Why does Starbucks pay so little tax? - MoneyWeek Investment Tutorials

[Music] [Applause] [Music] how do they do it several companies have been in the news recently Starbucks Google and eBay and all for the same reason and it's not one they want to be the news for it's paying very very very little tax going to take a look at that topic in this video and ask the question how is it that according to Reuters Starbucks has only paid around eight and a half million dollars in tax over the last few years when it's made billions of dollars of sales of coffee and the like similar accusations I mean level of Google eBay and one or two other companies so how do they do it alright going to get to that in just a moment I'm going to reveal three little tricks that companies like that and the retail sector can employ to minimize their tax bills now before I set off let me just say one thing none of those companies have been accused of doing anything illegal avoiding tax is all about negotiating using expensive accountants and lawyers with HMRC the tax authorities in this country and reducing the amount of tax you pay and the name of the game if you want to pay a little bit of tax is to declare low profits all right so you need to get that into your heads watching this video if you're talking to investors there's a company you want nice big profits for doing incredibly well if you're talking to they're now revenue you put your dour face on you say oh no we don't make any money because if we're not making any money you can't charge us any tax okay so the name of the game is reducing profit sanatoriums the taxman so you pay less tax or whatever rate on those profits all right so first thing is we're not accusing these companies are doing anything illegal immoral dodgy possibly yes but not illegal right secondly we're talking about one tax corporation tax bit of a weird tax is the tax that companies pay no companies are not people okay Starbucks isn't a person all right so most people are used to taxes on people all right so for example Starbucks does pay other taxes in the UK it employs around 5,000 people and has to pay national insurance contributions which won't go to hear those employees and it pays business rates and so on but the tax they're talking about is a tax on the Starbucks company itself school corporation tax that's the only one I'm going to cover and the third point I should clarify one on two journalists have got this completely wrong all right is that you do not pay corporation tax on sales you pay it on profits all right but there's still a problem because most people think or shortly Starbucks makes lots of profits surely it sells lots of coffee gets expanding at a rate of knots why is it paying so it'll tax all right so what are the three tricks now there are many many many tricks the expensive accountants working for these companies can use to reduce the tax bill I'm gonna focus on three all right and I'm not saying all of the companies I mentioned using these tricks all of the time but they're good ones if you're a retailer tryna cut your tax bill down so what are they okay here's a little scenario and here's one of my dodgy diagrams okay so let's put the UK in the middle all right and people who've watched me draw before know that that's the UK okay small triangle Ireland all right now it's pretty clear now that's the UK let's introduce a couple more countries all right I'm going to put the rest of Europe over here with Holland about there you'll see why in a moment and I'm going to put the US over here all right now my sketching skills are pretty fabulous like there's the the Gulf of Mexico pretty clearly there's the USA all right and these are the three main players in this piece now think remember is this when you're talking about um the Starbucks case at the moment for example you're talking about not the whole Starbucks global Empire Starbucks has you know there's coffee shops all over the place America Europe UK all right the bit where UK corporation tax is paid is here the operation in the UK all right the Inland Revenue in this country is not worrying about how much tax the the Starbucks in America pays or in Holland I would just talk about the UK operation now here's the trick okay let's put Starbucks here are three drinks in fact my bath stores all over the country all right now what can you do here's what you want to do a Starbucks you want your profits residual profits to be as low as possible the tax purposes in the UK just the tax purposes alright investors won't be happy if you say we make no money well invest is one here you make lots of money but the story is different okay you put your tax hat on and you going to talk to you a number of news I know we make barely any money now how can a company that is seemingly selling loads of coffee and everyone knows that coffees incredibly profitable all right credibly profitable would you pay for a for a cappuccino mocha latte chai thing these days maybe it's three or four pounder cup okay certainly is where I live and the cost is what a bit of you know pull of styrene and some coffee beans and there must be a phenomenal profit on that alright so people are thinking you know I know you have to pay for shops in Samba they must make must be making money so how is it that amazing to present a picture to the Inland Revenue but they're not they're not making money how's that work well the answer is you need to find ways if you're the Tax Board here of getting the profit the tax purposes down as low as possible how do you do that and the answer is profit as I cover in other videos is your sales revenue minus costs alright so you could lie about your sales revenue but that's going to be a bit difficult wouldn't recommend that one well that's easy to check but what you can do is bring your costs up so your profit is next to nothing and your tax bill is also next to nothing right so how do you get those costs up how do you raise the costs bring down the profit and then go actually corporation tax rate maybe 25% in the UK but 25% of nothing is nothing haha okay how do you do it three tricks coming up now right number one number one here's an idea you could fund so let's put head office HQ for Starbucks worldwide over there American company after all you could get head off this to fund your UK operation alright so the words head office basically pump debt into the UK business to get it started and you can't create stores out nothing that we funded somehow we're property and soul all right and then you pay interest back to head office and the great thing about borrowing money from another company in your group is who sets the rate and the answer is the worldwide finance director over here probably writes in other words you can set the rate at a level that starts to absorb some of the profits that the UK operations making right imagine you frog can take 100 million profits operating profits the interest bill at a rate set by HQ over here knocks out you half of those profits I'm making up those numbers you get the idea the higher the right the lower your profits are the less tax you're gonna pay so there's one idea now you can't get carried away you can't say we pay interest at a rate of 50 percent to wipe out all our taxable profits because the enamor of you're not that daft they're going to say well we're 50 percent that's that's a totally uncool they yeah the tax authorities reserve the right to say well hang on there 50 percent no one pays 50 percent if you're borrowing in the open market that's just a silly number but it does give the business the scope to reduce UK profits the remember that's the idea we're getting to here bring down the profits there so that the company isn't hit too much UK corporation tax there's idea number one okay intercompany interest charges here's another one can anybody sap stall could I go down the road today and set up stall saying I am mini Starbucks buy your Starbucks coffee here no all right because there's a Starbucks brand there's a royalty and licensing agreement if you like I need the right cups I need the right ingredients okay the stores got to look a certain way other words not just anyone can march out and set up a Starbucks franchise okay so here's another little trick why doesn't Starbucks stick its arm licensing agreement to use the Starbucks name and operate a Starbucks operation globally in somewhere with a low tax rate like Holland you've got places that we pay much less tax and you okay so why don't you stick some sort of licensing or royalty agreement have that held what's on my nice and low tax you'll see why in a minute like Holland and then what you do is it you charge places like the UK to make and sell Starbucks coffee under the Starbucks brand so maybe what you do say right UK operation all right um it will cost you under the terms of our arrangement it will cost you six percent of your sales figure every year to use the Starbucks brand all right so now you've got now you another way to reduce the UK's profits because they're having to hand over six percent of their sales every year to this Dutch operation all owned by Starbucks globally by the way that's the point in order to make install Starbucks coffee okay and you might be thinking about 6 percent that's not much so I kind of chewing to profits over you having to pay that what's quite a lot I mean Reuters estimate in 2011 Starbucks may 636 okay million pounds worth of UK sales okay suddenly six percent of that number is like 37 million roughly speaking that's a lot of profit got nanotubes okay now hasn't gone down the tubes but that's another way of reducing the UK profits so you could safely in our revenue look and will not make it any money here we happen to pay these royalty costs for them to pay this intercompany interest all our profits go on okay so there's trick number two and what I'm thinking why six percent alright one or eight percent one or three percent well it's got to be something which is you can negotiate with the tax people okay if you can make it 20 percent they're going to say well what a cost to coffee and cafe Nero use for argument's sake that's just ridiculous just making this up but it's all negotiable you know because who's to say whether six percent is right or not probably Starbucks okay they'll say well we're a unique company you can't just mimic our brand and your else there's no market value and compare that to it's the way we operate and we think our brand and the right sell coffee is worth six percent twenty one who sets themselves up to Starbucks range right okay trick number three is this past losses where this works very simple it is out of a business in the UK for example and you lose money we're trying to grow it because you're spending lots of money on marketing and all the rest of it getting set up okay here's the way it works the loss that you make can be carried forward for tax purposes all right now put to put it very very bluntly all that means is this imagine in 2010 that make up the numbers here in 2011 imagine for tax purposes you make a loss of 50 million because you your trading is just not profitable happens and in 2011 you turn things around and you make a taxable profit of 50 million under the tax rules you can net the two off against each other carry that forward into this year to give you an overall tax bill for both years of zero alright now there are three ways just three three ways that a company can legally okay with a bit negotiation with the tax authorities bring down its UK profits heavily for tax purposes almost to nothing okay you have big intercompany charges I know this is all Starbucks globally but the way tax works is each country is treated separately so it's the UK that we're looking at so you have a royalty you have a sorry a debt agreement so you have debt funding to the UK branch with a heavy interest rate you have a royalty agreement with another part of the group that requires them to give up a chunk of their sales okay and you allow them to use past losses to reduce profits and all because you decide you don't want Starbucks to pay a lot of corporation tax in the UK you may pay it somewhere else but that's somewhere else we'll probably have a lower corporation tax than the UK does all right so there's a very quick whistle stop tour as to how Starbucks and alike get away with it nothing about that is illegal by the way despite the fact that our House of Commons investigations going on and what kind of stuff at the moment none of its illegal and if you'd like to know a little bit more about that and also get the written version I will be covering the same topic in next week's edition of money week magazine to download this free video to your favorite mobile device find us on iTunes by searching for money week and the entire video archive is also available free just visit money week calm

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Keywords: numbers, use, ratios, Forex, losses, Hedging, inflation, bank, payments, system, claims, successful, Dividend, stocks/shares, Cashflow, Overtrading, firms, profit, loss, trading, Bid, offer, spreads, MoneyWeek, Tutorial, Currency, credit, 'stock, market', investments, tutorials, Trading, Stocks, Analysis, Trade, to, Starbucks, Google, eBay, Corporation, tax, Tax, avoidance, evasion, How, does, work?, trade, economy, tim bennett, Business, Economics (Field Of Study)

Id: Th4fxMFRIt0

Length: 13min 41sec (821 seconds)

Published: Fri Nov 02 2012