Regaining Public Trust and Credibility after Tax Avoidance
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This assignment provides a detailed analysis of the consequences of tax avoidance on corporate reputation and suggests strategies for recovery, including independent verification agencies and a publicly posted bond to assure consumers that similar situations would not occur in the future.
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STARBUCKS CASE STUDY
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EXECUTIVE SUMMARY Ethics can be referred to as the values and beliefs of a person or company in association with organisational conduct (Sikka, 2018). This report stresses upon the case study of Starbucks in UK which was involved in evasion of taxes by reporting losses for the initial 15 years. The company evade high taxes even after holding large profitability base. It has been evaluated that over the last three years, company present their report with no profit along with any head income tax. In addition with this in the year 2007, Starbucks September financial report showed their losses on its 10thconsecutive annual year then Peter Bociean who then held the position of chief financial information showed the report according to which company already enjoyed high operating profit margin rate with estimated range of 15% which is equivalent to 50 million pounds. This report is divided into three sections. The first section gains an insight into the impact of company’s tax evasion on revenues of the organisation. The second piece explores the loss of customer base as a consequence of company’s scandal. The third part gains knowledge of the ways in which public relation or media coverage has taken a role post the entity’s unethical conduct. In this relation, it is recommended to enterprise to indulge in CSR activities, publicly sign a bond declaring avoidance of unethical practices and join hands with independent verification agencies with a view to enhance their name and stake in global market place.
INTRODUCTION Ethics can be regarded as the moral philosophies and/or beliefs of an individual or group associated with determining what is right or wrong (Barry, 2016). Business ethics is considered to that field of ethics that is concerned with the in-depth examination of business practices, policies, structure and corporate governance to ensure that organisation does not get involved in any malpractices such as tax evasion, bribery, black marketing, hoarding etc. (Chell and et. al., 2016). It is essential for an entity to adopt ethical code of conduct and practices, which do not harm to community or environment, with a view to ensure its sustainability in market for a long term.Intherecentdecades,practicesconcernedwithconservationofenvironmentand sustainable development have gained significance. The present report is based on Starbucks which is one of the leading coffee company as well as coffee house chain having its headquarters in Seattle, Washington. This report tends to stress upon the practices and code of conduct adopted by organisation within the confines of United Kingdom during the course of time. Starbucks within UK evaded the taxes to be paid by company in its initial 15 years by showing losses of organisation in its financial reporting and concealing its report irrespective of the large scale of revenues earned by entity (Alldridge, 2015). This was done with the prime objective of concealing the profits so as to evade taxes. The global reputation of a business organisation is highly crucial to ensure its long term business growth and sustainability. The loyalty as well as trust derived from customers owing to the favourable reputation of business organisation possesses a direct and significant impact on the bottom line of a company.This report will gain knowledge of the impact of Starbucks scandal upon the long term corporate image and stake of company. Similar incidents have also taken place with Amazon and Google which were found to be guilty of tax evasion (Barry, 2016). Such incidents significantly cause damage to the reputation and position of enterprise across the global market place. For an entity to become a market leader, it is significant that it possesses a favourable brand image such that people can easily develop loyalty and trust in the company and consequently, purchase the products produced by them. This report will explore main impacts of the Starbucks UK tax evading conduct upon the different aspects and global reputation of company. 4
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ANALYSIS As an outcome of Starbucks tax evasion activity, there were many types of severe consequences that have been faced by organisations. These consequences lead company towards facing negative impact on their organisation reputation in all over the world. Mentioned below there are some major points which is discussed below: “Tax evasion brought ill fate to industry” The tax authorities of UK and the U.S internal revenue service confidential report presented before media showcased that Starbucks evade high taxes even after holding large profitability base.It was shown that company was not earning any profits over the last three years as reported no profit under all the head of the income tax.For consecutively 15 years, the company continued to show losses in its financial statements with a view to evade taxes. Seeing this, high authorities of UK such asHer Majesty’s Revenue & Customs (HMRC),asked company to present confidential reports of financial system on which they declined to comment. This made company to face a severe deduction in their intellectual property fees if the coffee firm did not show their actual charges (Sikka, 2018).All of this tax evasion activity and its aftermath brought bad name to the Food & Beverage Industry, particularly, the coffee sector. This unethical act posed huge damage to the name and position of the industry in which it serves (Food & beverage). The goodwill of this industry came to a stooping low position in a very short period of time. A number of other companies operating within this business sector disregarded Starbucks UK for getting indulged in an unethical and illegal activity such as tax evasion and making an attempt to pay less tax than the original, by reflecting losses in company’s financial statements instead of profits. “Starbucks tax avoidance leads to decline in sales” Starbucks is one of the leading coffee shops company operating their business activities while having its headquarters in UK. Most of the people by hearing company name think of machetoes, latté and tax dodging. This giant coffee shop industry faced protest and general animosity and chords from the public of Britain and overall UK. As per the report, it was emerged in the year 2012 in that report Starbucks was convicted in paying little to the taxes in the UK province despite holding hundred of stores within the country (Bird and Davis- Nozemack, 2018). This tax dodging can be said as aggressive tax planning that was done by company. After this report company falls under a great pressure and promised to pay appropriate 5
tax to the government with an estimation of 8 million dollars along with another 16.8 million in the consecutive years 2013 and 2014. By doing this Starbucks promised to build customer relationships. In addition to this, company take another effective move to secure relations along with this company also made promises that it will pay higher taxes in the UK provinces. Individuals within UK by seeing this report started boycotting Starbucks. In an interview of Starbucks speech at London Chamber of Commerce and industries a question has been asked to Chris Engskov who holds a position of managing director in Starbucks Coffee UK (Akhtar and et. al., 2017). The question that has been asked company management director include the reason behind Starbucks did not paid taxes in UK. In return to the answer Chris said Company pay appropriate range of tax in theprovince of UK, but it is also true that company fail to pay a meaningful amount which is related to corporation tax that has been paid by profit of a company (Abreu and Gomes, 2019). Later he said that company further committed to pay require amount of high taxes and move towards effectively retaining their public trust by acting responsibility and listening to the government.All of the tax avoidance scandal caused the sales of organisation to fall down by a relevant percentage. In this regard, it was reported that the Starbucks group’s main UK subsidiary, namely, Starbucks Coffee Company (UK) Ltd, witnessed the first ever fall in turnover in the year 2012 to end of September 2013 from 413 million pounds to 399 million pounds. This further continued and the aftermath of this scandal is still being faced by Starbucks UK and its revenue figures. “Starbucks and its relationship with their employees’ customer and the wider society” Starbucks is a multinational coffee shop industry effectively engage in the process of selling their products in different companies in order to gain high advantages. Just after the report of tax Evasion Company effectively reforms the current tax system within UK specifically related to corporation tax. Company make formative promise is to pay require amount of taxes as per by the law. Along with this, day in order to earn trust of their customers company listened to their customers issue and their expectations. As per the view of company, most important Assets of Starbucks that has been built by company are trust with their employees, customer, society and media in which they operate their functions (Nigrini, 2017). The report which has been released by UK Parliament public account committee states that multinational corporations like Google, Amazon and Starbucks put themselves in a major fire storm which leads them towards criticism in order to not pay minimal tax rate within the UK region. This allocation which is 6
related to tax evasion leads Starbucks into a serious crisis that affected their relationship with public. Serious outrage on social media played out that explodes negative corporate ethics that has been followed by Starbucks. This lead towards creating bad reputation in media coverage related to the tax evasion. Starbucks after facing criticism on tax evasion become poster child in corporate tax avoidance in the year 2012 as they are accused of taking advantage of artificial corporate structure in order to shift their profit out of the region of UK in the lower tax jurisdictions(Kirchler,HartlandGangl,2017).AfterfacingseriousoutcomesStarbucks effectively plans and promise to pay fair taxes as per the calculated percentage of government. Along with this, in order to make formative relationships with their customers Starbucks tend to become more responsible towards Corporate Social Responsibility in which they promises to meet legal mandated standards in order to save environment society and community in best effective way. CONCLUSION On the basis of above mentioned report, it can be said that the tax evading conduct of Starbucks had a severe impact upon the reputation of company. Also, it can be assessed that the unethical code of conduct when became public lead to loss of sales and profits for the enterprise. Further, it has been observed that the company lost a large quantum of loyal customer base owing to the tax evasion done by entity within United Kingdom. In addition to this, the negative publicityof entity that took place by way of media coverage also impacted on the overall performance of organisation. Besides this it is concluded that corporation is required to undertake measures to effectively deal with the damage caused to goodwill and position of enterprise. RECOMMENDATIONS The tax evasion scandal had a damaging impact on the global reputation of company. The main cause behind this was the corporate culture of corporation. It is highly suggested that business should carry out definite moral and ethical programmes in order to equip the employees with decisions related to what is right and what is wrong in relation to operations. Furthermore, to deal with the loss to overall global brand image and position in marketplace, business concern can consider the aforementioned possible solutions.These are, namely, engaging in CSR activities, joining an independent verification agency and setting up a public bond to pull through 7
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the losses made to the brand position and name within market place.These recommendations are explained in brief below:- Starbucks UK should put into practice as many processes possible to deal with the multifaceted situations that corporation landed in as a consequence of this unethical code of conduct and practice. Over the course of time, Starbucks UK has developed into an international brand name and thus, possesses a high position in market place that has been challenged post the public revelation of the unethical code of conduct of company. It is easier to speed up effectiveness programs and potentially save the entity from losses. It recommended that the company shouldengage in CSR activitiesso as to become an ethical organisation which gives its contribution towards welfare of community and environment (Abreu and Gomes, 2019). Even though the organisation possesses its own internal team for calculating the taxes and then preparing the financial statements yet the company can now considerteaming up with other independent verification agenciesto regain the trust and belief of consumers along with improving its reputation in market (Sisson and Bowen, 2017). It is recommended that company can also publicly post a bond that assures the public that the similar situation of tax avoidance would not take place in future again (Sikka, 2018). This would lead to building up the lost image of company and regaining the credibility of public and also the government. The bond would need a huge finance to be made so that customers can be assured that company truly regrets about evading the taxes and significantly misleading the public as well as law. Starbucks UK is a big name in coffee (food & beverage) industry and enterprise can consider the option of collecting funds from own sources for the bond. 8
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