Starbucks Case Study: Ethical Practices and Tax Avoidance in the UK

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ACADEMIC AND PROFESSIONAL SKILLS
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Executive summary
The success of any organization is highlight dependent on the ethics of the organization as it
is dependent on the regulations, work environment, management process and other important
factors of any organization. Nevertheless, this study has shed light over the case of Starbucks
and their skipping tax payment towards the government of the UK. The case study showcases
how it entailed profit by not adhering to government taxes. The tax avoidance in context to
the organization was immense. The organization did not report its profit in regard to the first
14 years of business. Starbucks did not pay any kind of income tax in context to its sales. The
director of the organization stated that they will be paying the tax to the HM Customs and
Revenue intended for two consecutive years even if they will fail to entail prior profit. The
regulatory body plays an important part in aiming to maintain the ethics of the organization.
In any country, the regulatory bodies are present to maintain the stability in different
segments such as finance, health, environment and so on. Large shareholders act as the
influencing factor for the changes and the activities within any organization. In the case of
Starbucks, the biggest stakeholder is the former CEO, Howard Schultz. He holds 33 million
of the share which has a direct link with the organization. This study has also made a
recommendation to provide training and recruiting employees as per the organizational
requirements.
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Table of Contents
Introduction................................................................................................................................4
Analysis......................................................................................................................................5
Conclusion..................................................................................................................................8
Recommendations......................................................................................................................9
Reference List..........................................................................................................................10
Appendices...............................................................................................................................11
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Introduction
Business ethics are very important to be entailed in the organization. Ethics are preoccupied
in an organization to examine the principles and the moral standards that undermine in then
business environment. Business ethics are crucial as it is considered a vital element that can
either lead to the success of an organization or demise. Ensuring the ethical practice is very
important for an organization and they can ensure measures in this regard for their growth
and productivity. Ethical practice in relation to an organization can be reflected by having a
prior code of ethics, awareness, and communication campaigns. This study revolves around
Starbucks. Starbucks is known as one of the premier retailers of coffee in around the world.
The product mix of Starbucks includes tea, coffee, and other snack items. The case study
showcases how it entailed profit by not adhering to government taxes. The tax avoidance in
context to the organization was immense. The organization did not report its profit in regard
to the first 14 years of business. Starbucks did not pay any kind of income tax in context to its
sales. On the other hand, it was revealed that KFC had paid tax of 36 million euros. This
instance was regarded as disgraceful by Michael Meacher MP and declared that this kind of
conduct is wrong in context to the interests of the country where it operates. The analysis for
this study was concentrated in terms of revenue, shareholders, PR relations and media
coverage and its Regulators (uk.reuters.com, 2019). The recommendations are provided in
this study to ensure that ethical practices are subjected to organizations. Transparency of an
organizations financial structure is deemed very essential to stay aloof of any problems in the
future.
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Analysis
Media coverage and PR Relations
In today's time, PR relations and the media coverage reveals all the on-going buzz to the
general masses. The success and the demise of an organization in this global world hold in
the hands of media. The avoidance of the income tax by the organization gas paced like fire.
The managing director (UK) of the organization was ashamed of the complexity and
manipulation of the tax arrangements and vowed to pay the taxes in regard to coming two
years (10 million euro’s in 2013 and 2014). The director of the organization stated that they
will be paying the tax to the HM Customs and Revenue intended for two consecutive years
even if they will fail to entail prior profit. Media coverage and PR relations have reflected the
fact the firm’s complex structure makes it difficult to understand its approach for the payment
of taxes. There were several media attacks in context to this case by its competitors on a
global platform. However, the organization stood still and stated that it pays all the taxes and
meets all the international regulations and the standards. According to Reuters, Starbucks,
had a capitalization of the market of 40 billion dollars and is considered the second most café
joint after McDonald's. Media and PR had tax shammed the group for not accounting its
profit. The findings by Reuters made the director oblige to return the tax (uk.reuters.com,
2019).
Regulators
The regulatory body plays an important part in aiming to maintain the ethics of the
organization. In any country, the regulatory bodies are present to maintain the stability in
different segments such as finance, health, environment and so on. It is the duty of any
organization to cooperate with the regulatory bodies of any country to maintain the ethics of
the organization and promote a healthy environment of the organization. On the other hand,
in every organization, there is a number of regulatory bodies to take care of the business,
work environment and problems of the organization. According to the code of ethics, every
organization needs to follow the regulations set by the regulatory bodies such as SCA and
FRC in aiming to do business within the UK. In the case of Starbucks, the organization did
not report its profit in regard to the first 14 years of business. Starbucks did not pay any kind
of income tax in context to its sales. The forts duty of the financial regulatory authority of the
organization is to pay the tax to the government of the UK (Kang and Namkung, 2018). As
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per the ethics, any business except the nonprofit organizations such as NGOs, all the
organizations are bound to pay tax to the government for the development of the country. In
case of not paying tax to the government is considered as the criminal offense. From the CEO
the top most people in the management are responsible for the regulations within the
organization. When an organization is earning a huge profit, it is their responsibility to pay
the tax as per their income from the business. In this country, all the working people above
the bar of the taxable income are contributing their token to enrich the country. Whereas,
being a one of the famous organization Starbucks did not pay their tax for a long period.
Hence, it highlights the failure of the regulatory body of the organization as they could not
cope up with the regulatory bodies of the country. It is against the ethics of the business as
every organization is bound to follow the rules and regulations set by the government. Where
other organizations are paying their tax to the government in that case skipping the tax is
considered as the unethical activity by Starbucks.
Shareholders
Ethics in the business is highly dependent on the shareholder of the organization. Rules and
regulations are being developed or revised as per the decisions taken by the large
shareholders. Large shareholders act as the influencing factor for the changes and the
activities within any organization. The main factors of any organization are rules and
legislation, working process, marketing, productions and so on. In taking any decision the
large stakeholders play an important role. In the case of Starbucks, the biggest stakeholder is
the former CEO, Howard Schultz. He holds 33 million of the share which has a direct link
with the organization. On the other hand, in an indirect way, he holds a share of 1.7 million
(Ferreira et al. 2018). Hence it is clear that he is the influencing person as the stakeholder of
the organization. However, in aiming to give a huge growth to the business the former CEO
gave importance towards the investors as investment was essential for the expansion of the
business in every corner of the UK. Mellody Hobson becomes the biggest stakeholder and the
shareholder of the organization. She also has a direct and indirect share of Starbucks whereas
she has direct 246000 shares and indirect 283146 shares (Sachs, 2018). In the global retail
segment, John Culver claims the third leading shareholder which makes him the important
stakeholder for the organization. He has a 366402 share through the global retails of
Starbucks. In case of not maintaining the ethics of business, the stakeholders are responsible
to put the organization into the controversy which affects the business of the organization
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also. Though the former CEO apologized for the factor this case highlights the failure of the
stakeholders to maintain the ethics of the organization.
Revenue
Revenue of the organization is determined by the amount of the monetary benefits that are
received by the company through the exchange of the services and goods. In this context, the
revenue of Starbucks has increased since 2015. The tax slam adhered when it was found out
that the group did not pay any taxes since it has opened in 1998. The acquisition in the UK
for that time period nearly accounted for up to 3 billion pounds. They had opened 735 outlets
but did not pay the authentic taxes. Only 8.6 million taxes were paid by them. But this
instance was slammed by Reuters and the director of the group vowed to repay the tax over
the two years. There were several transcripts which were analyzed at the time and it
gracefully stated that their business in the UK was deemed profitable. Michael who was an
entailing member of the Labour Party denoted this incident as unfair and unquote. Total
revenue of Starbucks in the year 2015 was $ 19,162,700 and cost in context to the revenue
was $ 7,787,500. The operating income of star bucks in the year 2015 was $3, 60, 000 which
went up higher in 2016 ($4, 171,900). The gross profit in context to 2015 was $11,375,200
when rose in the year 2016 with $12,806,900. In the month of October 2012, the group
opened new outlets at binge. Yet, they proclaimed that no profit was withheld
(investor.starbucks.com, 2019).
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Conclusion
This study focused in accordance with the case study of the famous café chain Starbucks. The
study mainly reflected the findings of Reuters on regard to the avoidance of the taxes by the
organization. The complex framework and confusing account structure in Britain made it
more difficult to understand the tax arrangements. The analysis of this study was conjugated
by the reflections in context to the Public relations and Media coverage. There were several
magazines and news channels including the non-traditional media channels that slammed the
group for its tax avoidance and non-reporting of the profit ratio. Apart from Media coverage
and PR, there were several other attributes that were analyzed and evaluated. The other areas
of emphasis were entailed in context to the revenue of the organization, regulators in regard
to the Starbucks Group and shareholders in relation to the Seattle based group. The measures
of ethical, conduct and importance of ethics in an organization were subjected in this
proposed study.
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Recommendations
Business ethics are entailed very importantly for the sustenance if an organization. If business
ethics are not monitored in prior details then depletion of an organization will entail. In this
regard, Starbucks needs to procure effective ethical measures so that they can cover up for the
tax slam of 2012 (investor.starbucks.com, 2019). The UK structure of Starbucks is very
complex and in order to mitigate this, the organization needs to simplify the structure (Kan,
2015). There are various risks which can pertain in an organization if the ethical practices are
not true and efficient. The recommendations through which an organization can entail ethical
practices are as follows:
Educating the staff about the risks
Educations of the employees are very important to avoid risks and discrepancies in an
organization. If they are made aware of the ethical considerations in an effective manner, then
risks can be avoided. If the staff and the members are well aware of the risks that pertain in
an organization then discrepancies will be avoided. If misconduct, when noted, is imparted to
the authorities that it can help the organization from being questioned (Nachtmann Motala,
2016).
Hiring and recruiting well
As stated by Kan (2015), management plays a very crucial role in withstanding the ethical
conducts of a business. The members of the organization are needed to be truthful in all
regards to ensure good ethics in an organization. Recruiting and hiring if the employees are
needed to pertain in ethical terms and they are needed to explain the codes of ethics so that
they do not make mistakes.
Transparency in context to the organization’s finances
As commented by Nachtmann Motala (2016), it is very important to entail transparency in
accordance with the finance of the organization. There is strict regulation for the payment of
taxes imposed by the government. So being transparent can save the company from other
problems. Payment of taxes at regular intervals and in true order is very essential.
Speaking the truth in context to authority
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The corporate culture needs to entail that the employees and the authority members are
truthful to each other and the government. As commented by Vlcek (2017), misconduct in
terms of ethics needs to be reported to procure an effective ethical practice. The difference
between the legal and ethical codes needs to be understood by the authority so that no
loophole is entailed.
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Reference List
 Ferreira, J., Mueller, J., and Papa, A., 2018. Strategic knowledge management: theory,
practice, and future challenges. Journal of Knowledge Management.
 investor.starbucks.com (2019), Starbucks Investor Relations, Available at
https://investor.starbucks.com/press-releases/financial-releases/press-release-details/
2012/Starbucks-Reports-Record-Fourth-Quarter-and-Fiscal-2012-Results/
default.aspx[Accessed on 01/01/19]
 Kang, J.W. and Namkung, Y., 2018. The effect of corporate social responsibility on
brand equity and the moderating role of ethical consumerism: The case of Starbucks.
Journal of Hospitality & Tourism Research, 42(7), pp.1130-1151.
 Karr, J., 2015. Immoral Legislation and Tax Benefits for Expat Corporations. Conn.
L. Rev., 48, p.1703.
 Nachtmann Motala, M., 2016. The New Global Politics of Sovereign International
Tax: Space, Time, and Why BEPS is Not the Final Frontier.
 Sachs, S., 2018. Stakeholder Management and Performance.
 uk.reuters.com (2019), Special Report: How Starbucks avoids UK taxes, Available at
https://uk.reuters.com/article/us-britain-starbucks-tax/special-report-how-starbucks-
avoids-uk-taxes-idUKBRE89E0EX20121015 [Accessed on 01/01/19]
 Vlcek, W., 2017. Multinational Corporations and the Digital Economy. In Offshore
Finance and Global Governance (pp. 43-70). Palgrave Macmillan, London.
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Appendices
Appendix 1: Recommendations
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Educating the
staff about the
risks
Transparency
in context to
the
organization’s
finances
Hiring and
recruiting well
Speaking the
truth in context
to authority