By John Gillespie

A Starbucks ‘Venti’ chai tea latte contains a bewildering 52.7g grams of sugar, yet the story of Starbucks has not always been so sweet. While global revenues run into the billions, through shifting company profits Starbucks had (until 2012)  managed to reduce its corporate income tax liability to an effective rate of less than 1% in the UK. With an official UK corporate income tax rate of 20% in 2012, you would be forgiven for finding this difference baffling. The British public did, and the tide of public opinion turned against Starbucks, followed by the hand of the law.

The European Commission identified a cavity in Starbucks’ European Union operation in 2013, and played dentist when it deemed that Starbucks and its relationship with the Netherlands needed a filling. The Commission ruled that the ‘sweetheart’ deal offered by the Dutch had violated European state aid rules, which aim to prevent member states offering specific companies competitive advantages. It was through this relationship that Starbucks was able to dramatically reduce its tax liability across the EU, particularly in the UK.

The legal sovereignty enjoyed by member states allowed the Netherlands to set a super-low tax rate on the sale of royalties, a development that is central to the Starbucks problem. Across borders the tax inspector has little legal flex, and it is not a core interest of the Dutch tax authority, for example, to be concerned with UK tax avoidance. There is no authoritative international tax authority to mitigate possible abuse between different countries, as even the Organisation for Economic Cooperation and Development, which is particularly active in international tax policy reform, is a supranational body with no official authority.

Regarding the control of tax behaviour within Europe, the EU is equipped with some jurisdiction. However taxing rights are, generally speaking, unharmonised across the bloc, and ‘tax competition’ between member states is perceived as healthy in order to promote the competitiveness of the EU market internationally. It is interesting to note that the rules of state aid that Starbucks violated fall under the branch of competition law, not tax law. The coffee giant had not broken the law in reducing its EU tax liability, but rather the Netherlands had breached EU rules in order to entice Starbucks to station its European headquarters in Amsterdam.

Hence, while tax inspectors are constrained by the borders of their legal jurisdiction, companies operate around the world with little restriction. Multinational enterprises often control substantial resources and are able to shift profits between countries in a manner that decreases their overall tax liability, often in a perfectly legal fashion – thanks to the confines of domestic tax law and the impunity of international organisations.

Though there is a lesson to be learned here. Where the law is slow to react to modern corporate practices, we as consumers wield considerable power. Too much sugar causes teeth to rot, and Starbucks lost its bite as UK consumers boycotted the company in 2012, in response to the revelations regarding the company’s tax structuring. The company reacted in an unprecedented fashion and pledged to pay £20 million more in UK tax than it was legally obliged to. The European headquarters was moved to London, and Starbucks has consistently paid more corporate income tax in the UK since. The company’s revenues have correspondingly recovered as the company now prides itself on its social responsibility, served with a shiny white smile.

As revelations regarding questionable cross-border tax structuring continue to surface, with Apple, Amazon, Google and IKEA often mentioned in media leaks such as the recent ‘Paradise Papers’, we ought to bear in mind that though the law may be presently ill-equipped to ensure those companies are taxed in a way we deem fair, we have the power to influence corporate policy in our own pockets.

So next time you are cold and thirsty, what will it be – another chai tea latte?

 

 

John Gillespie is an international student at Uppsala University and is passionate about tax justice and having a good time.

 

 

Image: Madison Bilsborough

Related Posts