all our espresso beverages because they are 100% Fairtrade certified. Coffee is one of our major cost components and while we could acquire cheaper coffee, our belief has always been that we should source the highest quality, ethically-sourced coffee. No other major coffee chain in the UK purchases 100% Fairtrade certified espresso.

8. Starbucks in the UK is registered as Starbucks Coffee Company UK Ltd. Our UK headquarters is in Chiswick, West London. Our UK operation is responsible for directly running all stores and product marketing in the UK as well as managing our third party licensee relationships. Other significant business activities such as product development, brand development and trademark protection are carried out either at EMEA level in Amsterdam, where we employ 220 partners in our offices and roasting plant or at global level in Seattle.

9. Finally, it is important to note that Starbucks overall corporate tax rate is nearly 33% for 2012. This compares to a median effective rate of 18.5% for large multinational US companies.

A Summary of Our Tax Affairs in the UK

10. Over the last 14 years we have paid £8.6m of corporation tax in the UK. Corporation tax is a tax on profits and the simple fact is that it has been difficult for us to make a profit in the UK under any measure. Under the rules we are required to follow when reporting our US results, which exclude royalty payments and interest expense, our most profitable year (2007) in the UK had an operating margin of only 6%. It has been stated several times in the press recently that our UK operating margin using our US reporting method has reached 15%. This is categorically incorrect and we have never stated publicly or in our internal records that our UK profit margin has been near 15%.

11. Our lack of profitability in the UK is a source of concern to us as a business. There are a number of reasons behind this. One significant factor is the cost of leasing property in the UK. In the US, property costs amount to around 10% of sales revenue, whereas in the UK they represent around 25% of sales revenues. Nevertheless, our business in the UK is improving and we are restructuring our property portfolio significantly to counteract this. Another factor is that this is a very competitive market to sell coffee and we have to work very hard to attract and retain customers and as noted above, we are committed to providing only ethically sourced coffee. We are optimistic we will become more profitable in the coming years and with 13 consecutive quarters of sales revenue growth on a like-for-like basis behind us, we are moving in the right direction.

12. A large degree of scrutiny has attached itself to the ‘royalty payment’ of 6% we make to our EMEA headquarters in Amsterdam. Charging a royalty payment for the right to use a global brand and for services provided is standard business practice for multinationals. When marketing fees are included, our royalty rate compares quite favourably to other multi-national licensors. As noted above, the royalty also reflects the services provided to Starbucks UK and includes product development, marketing, brand development and trademark enforcement and protection as well as IT and accounting functions in the regional and global headquarters. Were these services not provided to Starbucks UK internally we would have to fund them locally, at much greater cost which would further impair Starbucks UK’s ability to be profitable.

13. It has been discussed that Starbucks financial reporting in the US has suggested a different level of profitability in the UK compared to that declared to HMRC by the UK business. This is simply and entirely due the different requirements that American and UK tax authorities place upon the way we file our accounts. Specifically, US accounting rules (US GAAP) require us to exclude intra-company royalty payments and loans interest for tax filing purposes whereas UK rules require us to include them. Starbucks UK, as a subsidiary of a US multi-national company, is obliged to follow US GAAP principles.

14. We would like to reiterate for consideration that corporation tax is only one of a multitude of taxes businesses pay. Taking into account business rates, VAT, employer national insurance contributions, Stamp Duty and other business taxes, we estimate our overall contribution to the Exchequer amounts to be over £160m over the last three years. We also employ around 8,500 people and, as noted above, directly and indirectly in our supply chain activities and through our licensees are hoping to create thousands of jobs in the UK. Our point is that Starbucks makes a net positive contribution to the UK and we are proud to do so.

How We Work with HMRC

15. We respect the difficult task HMRC faces in administrating taxes across many tax jurisdictions. This administration requires working with other tax jurisdictions to determine the amount of tax revenue each jurisdiction is entitled to, based upon activities carried on in each jurisdiction. Each jurisdiction is competing for tax revenue dollars as well as competing to attract business to their jurisdiction. Our relationship with HMRC is nothing other than professional. We have always been willing to engage and, in our belief, have been nothing other than cooperative and respectful. We consider this an appropriate relationship between a company and its tax authority and it reflects how we work with equivalent bodies in countries around the world.

16. HMRC has completed an extensive audit of our tax years FY 2003 to FY 2008. This audit resulted in a reduction in our tax deduction for the royalty payments from 6% to 4.7%. We are currently engaged in negotiations with HMRC to reach an agreement on the appropriate tax deduction for our royalties from FY 2010 to FY 2016.

Starbucks Future in the UK

17. Over recent years we have been restructuring our business in the UK to position it for further growth. In particular, this has involved managing our property costs downwards, deploying new format stores such as drive-thru which trade very effectively, and diversifying into at-home coffee machines, franchising and vending. There can be no doubt that we are trying to grow.

18. The overall strategy for the UK is continuing investment which creates jobs, expands the business and – ultimately – will see us become a profitable operation in the coming years. We announced in December that we are aiming directly and through our licensees to open 300 stores and create net 5,000 jobs in the UK in the next five years.

19. As we return to profitability our tax responsibilities will change and we anticipate paying greater amounts of corporation tax in the UK in the future and at the same time our overall tax contribution will continue to escalate.

12 November 2012

Prepared 23rd November 2012