Tax Avoidance by Starbucks - Essay Example

TAX AVOIDANCE BY STARBUCKS By Tax Avoidance Tax avoidance is a legally allowed way of minimizing the tax liability of a company by use of creative financial management reporting techniques and reporting. Most corporations in the world make quite a significant amount of profit, but remit just a small amount of the same to the tax authorities. Most of these corporations report either low profits or no profits at all to avoid making huge tax payments, which is a problem that affects many countries since it is legal and allowed companies to avoid paying taxes. In the UK for example, Starbucks, a coffee giant outlet commanding 31% of the total market turnover has been the recent victim of public criticism after revelations that since it began operations in the country, it had been avoiding tax payments to authorities, only paying 8.6 million despite generating 3 billion in revenues. Tax avoidance is an ethical issue as well as a national and global issue for a company that has its operations in many countries such as Starbucks. For close to 15 years, the coffee giant in the United Kingdom had been avoiding remitting taxes by reporting losses, only reporting profits in a single year. The company has been in operation in the country since the year 1998, with 700 outlets. There are various reasons why companies pay taxes to the authorities. While it is a legal obligation of the company, it is an ethical issue of portraying a good corporate image for the company (Rosser, Murray, 2010, p. 21). Closure of business is imminent by the authorities if the company is found to have evaded tax. Although it is legal to avoid paying taxes, criticism and loss of business for the company is quite possible in case the public decides not purchase products by the company. When David Cameron revealed to the public that Starbucks had not been paying taxes for the 15 years it had operated in the country, angry protestors demonstrated outside its outlets accusing the company being un-loyal to the country. Regardless of its origin being in America, the public expects the company to pay taxes to the UK authorities. To the public, any company should undertake this ethical practice so long as they buy their products. Starbucks risks loss of business from the public by failure to pay taxes. Physical demonstrations could turn to economic to the extent of the public choosing not to purchase the products. Governments are keen in payment of taxes by the companies operating in their jurisdictions (Great Britain, 2011, p. 14). The issue of Starbucks became a political problem to the point of being raised in the World Economic Forum. Regardless of the sensitivity of tax payment issue, most companies cannot escape governments’ ridicule. Citizens pay taxes on their individual capacity, both as income tax and value added tax. It is logic for any country to demand tax remittance to the last coin, by a company doing business with tax compliant citizens. The company’s ,managing director, with protests for the politicization of the issue argued that the company was offering job opportunities to thousands of citizens, meaning that the tax question should be treated softly(Hilton, 2012, p.16). However, the big question is, if the employees pay taxes on their salaries, it was logical enough for the company to pay corporation taxes. Pressure from the public and lawmakers are another problem that the company faces to pay its taxes, with the law clearly stating that all companies ought to pay their taxes. By declaring that the company had been, operating at a loss means that the company should have closed its doors the moment the management realized that it was not making any profits. However, the company being in operation for 15 years and commanding 31% of the total turnover means that in some way the company was realizing a profit (Harford, 2012, p. 8). The public, through demonstrations, and the government through meetings with the board of the company had been trying to push the company to make pay its taxes. The pressures mounted on the company are overwhelming to the point of disrupting business for the company. This might have negative effects on the revenues of the company, if the accusations are to keep on following the company (Blankson, 2004, p. 45) Investment plans by the company is yet another problem that faces Starbucks with its present tax problem. Earlier, it had announced a planned investment of 100 million pounds, in an expansion strategy. This, the management saw as a move that would create 5000 more jobs to the citizens of UK, by starting 300 new stores. The move is quite justifiable, where the company would contribute to economic growth and success of the country by offering jobs to a number of people. However, tax payment is yet another obligation of the company, with public image in question after the revelation. The plan could be hampered by many setbacks for example people choosing not work in organization that does not honor the tax laws of the country. For the plan to be effective, the company should honor the law and act in accordance with the country’s legal provisions requiring all the corporations to pay their taxes (Megginson et al 2008, p. 455). Investors themselves are likely to shy away from the company, with potential shareholders choosing not to invest in its shares. Most investors check on tax compliancy of an organization, the consistency in payment of taxes and the company’s tax remittance records. Floating of shares in the stock exchange by a company is a form of borrowing funds from the public in order to raise capital for investment and expansion. If potential shareholders decide not to invest in the company, it lacks funds to finance its investment and expansion plans (Abrams, Doernberg, 1998, p. 78). The problem could extend to global levels and hamper the company’s plans of extending its network to other countries. Before a permit to start business in a foreign country, tax collector of the host country assesses the reports for the company to avoid allowing non-tax compliance companies from investing in the country. A good tax report from the parent company raises the company’s chances of being allowed to invest in the desired country, while a poor report reduces the chances all together. The company faces the management of the organization with an investor problem when they demand for tax reports. No company that in its articles has a clause that states that it would not pay taxes to authorizes (McGee, 2012, p. 54). All companies declare that they are tax compliant and in their articles, they state that they will be remitting their taxes to the government in relation to their annual profits (Cordes, 2005, p.155). If the management fails to honor this and decide on avoiding taxes, the shareholders will need to take action against the management, a decision that might cause the sacking of some people in the management. In conclusion, all reasons pointed out above, none justify Starbucks’s decisions of avoiding paying taxes. In fact, the firm is at a big loss by its move, due to the negative image and risks involved. Tax includes a small percentage of the total profits by the company. By choosing to comply, Starbucks only pays the stipulated amount to the authorities and retain the rest. The decision of not paying may mean being edged out of business or loss of business, which is a bigger cost to the company. Works Cited “Great Britain”, 2011, Tackling Tax Avoidance, TSO, Norwich. Abrams, H. E & Doernberg, R L 1998,  Federal Corporate Taxation., Foundation Press New York, NY. Blankson, S 2004, Tax Avoidance: A Practical Guide for UK Residents, Lulu, Cary NC. Cordes, J. J 2005, The Encyclopedia Of Taxation & Tax Policy, Urban Institute Press, Washington, DC. Harford, T 2012, The Undercover Economist, Oxford University Press, New York, NY. Hilton, A 2012, "Starbucks tax furore is PR failure,” PR Week McGee, R W 2012, The Ethics Of Tax Evasion: Perspectives In Theory And Practice Springer, New York. Megginson, W. L Smart S B & Lucey B M, 2008, Introduction to Corporate finance, Cengage Learning Emea, London. Minars, D 2003, Corporations Step-By-Step, Hauppauge, Barron’s, NY. Rosser, K. J & Murray R 2010, Tax Avoidance, Sweet & Maxwell, London.   Read More