How much is too much to pay in corporate tax? For Starbucks Corporation (NASDAQ:SBUX) , the answer used to be “any.” The company managed to go five years without paying corporate tax in the U.K. because the business wasn’t profitable. On Sunday, it broke the streak and forked over 5 million pounds in taxes to the British government.
The company released a statement with the payment, clarifying that it was the voice of customers, not the condemnations of the Prime Minister, that caused it to take such a generous view toward taxation. In fact, the company pointed out that it was really doing everyone a favor, since it “decided to forgo certain deductions” just so it could pay its loyal customers back. How sweet.
The tricks of the trade
The British coffee game has a decent number of players, and while Starbucks Corporation (NASDAQ:SBUX) is a leader, it’s by no means the out-and-out dominator that it seems to be in the United States. But that position isn’t the reason Starbucks has had trouble being profitable. The problem is the European Economic Zone and the Netherlands.
Starbucks’ British operation is a separate business, wholly owned by Starbucks Corporation (NASDAQ:SBUX). That U.K. business is overseen by Starbucks Coffee EMEA, based in the Netherlands. For Starbucks in the U.K. to use the Starbucks Corporation (NASDAQ:SBUX) logo, name, and intellectual property, Starbucks EMEA charges Starbucks U.K. a royalty fee. As it turns out, that fee — along with beans, milk, rent, and all the usual costs — means that the U.K. business can’t seem to turn a profit. Dang.
Now, as a complete coincidence, the Netherlands doesn’t charge a withholding tax on royalty payments. So Starbucks Corporation (NASDAQ:SBUX) EMEA can take all that cash from the U.K., and send it off to Starbucks global. It pays no tax in the U.K. because of the losses incurred for sending cash to the Netherlands, where is receives favorable tax treatment on the income that it then sends off to its parent.
The other players
The 10 million pounds that Starbucks Corporation (NASDAQ:SBUX) is planning to pay this year in taxes to the U.K. will more than double the total tax paid by the company since it started operating in Britain. In the company’s defense, it’s been running this unprofitable business since only 1998 — 15 years. Up to this point, the company has paid just 8.6 million pounds. The push from its customers finally put Starbucks over the edge, it seems, and the company has committed to paying another 10 million pounds next year.
Amazon.com, Inc. (NASDAQ:AMZN) and Google Inc (NASDAQ:GOOG) have also been named and shamed by the British government for their tax practices. Last month, it came to light that Amazon.com, Inc. (NASDAQ:AMZN) paid less in tax last year than it received in government grants — 2.4 million pounds versus 2.5 million pounds. The small payout was due to the company’s corporate structure, and the European business is based in Luxembourg, even though it employs 11 times as many people in the U.K.