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Starbucks Tax Payment Issue - A critical and ethical analysis

Starbucks Tax Payment Issue – An Ethical Analysis

Ahsan Hameed (Date: 06.01.2013)


In this dynamic and challenging business world, the companies are facing intense pressure from customers and stakeholders of society to fulfill its corporate ethical and social responsibilities. This essay research is also belongs to business ethics and social responsibility. This case is about the Starbucks Company that has faced an ethical issue of tax payments in the UK. The aim of this essay is to critically evaluate the different ethical perspective of Starbucks on tax payments. The outcomes of research are highlighting the different ethical issues regarding tax payments and how companies manage these issues to fulfill their social responsibility towards its state.

Now a day, the customers and people of societies are required from company to behave like a socially responsible company. The business ethics comprise of moral values and guidelines, which govern the behaviour (or businesses) to behaviour ethically in doing good or wrong (Riley, 2012). While the corporate social responsibility is focused towards public, economic and social responsibility aiming at demonstrating a responsible behaviour and responsiveness to social, economic, environmental and ethical issues (Pomona, 2009). Once a company is succeeding to make the customers believe that it is acting as a socially responsible company than it enjoys so many benefits such as, achieve brand loyalty of its customers, attract interest investors, positive publicity from media coverage, attract and retail good employees, make everyone part of the brand and increase its revenues (PRLog, 2010). According to Buchanan (2010) claims that the company wins the customer trust through acting responsible company that later provides it many monetary and non-monetary benefits. However, some opponents put an objection that the company’s action of becoming a socially responsible company is not for social benefit, but only for trapping customer. The fact is, the company acts responsibly to increase profit of shareholders and also becoming accountable to stakeholders and environmental (Teshome, 2009).

With a mission statement of “to inspire and nurture the human spirit, one person, one cup and one neighbourhood at a time”, the Starbucks, an American chain of coffee houses, is serving millions of customers every day (Starbucks, 2011). The Starbucks has been established, by Howard Schutz in 1971 with a first store in Seattles Pike Place Market of America that sells whole beans of coffee, tea and spices. The first coffee house was opened in 1984 in Seattle. After 42 years of history, the Starbucks is now available at more than 17,000 locations in over 50 countries with a vast product portfolio including coffee, coffee and tea, fresh food and other consumer products. The Starbucks has been entered into the European market in May 1998 through an acquisition of 65 Seattle Coffee Company stores in the UK (Starbucks, 2013).

The Starbucks is committed to act as a socially responsible company and it strongly believes that a business can, and should, have a positive impact on the communities they serve. The scope of social responsiveness of Starbucks covers the community serving, environmental protection, ethical sourcing and welcoming diversity. In addition, the other initiatives of Starbucks include; (a) Introduction of fair-trade access fund for helping smaller companies and individuals to access the fair-trade system, (b) Starbucks youth action for helping the children, and (c) Giving back to local women in Liverpool for helping the victims of domestic violence (Starbucks, 2013). These initiatives are showing the commitment of Starbucks towards fulfilling its social responsibilities.

Few days back, the Starbucks has recently experienced the issue of tax payments. The Starbucks is not paying corporate tax to the UK government, because of loss it has to face from its operations. In the previous 14 years, the Starbucks has paid a total of £8.6 million corporate tax during its tradition in the UK. Last year, the company’s sales have been reported as £400 million but companies have reported taxable income only for one time in the previous 15 years of operations in the UK market (Geoghegan and Peston, 2012). In the United Kingdom, the status of Starbucks Company is a “foreign company”, as it belongs to America, and all foreign companies are payable to taxes on their taxable income, and when any company is not having its taxable income, it cannot be liable to pay taxes (Peston, 2012 ). According to the investigative report, the Starbucks didn’t make profit in previous years, so there was no taxable income that’s why Starbucks didn’t pay tax. The initial response of officials of Starbucks was, “Starbucks is a good tax payer that has paid all his tax obligations regarding tax payments and they are going to pay in the future as well and they are fully complying with the tax law” (Gompertz, 2012). So, according to legal groundings it has been clarified that the Starbucks is not committing breach of law by avoiding tax payments.

The Starbuck’s spokesperson have announced that the Starbucks is going to pay a £20 million tax other than the company tax in the account of company tax and Starbucks would also pay the tax in 2013 and 2014 as well, even it makes a profit or loss during 2013 and 2014 as well (Geoghegan and Peston, 2012; Gompertz, 2012). However, the managing director of Starbucks, Mr Kris Engkov, has announced that the Starbucks is committed to doing even beyond the law. As the tax was not payable by Starbucks against any law, but still they are paying in the favour of state welfare and demand of their customers, so Starbucks is committed to fulfil its ethical responsibility as well.

On January 8, 2012, there has been raised a protest against Starbucks have been started by the UK Uncut against the tax avoidance practices of Starbucks. According to Geoghegan and Peston (2012), as they were within store at the time of the protest, it has been reported that the protesters were demanding from Starbucks to pay taxes that have put the banners and play cards on which the slogans were mentioned “Boycott Starbucks – Tell Your Friends”, “Starbucks sucks money from UK”, “Starbucks – Pay Your Taxes”. The protesters were claiming that the UK Government should take action against Starbucks for tax avoidance and also for other companies, which are avoiding taxes under government laws, so that anyone can not snatch the part of the UK welfare state. However, the Starbucks has announced to pay £20 million for paying in corporation taxes, but UK Uncut is demanding to hold all Starbucks restaurants responsible for tax and closed till the time they pay all the tax dues (Hodge, 2012).

When we see at ethics, they govern the behavior towards morally right and wrong, but ethics are not laws that can be imposed under the legal framework (Riley, 2012). The recent ethical issues of Starbucks have raised many ethical issues, because this case does not come under legal framework and Starbucks is not doing anything illegal but it can come under the framework of ethics. In reality, there have been offered tax avoidance schemes by the UK government to some companies and Starbucks was one of them. Ms Margaret Hodge, chairperson of the Public Accounts Commission (PAC) has strongly criticized these tax avoidance schemes and declared these schemes as utterly immoral. She also quoted that these tax avoidance schemes will run the rings very soon around the tax authorities, because the tax avoidance schemes they have are neither in the benefit of the economy nor acceptable by the public (Hodge, 2012).

It means, the Starbucks is not breaching the tax rules and not committing crime through avoiding the tax payments, because in accordance with the tax schemes, offered by the state government, Starbucks is enjoying the relaxation of taxes. It has been clarified that the Starbucks is not committing any crime through avoiding tax payment. Now we consider the ethical aspects of Starbucks’s action of avoiding taxation and related aspects. The outcomes of analyzing the ethical groundings of this issue would make it clear that either the Starbucks is acting ethically wrong or not.

When Starbucks announced to pay the £20 million tax in the account of company tax, the very first reaction has been raised by HM Revenue and Customs, who have stated that the corporation tax is not a voluntary tax. The UK public expects from all businesses to pay their taxes fairly. The HRMC also announced that they would challenge this law in court as well in which the companies are avoiding their tax payments under the law and they want everyone and every company to pay tax fairly (Hodge, 2012). Paying tax comes under legal framework and its legal obligation and it shouldn’t be paid as a donation or pay voluntarily but paid as per the tax rules of the country.

The UK Uncut has declared the Starbucks as tax dodger and it should be held accountable under legislation. The justification by UK Uncut is that “offering to pay some tax if a when it suits you doesn’t stop you being a tax dodger” (Hodge, 2012). The findings of the investigation report, the statements of HRMC department and actions of PAC don’t declare the Starbucks’ as tax dodger. Here is it more relevant to ethical perspective and Starbucks can be held responsible under unethical account.

Lewis (2012) raises a debate on an issue that “Is paying tax just a question of ethics?”. Now days, the companies are considering that paying their taxes is a philitrophic effort instead of fulfilling their moral duty. The discussion of results is showing that first of all the tax payment is a legal duty rather than philitrophic activity. Second, if we accept that it is a philintrophic activity then we desperately need to collect tax even though taking the pay payers under a legal framework. So, companies need to consider the tax payment as legal duty and pay the taxes under fairness standards. However, there are companies, which are chosen by themselves either to pay the taxes or not such as online companies and foreign companies. So there is needed to change the rule and everyone should be taken under tax laws.

According to Back (2013) the business corporation should consider the tax payment as legal duty and also a social duty, because avoiding the tax is not only illegal but also unethical. The companies should have a good level of tax planning that will help them in minimizing their tax liabilities with an easy and smooth tax system. And there is no doubt that tax payment is also an ethical issues and companies should fulfill this social responsibility. The companies should pay fair share of their income as tax and should not use the loop whole for avoiding tax. Because one a company is not paying their taxes fair, ensuring that the companies not not fulfilling its social responsibility as well. When company pays the tax fairly, then it’s good enough, but if the company doesn’t pay a fair portion of income for tax then it may be fulfilling its legal duty to confirm the tax rules, but it is not fulfilling its ethical responsibility. The same is the case has been happening to Starbucks, because the Starbucks was enjoying the tax avoiding scheme in which it doesn’t need to pay to the UK government. While, on the other side, from an ethical point of view, the Starbucks is, no doubt, fulfilling its legal responsibilities, but it is not fulfilling its ethical responsibility. So, the implications for companies are to fulfill their both legal and social responsibilities through paying tax fairly.

Although the Starbucks agreed to pay £20 million volunteers in the account of company fund, but some of people call it a marketing or publicity stunt of Starbucks (Geoghegan and Peston, 2012). The Starbucks was agreed to pay more corporation tax after a public outcry not before. So, it can be considered as an effort towards gaining marketing benefits in order to build the positive image in the eyes of its customers and make the believe that Starbucks is an ethically and socially responsible company. This is also a fact that this incident has damaged the image of Starbucks badly, as people are considering the Starbucks as the unethical company that avoids tax and they have built negative perception in their minds about Starbucks. The officials of Starbucks also admitted that the image of Starbucks has been badly damaged and we need to rebuild the brand image in the minds of our customers (Hodge, 2012). It is quite true that the customers won’t like to buy from those companies which are not socially or ethically responsible with the economy (Simply CSR, 2008). It means the Starbucks had to pay the high price of this unethical action by customers, especially which are more loyal to Starbucks.

There is another perspective on this issue that the as Starbucks is enjoying the relaxation of tax rule and it had to face the public outcry. There are also other companies such as, Google and Amazon, which are also enjoying the relation of taxes in the UK, but people won’t stop using the Google or Amazon (Hodge, 2012). On the other hand, the Google and Amazon have denied this blame that they are avoiding tax. According Google officials, we always comply with all the tax rules in the UK and make our contribution to the UK economy through payroll, local and corporate taxes and it had paid £6M corporation tax in 2011. While the Amazon has announced that Amazon pays all the applicable taxes in every jurisdiction that it operates within and it has paid tax of £1.8 million corporation tax in 2011 (Hodge, 2012).

But there is another report that the three heads of these companies, held responsible regarding tax issues, have been invited and ritually flagellated by Parliament’s Public Accounts Committee (PAC). The PAC has invited Troy Alstead (Head of finance at Starbucks), Mr, Andrew Cecil (Amazon) and Mr Matt Brittin (Google). Mr. Alstead was asked to portray and justify his company’s move upon being a perennial commercial flop that why not paying tax since last 14 years. Mr. Cecil has been accused of being pathetic for his inability and incompetence to disclose the portion of his company’s sales from entire Europe sales. However, Mr. Brittin has not been ragged by tax accusation, because Google itself has reduced its tax bills, but Mr. Brittin has been held responsible against confidence justice (Knight, 2012). The purpose of stating the stories of all three executives is that however, they may not be breaking the legal law of taxation but they still help accountable on the ethical groundings because the company needs to justify that why they are not fulfilling their ethical or social responsibility. It also implies for all companies to make their tax payments transparent and fulfil their both legal and social or ethical responsibilities.

Conclusion:

The above case is discussed about an ethical matter, where the Starbucks, a leading global chain of coffeehouses worldwide, has been held accountable by the public outcry regarding their tax avoidance. For the last 15 years, the Starbucks has paid the tax just one time, as they were allowed under the rule not to pay taxes if their income is not taxable income. In this result of public outcry, the Starbucks is agreed to pay an extra tax and also assures to pay taxes in 2013 and 2014 as well, even if the company makes a profit or loss. However, it is crystal clear that the Starbucks is not committing a crime; as the company is enjoying tax relaxation according to the UK tax law. Other than the legal framework, if we see the ethical perspective, we may find a lot of ethical perspective. According customer or UK citizen, the Starbucks should pay taxes if they are reporting sales, and tax is necessary for making the UK a welfare state. The managing director of Starbucks stated that we are paying tax with going beyond the legal boundaries and we are committed to listen our country and act socially and ethically responsible company. The UK HRMC official’s states that the public wants every company to pay tax fairly and they will challenge this tax law that provides companies to avoid tax. In concluding the discussion, however, the Starbucks is not doing legal wrong but morally it was wrong. The company should pay tax fairly and should not enjoy any tax scheme that may take it out of ethical grounds.

 


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