By Tom Fairless
BRUSSELS-- Starbucks Corp. is going through the grinder in
Europe.
The world's biggest coffee chain has raised suspicions among
regulators and local governments by reporting losses in its biggest
European markets for years despite recording hundreds of millions
of dollars of annual sales.
Last year, as European Union regulators opened a formal
investigation, a profit materialized: EUR407 million ($446.6
million), reported by the company's European head office in
Amsterdam. The coffee chain has since moved its headquarters to
London.
The reason for the windfall: 502 million Swiss francs ($527.8
million) in dividends, transferred from the company's coffee-buying
unit in Switzerland, which has fewer than 40 employees, according
to corporate filings.
The huge profit is likely to stoke concerns around Starbucks's
tax practices in Europe, which are under scrutiny for the second
time in just over two years. EU antitrust chief Margrethe Vestager,
who is running the bloc's investigation of Starbucks's tax affairs,
has pledged to announce results by June, which could include
sizable back-tax demands.
Starbucks has long insisted that its complex European
structure--which until recently centered in the Netherlands rather
than the U.K., by far its biggest market in the region--wasn't
designed to avoid tax. The structure, it said, was built around its
Amsterdam-based coffee-roasting house and reflected that city's
rich history with coffee.
Even so, the tax advantages are clear: The Amsterdam unit paid
just EUR2.6 million in corporate tax on last year's EUR407 million
pretax profit in the Netherlands--or well under 1%--as part of a
deal with the Dutch government that has drawn the attention of EU
regulators.
All the coffee Starbucks uses world-wide is bought by the
company's Swiss unit, even though the coffee never actually
transits through Switzerland. It is then sold to Starbucks
operations around the world at a 20% markup, the company's former
chief financial officer, Troy Alstead, told British lawmakers in
2012, after Starbucks found itself at the center of a controversy
over its tax bills.
That means the Swiss unit loads costs onto the coffee bought by
Starbucks stores around the world and depresses their profits.
British lawmakers have expressed skepticism that the 20% markup was
"reasonable."
Starbucks said that "profits generated by [its] companies are
periodically paid as dividends," and that it follows international
guidelines in charging fees between business units in different
countries.
On the same day the Swiss dividends arrived in Amsterdam last
October, Starbucks transferred the bulk of them to a new U.K.
holding company--one of three British entities it has created since
June--corporate filings show. It subsequently dissolved another
London-based shell company, Alki LP, which had become a focus of EU
regulators' inquiries because it received tens of millions of
dollars annually in royalty payments from Amsterdam.
Starbucks is one of four multinational companies operating in
Europe--along with Apple Inc., Amazon.com Inc. and Fiat Chrysler
Automobiles NV--whose tax affairs are being investigated by
regulators in Brussels.
Above all, Starbucks stands out for its response: Rather than
citing a duty to investors to minimize tax, as other companies like
Google Inc. have done, Starbucks has repeatedly pleaded
innocent.
"We do nothing--nothing--to avoid taxes," Mr. Alstead told
British lawmakers in 2012.
Now, that narrative is being challenged.
In a preliminary decision in November, EU regulators argued that
Starbucks's structure in the Netherlands had no economic rationale.
Their probe could result in a back-tax bill running into tens of
millions of dollars. Dutch regulators have said they believe
Starbucks's structure in the country is appropriate.
Tax avoidance isn't illegal. Other companies like Google and
Facebook Inc. minimize their taxes by moving foreign profits
through countries such as Ireland, the Netherlands and Bermuda.
Starbucks said it complies "with all relevant tax rules, laws,
and...guidelines" and pays "a global effective tax rate of 34 per
cent." The coffee chain gets about three-quarters of its revenue in
the U.S., where the top marginal corporate tax rate is 35%, adding
to state and local corporate taxes.
But the EU has found a new way to clamp down on corporate tax
avoidance using a law that prohibits sweetheart deals that allowed
some companies to pay less tax than others. This led it to also
investigate the tax affairs of Apple, Amazon and Fiat. All three
companies have denied receiving special treatment, and the national
governments involved have denied giving it. The EU has said it
plans to publish results of its probes by June.
At the center of the probe is a web of partnerships operated by
Starbucks in the Netherlands and the U.K. Two of the
partnerships--Rain City and Emerald City, nicknames for its Seattle
hometown--are based in the Netherlands but aren't subject to Dutch
corporate tax, according to the EU's report and corporate
filings.
Emerald City owns a Hong Kong-based vehicle that controls
Starbucks's operations in Beijing and northern China and the
company's 50% stake in its Indian joint venture. It also owned a
third, now-dissolved European partnership, Alki, which was based in
London.
EU regulators have homed in on Alki, which held all of
Starbucks's intellectual-property rights for Europe, the Middle
East and Africa--and received tens of millions of dollars in annual
royalty payments from Amsterdam. Hefty royalty payments to units in
lower-tax jurisdictions are another tool that multinationals can
use to avoid tax.
In a preliminary decision in November, the European Commission
questioned royalty payments made by Starbucks's manufacturing unit
to Alki, which didn't pay Dutch corporate tax. It is unclear
whether the holding company, which was based in the U.K. before it
was dissolved, paid U.K. taxes.
Starbucks declined to comment on Alki's tax treatment. In its
report, the commission said royalty payments to Alki from Amsterdam
were considered a direct payment to Starbucks's U.S. operations
from a Dutch tax perspective. The commission also said the royalty
didn't "reflect the value of the intellectual property" because it
"fluctuates from year to year and is not in line with sales."
The Dutch government said it was "convinced" that its tax deal
with Starbucks didn't constitute illegal state aid.
Alki was dissolved last December, shortly after its ownership
was transferred to a new U.K. company, Starbucks EMEA Holdings
Ltd., according to corporate filings. Starbucks announced last year
it would move its regional headquarters to the U.K. from the
Netherlands. "This structure [Alki] no longer exists," it said in a
statement.
Alki had no employees, a person familiar with the matter said.
Its address in London was the U.K. headquarters of Baker &
McKenzie, a law firm that advises Starbucks on tax matters.
Starbucks and Baker & McKenzie declined to comment on the
matter.
The EU investigation comes after a tax furor in Britain led to
store boycotts and a 2012 parliamentary hearing. The company's U.K.
annual sales fell following the furor, its first decline since it
set up shop in the country in 1998.
At the time, Starbucks had paid GBP8.6 million ($12.8 million)
of British corporate tax over 15 years despite sales exceeding
GBP3.5 billion in Britain. It has since voluntarily paid an
additional GBP20 million by forgoing certain deductions.
At the hearing, Mr. Alstead, who previously served as a director
of the U.K. business, blamed the company's persistent losses in
Britain on "strategic mistakes," including expensive property
leases. "We are not at all pleased about our financial performance
here," he said.
British lawmakers weren't convinced. "If you have made losses in
the U.K. over 15 years, which is what you are filing, why on earth
are you doing business here?" said Margaret Hodge, who chaired the
hearing. "It just doesn't ring true."
According to corporate filings, Starbucks's British business
started making large royalty and license-fee payments to Amsterdam
in 2003, five years after it opened in the U.K. Mr. Alstead last
month took unpaid leave after 23 years with the company "to spend
more time with his family," Starbucks said. It said his decision to
take time off was a personal one, unrelated to the corporate
structure.
British lawmakers are no longer investigating Starbucks.In
Britain, Starbucks recently reported its first annual pretax
profit: GBP1 million on sales of GBP409 million in the year to
September. But after years of deep losses, the company has
accumulated GBP35 million of deferred tax assets that can be used
to offset future tax bills. That indicates it won't have to pay any
U.K. corporate tax for some time.
Starbucks said that the U.K. business "is now profitable and as
our turnaround continues, our tax payments will increase in line
with our profits."
Write to Tom Fairless at tom.fairless@wsj.com
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