Starbucks coffee company transformation and renewal summary

1

STARBUCKS:

SOCIAL RESPONSIBILITY AND TAX AVOIDANCE

ABSTRACT

This instructional case is designed to explore how accounting choices, and specifically tax

minimization practices, should consider a company’s overall strategy and positioning within

multiple stakeholder groups. Starbucks had been successful in growing its stores and presence in

the United Kingdom (UK), and described the profitable growth to investors as something it

wanted to build on in other international markets. However, in its 15 years of operations in the

UK, the company had paid UK corporate income taxes only once. Using a combination of legal

tax avoidance practices (e.g., transfer prices, royalty payments, interest expense), Starbucks UK

had effectively shifted taxable income to other Starbucks subsidiaries where it would be taxed at

lower rates.

In 2012, Starbucks in the UK faced a public relations furor over its failure to pay British

corporate income taxes. While the tax avoidance practices Starbucks used were common among

multinational companies, Starbucks had been very public in its commitment to being socially

responsible and a good citizen of the communities in which it operated. This included, among

other aspects, paying fair wages to employees and paying fair prices to coffee growers in

developing countries. Thus, its critics found it easy to point out that not paying its fair share of

taxes was inconsistent with the image Starbucks was portraying to consumers.

Case questions are designed to help you think about the strategic, legal, ethical, and public

relations implications of tax minimization strategies, especially when companies portray

themselves as responsible “citizens” of the communities in which they operate. The questions

also probe whether other characteristics of firms, including their “home” country and the nature

of the business, have implications for public perceptions about corporate tax minimization

strategies.

Keywords:

Starbucks

Taxes

Tax avoidance

Transfer prices

Tax havens

Corporate social responsibility

United Kingdom

Great Britain

2

1. Introduction

After years of success and rapid growth, Starbucks found itself struggling as the global economy

entered a financial crisis that would become “the great recession” (Barbaro & Martin, 2008). In

January of 2008, Starbucks’ CEO, Howard Schultz, articulated a “Transformation Agenda” to

address the challenges facing the company and ensure long-term future success (Schultz, 2008).

Although this agenda was multifaceted and outlined many changes, Schultz was careful to note

that the company’s commitment to social responsibility would not change. In the first of a series

of “Transformation Agenda Communications,” Schultz stated:

But even as we execute this transformation, there are certain integral aspects of

our company that will not change at all. These include our commitment to

treating each other with respect and dignity, providing health care and Bean

Stock for all of our eligible full- and part-time partners, and our commitment to

our community efforts, our ethical sourcing practices and encouraging our coffee

suppliers to participate in our CAFE practices program in our origin countries.

(Schultz, 2008)

By the end of 2012, Starbucks was reporting increased earnings, revenue growing at more than

11%, and was raising its forward-looking profit forecasts (Baertlein, 2012). It also found itself

facing a public relations challenge that threatened the company’s brand and reputation for

corporate social responsibility (Houlder, 2012). On October 15, 2012 Reuters published a report

titled, “Special Report: How Starbucks avoids UK taxes” (Bergin, 2012). This report described

the location of Starbucks affiliates and the inter-company transactions that explained how

Starbucks’ UK stores could generate operating profits but legally report no taxable income in the

UK. This story received a lot of media attention, and Starbucks made some attempts to respond

to the criticism it received for its tax avoidance efforts. These responses seemed to only fuel the

criticism from the media, its customers, politicians, and UK businesses that paid UK corporate

tax on profits. Amid UK budget cuts to social services, protesters sought to bring attention to the

impact of corporate tax avoidance on tax revenues and social services in the UK. Starbucks

became a target for protesters because its UK stores were quite visible and reported billions of

pounds of sales, while the company had paid almost no UK income taxes since beginning

operations in 1998. Exhibit 1 includes links to news videos including footage of the protests.1

Public accusations of “immoral” tax avoidance and “ripping off” taxpayers (Syal & Wintour,

2012) were not consistent with Starbucks’ image and the community responsibility it had

assumed:

1 All data and information are from the time of the UK row over Starbucks’ tax avoidance - late 2012 (the company’s fiscal year ended in 2013). The epilogue provides updated information on

subsequent events. Other companies are currently receiving scrutiny over their tax strategies,

and firms face similar issues on a regular basis. The intent of keeping this case set in 2012 is to

allow readers to experience events as an accountant or tax professional at Starbucks during that

time period.

3

We’ve been building a company with a conscience for more than four decades,

intent on the fair and humane treatment of our people as well as the communities

where we do business, and the global environment we all share. We are proud of

our heritage. Yet never before have we seen the marketplace and today’s

consumers have such a deep interest in and knowledge about what companies

stand for and how they are living up to their promises. Not only is standing for

something beyond making a profit the right thing to do, it is the way business must

be conducted in the 21st century. Only by doing business through the lens of

humanity can an organization establish a crucial reservoir of trust with its people

and its customers. At Starbucks, it is a trust we must earn every day. (Starbucks,

2012c)

Exhibit 1: Video links

Jonathan Paige, theguardian.com, December 8, 2012, video available at

http://www.theguardian.com/business/video/2012/dec/08/uk-uncut-starbucks-taxes-video; last

accessed April 1, 2016.

Starbucks, Amazon, Google accused of UK tax avoidance

NBC Nightly News (reported by iTV’s Libby Weiner), December 3, 2012, video available at

http://www.nbcnews.com/video/nightly-news/50056785#50056785; last accessed April 1, 2016.

http://www.theguardian.com/business/video/2012/dec/08/uk-uncut-starbucks-taxes-video
http://www.nbcnews.com/video/nightly-news/50056785#50056785
4

2. A tale of two Starbucks

Starbucks began UK operations in 1998 (Bergin, 2012), and as of September 29, 2013, 764

stores were open (549 company-owned and 215 licensed stores) (Starbucks, 2013a, pp. 4-6). In

communications with analysts and investors between 2001 and 2011, Starbucks executives

described its UK operations as profitable and held the unit’s successful operation up as a model

for other international markets (Bergin, 2012). Nevertheless, it consistently reported net losses

to UK tax authorities, reporting a taxable profit only once in its first 14 years of operations in the

UK (BBC News, 2013).

Starbucks characterized the performance of its UK operations in distinctly different ways to two

different audiences: to investors, Starbucks described its UK operations as profitable, but to UK

tax authorities the company reported losses (Bergin, 2012). Although this may seem

disingenuous at best, there were no allegations of illegal actions. Financial accounting standards

establish the parameters for reporting net income or loss reported to investors in a company’s

financial statements. Tax rules are distinct from financial accounting standards, making it quite

common for taxable income to differ from net income reported in financial statements.

Multinational corporations like Starbucks have operations in multiple taxing jurisdictions, further

complicating the determination of the amount of income subject to taxation in any particular

country.

3. Incentives and mechanisms for shifting and minimizing taxable income

Countries have different income tax policies, regulations, and rates. This creates incentives for

companies to minimize taxes by shifting taxable income across jurisdictions. For decades,

multinational companies have used well-known techniques to legally shift profits from high tax

countries to lower tax countries. Transfer pricing, for example, is one of the most commonly

used methods to shift profits.

A transfer price is the price charged in a business transaction between entities under common

ownership. Multinational companies can reduce income taxes by locating a subsidiary in a

country with favorable tax policies, and using this subsidiary as a supplier to other subsidiaries

located in higher-tax countries. This tax advantage can be increased by charging the highest

price possible for supplies, reducing the profit reported by the purchasing subsidiaries in high-tax

countries, and increasing that of the supplier (the subsidiary in a low-tax country). Since the

transacting companies are part of the same multinational company, transfer prices and the

allocation of profits across subsidiaries have no effect on the total gross profit reported in the

consolidated financial statements for the entire corporation. However, transfer prices and the

allocation of profit across subsidiaries in multiple tax jurisdictions can substantially affect the

total income tax paid by a multinational company, and thus its consolidated net income. It can

also affect the amount of income tax that a multinational company pays in individual countries.

Transfer prices are established by companies under common control, and it can be difficult to

determine an arms-length transaction price. Substantial judgment is often necessary to determine

5

where value is created in order to determine an appropriate transaction price. This creates

opportunities for multinational companies to use transfer pricing opportunistically to minimize

taxes. However, it also creates uncertainty and risk for multinational companies, since transfer

prices are subject to scrutiny by income tax regulators. The amounts involved can be substantial.

For example, in 2006 the US IRS reached a $3.4 billion settlement with GlaxoSmithKline in a

transfer-price dispute (McKinley, 2013).

In recent years, technology companies have become associated with the use of transfer pricing

approaches to reduce income taxes. These companies rely on intellectual property, which is

much easier to move than tangible property. A multinational company’s intellectual property

can be held by one subsidiary that then charges royalty or licensing fees to other subsidiaries. By

selectively choosing the tax jurisdictions where intellectual property is held and establishing the

licensing fees charged, multinational companies can effectively shift income across tax

jurisdictions. Google has been particularly adept at using these techniques to minimize taxes.

Over a three-year period beginning in 2007, Google saved $3.1 billion and increased reported

earnings by 26 percent (Drucker, 2010).

Tax rates vary by country, by the type of activity being taxed, and sometimes through special

arrangements between companies and local tax authorities as part of an incentive package for the

company to make investments in a certain location. For example, 2012 corporate tax rates in

Switzerland were generally under 20% (varying significantly by canton), while corporate taxes

were 24% in UK, 25% in Netherlands, and up to 40% in USA (KPMG, 2016). In certain

countries corporate earnings were not taxed (e.g., Bahamas, Bermuda, Cayman Islands).

However, the Swiss tax rate on commodity trading gains was 5%, and the rate on royalties for

the use of intellectual property was as low as 2% (Bergin, 2012). Ireland also taxed royalties at

5%. Thus, a company that chose to have royalties paid to a subsidiary in a country with lower

taxes on royalties, and traded commodities (e.g., coffee) through countries with lower taxes on

trading gains, could reduce its overall tax bill compared to a company that did not structure

transactions in this manner.

4. How Starbucks’ shifted UK operating profits to other taxing jurisdictions

Transactions between affiliated companies under the common control of Starbucks helped to

create the taxable losses reported to UK tax authorities. These can be categorized into the

following three areas:

Royalty Payments: Starbucks’ UK unit was charged a royalty fee for the right to use intellectual

property including the Starbucks brand and various business operations. This fee, equal to 6

percent of sales, was deductible for UK taxable income. These royalties were channeled through

various Starbucks owned companies in ways that reduced the effective tax rate to less than 5

percent (Wykes, 2013).

For every £1 million revenue, Starbucks UK would pay £60,000 in royalties to another Starbucks

entity and deduct this amount in computing its UK taxable income. If Starbucks UK had not

made these royalty payments, for every £1 million in revenue, its deductible expenses would

6

have been lower and its taxable income would have been £60,000 higher. At the UK corporate

tax rate of 24%, Starbucks UK would have been subject to about £14,400 of taxes on every £1

million in revenue. The royalty payments effectively shifted taxable income from the UK to a

jurisdiction with a much lower tax rate.

Transfer Pricing: The coffee sold at Starbucks stores in the UK was purchased from a Starbucks

trading company based in Switzerland, and was roasted by a Starbucks company based in the

Netherlands. Of course the actual coffee beans originated somewhere with a tropical climate,

and may never have passed through Switzerland. Switzerland, however, was just the legal

address for the trading company. Ultimately, the transaction prices between the three Starbucks

entities determined a major component of the cost of the products sold by Starbucks’ UK stores.

By paying a higher price for coffee to another Starbucks entity, Starbucks UK increased costs

and reduced taxable income reported in the UK, thus shifting profit to its Dutch and/or Swiss

entities. Although corporate income tax rates were similar in the UK and the Netherlands (24

and 25 percent, respectively), in Switzerland, profits from international commodity trades were

taxed at 5 percent (Bergin, 2012). Starbucks also had a special tax agreement with the

Netherlands as part of its agreement to locate its roasting facilities there. Thus, Starbucks’

corporate tax rate in the Netherlands was lower than the standard corporate rate (European

Commission, 2015).

Example: Assume that Starbucks Switzerland paid suppliers £900,000 to have green (un-

roasted) coffee delivered to Starbucks roasting facilities in the Netherlands, and charged the

Dutch roasting entity £1.2 million for the beans and its sourcing services. The Dutch entity then

roasted the beans, and sold them to Starbucks UK for £1.5 million to cover the cost of roasting

and transport, as well as a royalty payment it made to another Starbucks entity for the

“knowledge” it used to roast and package the beans. Assuming that the actual cost of the coffee

delivered to the UK, including transportation, logistics management, and roasting, was £1

million, Starbucks UK paid an extra £500,000 for the roasted coffee. The inflated transfer price

increased Starbucks UK’s deductible costs, and thus reduced its taxable income by £500,000.

At the UK corporate tax rate of 24%, if this transfer price had not been inflated, £500,000 would

have flowed through to taxable income, and Starbucks UK would have owed £120,000 in taxes

for every £1 million worth of roasted coffee beans.

Inter-company debt: Starbucks financed the growth of its UK operations with inter-company

debt, and charged an interest rate (LIBOR2 plus 4%) that was substantially higher than its

corporate bond rate (LIBOR plus 1.3%) and the rate that other US multinational restaurant

chains charged their subsidiaries (typically LIBOR plus 2%) (Bergin, 2012). The interest

Starbucks UK paid to other Starbucks companies was deductible and reduced the amount of

income subject to tax in the UK. Starbucks UK paid £2 million in interest payments to other

Starbucks companies in its 2012 fiscal year (Bergin, 2012). Because of the high inter-company

interest rate, Starbucks UK paid approximately £1 million more interest than it would have paid

at its corporate bond rate. At a corporate tax rate of 24%, this incremental interest expense

reduced UK taxes by £240,000. Starbucks UK’s interest payments would represent interest

2 LIBOR is an interest rate that banks charge each other, and is typically used as a benchmark for setting other interest rates.

7

revenue for another Starbucks entity and be subject to income tax, but once again that entity

would be strategically located in a tax haven where the rate was substantially lower than the rate

in the UK.

5. Starbucks and social responsibility

Since 2001, Starbucks articulated a commitment to corporate social responsibility and issued a

Global Responsibility Report (Starbucks, 2013b). Exhibit 2 includes excerpts from Starbucks’

2013 Annual Report (filed with the Securities Exchange Commission as Form-10K) that reflect

the importance of social responsibility to the company’s business and brand. In 2008, the

company established a set of goals related to ethical sourcing, environmental impact, and

community improvement (Starbucks, 2013b, p. 3). Starbucks’ annual Global Responsibility

Report includes a summary of its performance related to these goals. The Starbucks Global

Responsibility Goal Performance Summary for fiscal 2013 is reproduced in Exhibit 3.

Exhibit 2

Selected excerpts from Starbucks 2013 Annual Report regarding social responsibility

(emphasis added)

Item 1. Business

Global Responsibility

We are committed to being a deeply responsible company in the communities where we do

business. Our focus is on ethically sourcing high-quality coffee, reducing our environmental

impacts and contributing positively to communities around the world. Starbucks Global

Responsibility strategy and commitments are integral to our overall business strategy. As a result,

we believe we deliver benefits to our stakeholders, including employees, business partners,

customers, suppliers, shareholders, community members and others. For an overview of Starbucks

Global Responsibility strategy and commitments, please visit www.starbucks.com.

Item 1A. Risk Factors

You should carefully consider the risks described below. If any of the risks and uncertainties described in

the cautionary factors described below actually occurs, our business, financial condition and results of

operations, and the trading price of our common stock could be materially and adversely affected.

Moreover, we operate in a very competitive and rapidly changing environment. New factors emerge from

time to time and it is not possible to predict the impact of all these factors on our business, financial

condition or results of operation...

Our success depends substantially on the value of our brands and failure to preserve their value,

either through our actions or those of our business partners, could have a negative impact on our

financial results. We believe we have built an excellent reputation globally for the quality of our

products, for delivery of a consistently positive consumer experience and for our corporate social

responsibility programs. Our brand is recognized throughout the world and we have received high

ratings in global brand value studies. To be successful in the future, particularly outside of US, where the

Starbucks brand and our other brands are less well-known, we believe we must preserve, grow and

leverage the value of our brands across all sales channels…

Business incidents, whether isolated or recurring and whether originating from us or our business

partners, that erode consumer trust, such as contaminated food, recalls or actual or perceived breaches of

privacy, particularly if the incidents receive considerable publicity or result in litigation, can significantly

8

reduce brand value and have a negative impact on our financial results. Consumer demand for our

products and our brand equity could diminish significantly if we or our licensees or other business

partners fail to preserve the quality of our products, are perceived to act in an unethical or socially

irresponsible manner, fail to comply with laws and regulations or fail to deliver a consistently

positive consumer experience in each of our markets. Additionally, inconsistent uses of our brand and

other of our intellectual property assets, as well as failure to protect our intellectual property, including

from unauthorized uses of our brand or other of our intellectual property assets, can erode consumer trust

and our brand value and have a negative impact on our financial results.

Source: Starbucks. (2013a). Annual Report. Retrieved from

http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-reportsAnnual; last accessed April

1, 2016.

Exhibit 3

Starbucks global responsibility goal performance summary for fiscal 2013

Source: Starbucks Global Responsibility Report, Goals and Progress 2013, p. 28

Additionally, Starbucks took strong positions regarding its responsibility to employees.

Starbucks refers to employees as “partners” and provides benefits to all partners working 20 or

more hours per week. These benefits include store discounts, weekly free coffee, 401(k) plans

with matching contributions, discounted stock purchase options, tuition discounts at certain

universities and a limited tuition reimbursement program, adoption assistance and health

insurance for employees, their dependents, and domestic partners (Starbucks, 2012b).

Starbucks also took a strong position on the minimum wage. All Starbucks employees earned

more than the federal minimum wage, and Howard Schultz, the CEO, has supported increasing

http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-reportsAnnual
9

the minimum wage (Lobosco, 2014). Starbucks also has programs designed to create jobs

(Starbucks, 2014a), and since 2007 has been a member of the Armed Forces Network, an

organization that seeks to help employ and support veterans and military spouses (Starbucks,

2014b, Starbucks 2013c).

Starbucks’ website provides a link to awards and recognition that it has received. Exhibit 4

reproduces this list from 2012. The list is prefaced with the statement that, “Since the beginning,

Starbucks has been a different kind of company. One that is dedicated to inspiring and nurturing

the human spirit.” (Starbucks, 2012a). Most of these awards relate to Starbucks’ social

responsibility accomplishments, and the selection of awards included on the list reflects the value

that the company places on recognition for ethical and responsible behavior.

Exhibit 4

Starbucks company recognition

Source: Starbucks website accessed January 7, 2015. This link is no longer available. http://globalassets.starbucks.com/assets/5e71c94483a44a5db41abf79581fbf22.pdf

http://globalassets.starbucks.com/assets/5e71c94483a44a5db41abf79581fbf22.pdf
10

6. Starbucks’ initial response to the UK protests

Reuters published its “Special Report: How Starbucks avoids UK taxes” on October 15, 2012

(Bergin, 2012). The company responded quickly to the media attention, posting a statement on

its website entitled “Starbucks Commitment to the UK” on October 17th (Engskov, 2012a),

reproduced in Exhibit 5. In this statement, Starbucks Coffee UK’s managing director, Kris

Engskov, noted that while Starbucks had not paid UK corporate income tax, it had paid hundreds

of millions of pounds in a variety of taxes in the UK, including National Insurance contributions

for its employees. He also noted that the company was investing in UK operations, and

contributing to the UK economy by opening hundreds of new stores, creating thousands of new

jobs, and purchasing services and supplies from UK companies. By creating income

opportunities of individuals and other UK businesses, Starbucks’ economic activities helped

generate UK tax revenues (Engskov, 2012a).

Exhibit 5

October 17, 2012 Statement by Starbucks Coffee UK’s managing director

Starbucks Commitment to the UK 17 October 2012

Posted by Starbucks

Following a number of stories in the media over the last day about Starbucks and the amount of tax we pay each

year, I believe it’s important that we share the facts with you on this important issue.

The most important thing to understand is that Starbucks does pay tax in the UK. Indeed over the last three years

we have paid over £160 million in various taxes including National Insurance contribution for our 8,500 UK

employees, and business rates.

The truth of the matter is, the one tax that has been debated in the media, corporation tax, is based on the profits

we make in this country – and regrettably we are not yet as profitable as we’d like to be. Is our ambition to be

much more profitable, and therefore pay more corporation tax? Absolutely right, and that is why we are making

long-term investments in the UK, creating new jobs, opening new stores and delivering new and innovative

products for our customers.

The UK represents a very important market for us and I want to be really clear about what contribution we make to

the country. Yes, we pay our taxes, but we are here to invest and grow the business. We have raised capital to

invest in 5,000 new jobs and open 300 new stores up and down the country. We are also creating 1,000

apprenticeship positions. We contribute to Britain by buying local products such as cakes, milk, sandwiches and

using local suppliers to do things like store design and renovation. I am confident these kinds of investments will

make us more profitable in the future, and as a result, the corporation tax we pay will increase.

I also wanted to clear up some misapprehensions about a few aspects of our business that have impacted our

financial performance: how we source and roast our coffee beans, the royalty we pay to use the Starbucks brand in

the UK and the competitive nature of selling coffee in the UK.

Let me start with the beans. To achieve economies of scale for the region we have a buying operation in

Switzerland and a shared roasting plant in Amsterdam – it doesn’t make good business sense for wholesale bean

buying or roasting to happen in each country. So for the UK we buy and roast our coffee in Europe, the same as

other Starbucks businesses in the region.

In terms of the fees we pay to use the Starbucks brand, we pay a royalty levied against our revenues to use the

brand in the UK. This is applied wherever we operate in the world at a consistent rate, as is the case for many

other global brands.

Finally, the UK is one of the most competitive places to sell coffee in the world and this has had a real impact on

the profits we make and therefore the corporation tax we generate. There are three reasons for this. The rent we

pay on our stores here in the UK is among the highest in the world. We spend more on the quality of our coffee than our competitors – offering 100% Arabica and 100% Fairtrade espresso coffees. We also spend more on store

design so the customer experience is as good is it could possibly be. We have heard that these investments in

quality are important to our customers and they are certainly important to us – and well worth the investment. We

11

haven’t always got it right in the past but all of these initiatives, and our focus on making sure we give British

customers what they want and need, have put us on a track for growth.

I want to say that this is a really important issue to me and to Starbucks. The UK is one of the most dynamic

espresso markets in the world, and we’re proud to do business and pay taxes here. As we continue to grow, we will employ more and more partners and contribute to the communities where we do business in new and

meaningful ways.

Thank you for listening and I look forward to reading your comments and suggestions.

Kris Engskov

Managing director

Starbucks Coffee UK

Source: http://www.starbucks.co.uk/blog/starbucks-commitment-to-the-uk/1240, last accessed

April 1, 2016.

Mr. Engskov acknowledged that Starbucks Coffee UK did buy coffee that was sourced by a

Swiss affiliate and roasted by a Dutch affiliate, but argued that this made good business sense

due to economies of scale. He justified the royalty fee paid for use of the Starbucks brand by

arguing that this fee was applied globally at a consistent rate and that the practice was similar to

that of other companies with global brands. Mr. Engskov did not comment on the tax

implications of its transfer pricing or the tax benefits of the particular arrangements of the

transactions across affiliates based in countries with different tax policies (Egnskov, 2012a).

As media attention grew, and Starbucks’ UK tax avoidance was criticized by its customers,

politicians, UK competitors and other UK businesses that paid the UK corporate tax on income,

Starbucks once again responded with a public statement. On December 6, 2012 Mr. Engskov

posted an “open letter” on the company’s website and made a speech at the London Chamber of

Commerce & Industry announcing its decision to change its approach to corporate tax (Engskov,

2012b). While reiterating that Starbucks had always paid taxes in accordance with the law, Mr.

Engskov announced that the company would “voluntarily” choose not to claim UK tax

deductions for inter-company royalty payments, interest charges or mark-ups on coffee included

in transfer prices. Starbucks estimated that in 2013 and 2014 it would pay approximately £10

million in each year for UK corporate tax on income (Engskov, 2012b). Mr. Engskov’s open

letter is reproduced in Exhibit 6, and a link to his speech announcing the change in tax policy is

provided in Exhibit 7. On its UK website, Starbucks posted a page with Tax FAQs that includes

a link to the London Chamber of Commerce and Industry speech (Starbucks, 2014c).

Exhibit 6

December 6, 2012 open letter from Starbucks Coffee UK’s managing director

An Open Letter from Kris Engskov

06 December 2012

Posted by Kris Engskov - managing director Starbucks Coffee Company UK

Today, we’re taking action to pay corporation tax in the United Kingdom– above what is currently required by tax law. Since Starbucks was founded in 1971, we’ve learned it is vital

to listen closely to our customers – and that acting responsibly makes good business sense.

Over the more than 14 years we’ve been in business here in the UK, the most important

asset we have built is trust. Trust with our partners (employees), our customers and the

wider society in which we operate.

http://www.starbucks.co.uk/blog/starbucks-commitment-to-the-uk/1240
12

The fact remains that Starbucks has found making a profit in the UK to be difficult. This is a hugely competitive market and we have not performed to our expectations over the many

years we’ve been in business here.

It has always been our plan to become sustainably profitable in the UK. We annually inject

nearly £300 million into the UK economy and are exploring additional initiatives to expand

our growth and speed our way to profitability in future.

And while Starbucks has complied with all UK tax laws, today we are announcing changes

that will result in the company paying higher corporation tax in the UK. Specifically,

Starbucks will not claim tax deductions for royalties and standard intercompany charges. Furthermore, Starbucks will commit to paying a significant amount of tax during

2013 and 2014 regardless of whether the company is profitable during these years.

Starbucks will continue to open our books to HM Treasury and HM Revenue and Customs on

an ongoing basis to ensure our financial performance and tax structure is transparent and

appropriate.

The commitments Starbucks is making today are intended to begin a process of enhancing

trust with customers and the communities that we have been honoured to serve for the past 14 years. And we will do even more. Our contribution will increase as we train over 1,000

apprentices over the next two years and pursue a series of initiatives that will increase

employment and investment.

We know we are not perfect. But we have listened over the past few months and are

committed to the UK for the long term. We hope that over time, through our actions and

our contribution, you will give us an opportunity to build on your trust and custom.

Yours sincerely,

Kris Engskov, managing director, Starbucks Coffee Company UK

Source: http://www.starbucks.co.uk/blog/an-open-letter-from-kris-engskov/1249; last accessed

April 1, 2016.

Exhibit 7

http://www.starbucks.co.uk/blog/an-open-letter-from-kris-engskov/1249
13

Link to video of Mr. Engskov’s December 6, 2012 announcement of Starbuck’s change in tax

policy.

Source: http://www.starbucks.co.uk/our-commitment; last accessed April 1, 2016.

http://www.starbucks.co.uk/our-commitment
14

Starbucks’ decision to pay more UK tax than required by law did little to defuse protests about

its tax avoidance practices and failure to pay UK corporate tax on income (Houlder, Jopson,

Lucas & Picard, 2012). UK Uncut, the group responsible for organizing many of the tax

avoidance protests at Starbucks stores in the UK, posted a press release on December 8, 2012

that commented:

Responding to Starbucks’ announcement that it will not claim tax deductions in

the UK on a range of its tax arrangements and Starbucks statement regarding

worker safety, Hannah Pearce, a UK Uncut supporter said:

“Offering to pay some tax if and when it suits you doesn’t stop you being a tax

dodger. This is just a PR stunt straight out of the marketing budget in a desperate

attempt by Starbucks to deflect public pressure – hollow promises on press

releases don’t fund women’s refuges or child benefits”…

Kara Moses, at the UK Uncut protest in Birmingham, said “So many people have

come to this protest because there is genuine public outrage that multinational

companies are being allowed to avoid tax while benefits and essential services

are cut. Starbucks’ admission that they have not been paying enough tax is a

clear admission of guilt, and shows that direct action by the public works. We will

keep the pressure up to end tax avoidance and these cuts that are devastating

women’s lives around the country.” (UK Uncut, 2012)

Even UK tax officials and politicians responded negatively to Starbucks’ announcement. BBC

News quoted Stephen Williams, a Treasury spokesman for the Liberal Democrats, as stating:

“People have been joking that some of these multinationals seem to think that

paying tax is voluntary. Well Starbucks have just confirmed the joke really.

Tax is something that is a legal obligation that you should pay according to the

tax rules of a particular country. It's not a charitable donation in order to gain

sort of brand value. But that seems to be what Starbucks are doing.” (BBC News,

2012)

7. Starbucks mission, taxes, and social responsibility

Starbucks’ Mission Statement included phrases including “To inspire and nurture the human

spirit,” “we take our responsibility to be good neighbors seriously,” and “The world is looking to

Starbucks to set the new standard.” (See Exhibit 8 for Starbucks complete mission statement,

circa 2011.) Starbucks’ practices to shift income from the UK to low tax countries were

completely legal, and common for multinational companies. As a company that portrayed itself

as being a responsible citizen in the countries in which it operated, the criticisms that it paid no

UK corporate income taxes had clearly hit a chord with consumers and the media in the UK It

was clear that Starbucks’ initial explanations, and then its subsequent decision to voluntarily pay

income taxes, had not quieted critics. As the company considered what further action should be

15

taken, it needed to consider not only the public relations implications, but also whether the

negative publicity would influence “socially responsible consumers” to shift their business to

competitors.

Exhibit 8

Starbucks mission statement To inspire and nurture the human spirit— one person, one cup, and one neighborhood at a time.

Here are the principles of how we live that every day:

Our Coffee
It has always been, and will always be, about quality. We’re passionate about ethically sourcing the finest coffee beans, roasting them with great care, and improving the lives of people who grow them. We

care deeply about all of this; our work is never done.

Our Partners
We’re called partners, because it’s not just a job, it’s our passion. Together, we embrace diversity to create a place where each of us can be ourselves. We always treat each other with respect and dignity. And

we hold each other to that standard.

Customers
When we are fully engaged, we connect with, laugh with, and uplift the lives of our customers— even if just for a few moments. Sure, it starts with the promise of a perfectly made beverage, but our work goes

far beyond that. It’s really about human connection.

Our Stores
When our customers feel this sense of belonging, our stores become a haven, a break from the worries outside, a place where you can meet with friends. It’s about enjoyment at the speed of life—sometimes

slow and savored, sometimes faster. Always full of humanity.

Our Neighborhood
Every store is part of a community, and we take our responsibility to be good neighbors seriously. We want to be invited in wherever we do business. We can be a force for positive action—

bringing together our partners, customers, and the community to contribute every day. Now we see that our

responsibility—and our potential for good—is even larger. The world is looking to Starbucks to set the new

standard, yet again. We will lead.

Our Shareholders
We know that as we deliver in each of these areas, we enjoy the kind of success that rewards our shareholders. We are fully accountable to get each of these elements right so that Starbucks—and

everyone it touches—can endure and thrive.

Source: This version of Starbucks’ mission statement comes from an author’s file, circa 2011.

This version can also be found in Harvard Business School Case 9-314-068, Starbucks Coffee

Company: Transformation and Renewal. The company has since adopted a different mission

statement.

16

References

Baertlein, Lisa. (2012, November 1). Starbucks raises 2013 forecast, defies industry trend.

Reuters. Retrieved from http://www.reuters.com/article/2012/11/01/us-starbucks-results-

idUSBRE8A01I820121101

Barbaro, Michael & Andrew Martin. (2008, January 30). Overhaul, make it a venti: some stores

expected to close in plan to revive Starbucks. The New York Times, p. C1.

BBC News. (2012, December 6). Starbucks agrees to pay more corporation tax. Retrieved from

http://www.bbc.com/news/business-20624857

BBC News. (2013, June 23). Starbucks pays UK corporation tax for first time since 2009.

Retrieved from http://www.bbc.com/news/U.K.-politics-23019514

Bergin, Tom. (2012, October 15). Special Report: How Starbucks avoids UK taxes. Reuters.

Retrieved from http://www.reuters.com/article/2012/10/15/us-britain-starbucks-tax-

idUSBRE89E0EX20121015

Bond, Shannon. (2014, April 24). Starbucks UK sales fall for first time after tax furore.

FT.com. Retrieved from http://www.ft.com/cms/s/0/f840512e-cbf0-11e3-a934-

00144feabdc0.html#axzz4IpZtOjMF

Clegg, Stewart, Martin Kornberger, & Tyrone Pitsis. (2011). Managing and Organizations.

Sage Publications.

Davies, Rob (2015, December 15). Starbucks pays UK corporation tax of £8.1 million. The

Guardian. Retrieved from https://www.theguardian.com/business/2015/dec/15/starbucks-pays-

uk-corporation-tax-8-million-pounds

Drucker, Jesse. (2010, October 25). Google has made $11.1 billion overseas since 2007. It paid

just 2.4% in taxes. And that's legal. Bloomberg Businessweek, (4201), 43-44.

Engskov, Kris. (2012a, October 17). Starbucks commitment to the UK. Starbucks. Retrieved

from http://www.starbucks.com/blog/starbucks-commitment-to-the-uk/1240?reply=89138

Engskov, Kris. (2012b, December 6). An open letter from Kris Engskov. Starbucks. Retrieved

from http://www.starbucks.com/blog/an-open-letter-from-kris-engskov/1249

http://www.reuters.com/article/2012/11/01/us-starbucks-results-idUSBRE8A01I820121101
http://www.reuters.com/article/2012/11/01/us-starbucks-results-idUSBRE8A01I820121101
http://www.bbc.com/news/business-20624857
http://www.bbc.com/news/uk-politics-23019514
http://www.reuters.com/article/2012/10/15/us-britain-starbucks-tax-idUSBRE89E0EX20121015
http://www.reuters.com/article/2012/10/15/us-britain-starbucks-tax-idUSBRE89E0EX20121015
http://www.starbucks.com/blog/starbucks-commitment-to-the-uk/1240?reply=89138
http://www.starbucks.com/blog/an-open-letter-from-kris-engskov/1249
17

European Commission. (2015, October 21). Commission decides selective tax advantages for

Fiat in Luxembourg and Starbucks in the Netherlands are illegal under EU state aid rules. Press

Release, retrieved from http://europa.eu/rapid/press-release_IP-15-5880_en.htm. Last retrieved 5

May 2016.

European Commission. (2016, August 30). State aid: Ireland gave illegal tax benefits to Apple worth up to 13 billion euros. Press Release, retrieved from http://europa.eu/rapid/press-release_IP-16-2923_en.htm. Last retrieved 30 August 2016. Fairless, Tom. (2015, January 16). EU Details Tax Case Against Amazon. Wall Street Journal.

Retrieved from http://www.wsj.com/articles/eu-details-tax-case-against-amazon-1421395136

Houlder, Vanessa. (2012, October 20). Starbucks at risk of a roasting over tax. Financial Times,

p. 3.

Houlder, Vanessa, Barney Jopson, Louise Lucas & Jim Pickard. (2012, December 6). Starbucks

pays up to avoid boycott. FT.com. Retrieved from http://www.ft.com/cms/s/0/d4f84a12-3fd5-

11e2-b0ce-00144feabdc0.html#axzz3OA7Q57v4

Jolly, David. (2014, April 16). Criticized on taxes, Starbucks will move European offices to

London. The New York Times. Retrieved from

http://www.nytimes.com/2014/04/17/business/international/starbucks-to-move-european-offices-