Wednesday, 5 June 2013

Starbuck's Profit

At the end of last year there was a hoo-hah about the Starbucks coffee chain, which doesn't pay corporation tax in the UK because its accounts say it makes no profits here. Kris Engskov, Starbucks' UK Managing Director, quieted the row by promising that in future the UK company would reform its accounting practises such that profits made here would no longer be transferred to Starbucks' operations overseas by means of brand royalty payments, mark-ups on coffee beans and high rates of interest on intra-company loans.

Meanwhile, Lisa Pollack at the FT published a series of articles on Starbucks' tax affairs, looking at its apparently inconsistent statements of profit and loss, its transfer payments, and its offer to pay more tax.

Having examined the transfer payments, Pollack wrote that
So that’s a £33m loss less £26m of royalties less £2m of interest, which gets one to a figure of £5m… which is still a loss. Some of the mark-up from the Swiss bought coffee would have to go too to get the company near profitable in the UK.
Which makes the punchline — that Starbucks has agreed to pay £10m of ‘tax’ voluntarily over the next two years — even weirder.
This analysis was seized on by commentators hostile to corporation tax in general.  But Pollack, in an otherwise informative series, has made a mistake.  The profit and loss for reporting purposes is not the same as the profit and loss for corporation tax purposes.  (I started on a post about this at the time: real life supervened.  But Tim Worstall has today repeated the claim, so I'm going to try to put things straight.)

The £33m is Starbucks' reported UK loss for 2010-11.  Pollack's point is that even if it reported results £28m better it would still be making a loss, and so (she implied) not paying corporation tax. But as the Financial Statement makes clear on page 19, some of the items contributing to the stated loss - depreciation and impairment in excess of capital allowances, and non-deductible expenses - are not allowable for corporation tax purposes.  They come to about £16m apiece.  Adding these back in, Starbucks' UK loss is reduced to £1m.  So with the £28m in royalties and interest payments the company would have a taxable profit of about £27m.
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Two additional points for clarity:
- the numbers on p19 are the affect of each item on corporation tax payable, which was 27% of the gross
- Starbucks has got past losses available to set against future profits.  So it may still not need to pay corporation tax.

4 comments:

  1. Dave - The one from Tim's blog5 June 2013 21:20

    UK corp-tax rate is ~25%. £10m would therefore represent more like £40m of profits being taxed, not £27m. Something's still wrong somewhere.

    ReplyDelete
  2. I'll try to make that calculation clearer:

    Reported loss: 33m

    Losses disallowed for
    corporation tax purposes: 32m

    Tax effect of those losses: 27% * 32m
    ~= 8.6m

    (Reported as 4.4m and 4.3m on page 19)

    Loss for corporation tax purposes: 33m - 32m
    = 1m

    Royalty and Interest payments
    Starbucks has offered to stop deducting: 28m

    Resulting profit for corporation tax: 27m

    ReplyDelete
  3. There are a few other adjustments which are apparent from looking at the tax reconciliation on page 19.

    For example, the effect of depreciation in excess of capital allowances is £4,411,398. Which is about a disallowance of about £15m.

    So that needs to be added into the equation too. You would have a taxable profit of £14m once you take that into account.

    ReplyDelete
  4. Worstall is at it again on Forbes today....

    http://www.forbes.com/sites/timworstall/2013/06/24/starbucks-gives-in-to-the-mobs-blackmail-over-tax/?utm_source=twitterfeed&utm_medium=twitter

    ReplyDelete