Starbucks UK Tax Evasion Case Study: Ethical Implications and Analysis

This case study examines the Starbucks UK tax evasion scandal, where the company avoided paying taxes for 15 years by reporting losses. The analysis explores the negative impacts on Starbucks' revenue, customer base, and public image. The report highlights the unethical conduct, the declin...Read More

STARBUCKS CASE
STUDY

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 10th consecutive 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.

Contents
EXECUTIVE SUMMARY.............................................................................................................2
INTRODUCTION...........................................................................................................................4
ANALYSIS......................................................................................................................................5
CONCLUSION................................................................................................................................7
RECOMMENDATIONS.................................................................................................................7
REFERENCES................................................................................................................................9

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. In the recent decades, practices concerned with conservation of environment and
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.
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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 as Her 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
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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 the province 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
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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, Hartl and Gangl, 2017). After facing serious outcomes Starbucks
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
publicity of 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
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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 should engage in CSR activities so 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 consider teaming
up with other independent verification agencies to 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.
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REFERENCES
Books and Journals
Aalbers, M. B., 2018. Financial geography I: Geographies of tax. Progress in Human
Geography, 42(6), pp.916-927.
Abreu, P. S. and Gomes, M. L., 2019. Corporate Social Responsibility and Tax Planning: from
Private to Public Regulation. Revista de Direito Internacional Econômico e
Tributário, 13(1), pp.422-448.
Akhtar, S., and et. al., 2017. Multinationals' tax evasion: A financial and governance
perspective. Journal of Corporate Finance.
Alldridge, P., 2015. 13. Tax avoidance, tax evasion, money laundering and the problem of
‘offshore’. Greed, Corruption, and the Modern State: Essays in Political Economy,
p.317.
Barry, N., 2016. Business ethics. Springer.
Bird, R. and Davis-Nozemack, K., 2018. Tax avoidance as a sustainability problem. Journal of
Business Ethics, 151(4), pp.1009-1025.
Chell, E. and et. al., 2016. Social entrepreneurship and business ethics: Does social equal
ethical?. Journal of business ethics, 133(4), pp.619-625.
Kirchler, E., Hartl, B. and Gangl, K., 2017. Income tax compliance. In Handbook of Behavioural
Economics and Smart Decision-Making. Edward Elgar Publishing.
Nigrini, M. J., 2017. An Analysis of Tax Evasion Drivers in Light of the Richard Hatch Tax
Evasion Saga. Journal of Forensic & Investigative Accounting, 9(2).
Sikka, P., 2018. Combating corporate tax avoidance by requiring large companies to file their tax
returns. Journal of Capital Markets Studies, 2(1), pp.9-20.
Sisson, D. C. and Bowen, S. A., 2017. Reputation management and authenticity: A case study of
Starbucks’ UK tax crisis and “# SpreadTheCheer” campaign. Journal of
Communication Management, 21(3), pp.287-302.
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