Starbucks’ new European HQ sign of ‘tax posturing’?

Starbucks’ new European HQ sign of ‘tax posturing’?

Tax mitigation strategies are here to stay and so is public disdain for them, leading multinationals to start ‘tax posturing’. Starbucks is the latest example.

On the surface, the announcement that Starbucks is moving its European headquarters to London from Amsterdam sounds logical: the UK is Starbucks’ largest European market. Moving “a modest number” of executives there makes sense. But the move is much more than that. It is just as much about overcoming Starbucks’ image in the UK as persistent tax avoiders.

Reports have shown that Starbucks, along with companies like Google and Apple, pay very little or even no tax in the UK despite a huge business presence. A Reuters’ investigation found that Starbucks paid £8.6m to the UK Treasury on more than £3bn of sales since 1998, or a little less than 3 percent. They have done no wrong in the eyes of the law, however, just in the eyes of the public. These numbers have become a significant public relations problem, particularly for foreign companies.

Crackdown on tax avoidance

Across Europe and North America politicians are desperate to keep promises of austerity after finding out how difficult spending cuts are, especially when facing mediocre private sector growth. Cutting down on tax avoidance is a politically advantageous pressure valve for these leaders. It is a way to increase tax revenues without imposing any new taxes. The G8 made it clear with an agreement that 2013 was the start of a new era of tax enforcement.

Just as important as the tax dollars themselves is how targeting multinational corporations polls with the public. “Corporate taxation” generally does not attract many voters’ attention, but closing down loopholes for international corporate fat cats fares much better. It s a way for politicians to appear to have the moral upper hand, especially if the perception is that they are too cozy with business interests, as is the case with David Cameron.

Arguably, the G8 is about 15 years too late on this issue. Tax avoidance – or transfer pricing strategy – has taken root in nearly every major corporation in the world. After all, most people know what goes on in the Cayman Islands (nominal headquarters of major companies are actually just some small filing cabinets) and that Double Irish with a Dutch Sandwich is not something off the In-N-Out Burger secret menu. Strategies like these, and many more that are immensely intricate, are commonplace.

Pragmatically, however, it is unlikely that these enforcement efforts will be fruitful. There is a large cash incentive for companies to find tax minimization strategies. By the time the G8’s tax avoidance plans are put in place, the Big Four accountancy firms will already be selling strategies to get around them. That is just the nature of the game – as soon as you close a hole in the dam, another hole opens.

Enter tax posturing

As politicians keep capitalizing on corporate tax avoidance, companies – particularly consumer brands that depend on the continuing public loyalty – will not let themselves be drawn as evil caricatures of greed and deception. Just as these companies develop new strategies and find new loopholes, they will be trying to soften their public image. Starbucks’ strategy is among the first of these. I call it ‘tax posturing’: public relations campaigns to avoid the label of ‘tax dodger’, but without actually significantly increasing their tax payment. Essentially, it is empty goodwill.

While Starbucks’ move to London comes with a pledge that they will probably pay more in taxes, there are reasons to doubt how long that will be true. New rules from the UK Treasury will make it easier for Starbucks to avoid paying taxes after their move there, as the Washington Post has outlined. Nevertheless, Starbucks is pledging to move jobs to the UK and pay more in taxes in every British news outlet.

The question now is how other businesses will craft their tax posturing. Google, Amazon, and Apple also have drawn the ire of the UK public over their tax strategies and could certainly benefit from some goodwill. These companies, with their deep ties to the social media, will need to build goodwill at some point. After all, Google’s founding mantra is “don’t be evil.”

While the protest against aggressive tax strategies has been the biggest in the UK, the US may also be a target for more tax posturing, especially with President Obama’s rhetoric on the issue. Depending on the definition used, up to 111 of Fortune 500 companies have not paid federal taxes in at least one of the last five years. With numbers like that, it is only natural to expect tax posturing to increase, especially given continued political pressure on the issue.

Categories: Europe, Finance

About Author

Alex Christensen

Alex is an Editor at Global Risk Insights, who also currently works in investment research. His work on political risk and economic policy has appeared in many forums, including Business Insider, Seeking Alpha, & The Emerging Market Investors Association. He holds a Master’s in Economics from the London School of Economics and BA from Washington University in St. Louis.