Through a Latte, Darkly: Starbucks's Stateless Income Planning
Edward D. Kleinbard
USC Gould School of Law
July 15, 2013
Tax Notes, June 24, 2013, pp. 1515-1535
USC CLEO Research Paper No. C13-9
USC Law Legal Studies Paper No. 13-10
In this report, Kleinbard reviews the recent Starbucks Corp. U.K. tax controversy (including a parliamentary inquiry), which revolved around the intersection of the company’s consistent unprofitability in the United Kingdom with large deductible intragroup payments to Dutch, Swiss, and U.S. affiliates. He also examines the company’s more recent submission to the House Ways and Means Committee. From those, Kleinbard draws two lessons.
First, if Starbucks can organize itself as a successful stateless income generator, any multinational company can. Starbucks follows a classic brick-and-mortar retail business model, with direct customer interactions in thousands of ‘‘high street’’ locations in high-tax countries around the world. Nonetheless, it appears that Starbucks is subject to a much lower effective tax rate on its non-U.S. income than would be predicted by looking at a weighted average of the tax rates in the countries where it does business.
Second, the Starbucks story demonstrates the fundamental opacity of international tax planning, in which neither investors in a public company nor the tax authorities in any particular jurisdiction have a clear picture of what the company is up to. It is inappropriate to expect source country tax authorities to engage in elaborate games of 20 Tax Questions, requiring detailed knowledge of the tax laws and financial accounting rules of many other jurisdictions, to evaluate the probative value of a taxpayer’s claim that its intragroup dealings necessarily are at arm’s length. U.S.-based multinational companies owe a similar duty of candor and transparency when dealing with Congress.
The remedy begins with transparency toward tax authorities and policymakers, through which those institutions have a clear and complete picture of the global tax planning structures of multinational companies, and the implications of those structures for generating stateless income. National governments should recognize their common interest in that regard and promptly require their tax and securities agencies to promulgate rules providing a uniform, worldwide disclosure matrix for actual tax burdens by jurisdiction. As a first step, the United States should enforce the rule requiring U.S. companies to quantify the U.S. tax cost of repatriating their offshore permanently reinvested earnings.
Number of Pages in PDF File: 22Accepted Paper Series
Date posted: May 14, 2013 ; Last revised: August 6, 2014
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