Public Accounts CommitteeSupplementary written evidence form Starbucks

Further to the Public Accounts Committee hearing of 12 November, please find below additional information requested by the Committee.

Q214–229: Royalties:

Starbucks UK and other Starbucks operating units in our Europe Middle East and Africa (EMEA) Region pay a 6% royalty to this region’s Amsterdam headquarters. The 6% payment is standard business practice for multinationals in the food and beverage sector and reflects a payment for services provided by Starbucks Coffee Company and Starbucks EMEA headquarters. It is a market-based payment and we have over 20 unrelated third party licensees that have also agreed to pay this royalty at a consistent rate across the world. Many of these third party licensees are large, sophisticated companies that know very well how to value the brand and services they receive from Starbucks.

The value Starbucks UK receives for the 6% royalty includes:

Rights to the Starbucks brand and trademark, one of the top 100 brands in the world and in the UK. Starbucks registers this trademark in every country it operates and actively protects this trademark, spending millions of dollars a year building and protecting our brand and other assets.

The highest quality and ethically sourced Arabica coffee. The way we roast coffee is proprietary to Starbucks. Licensees have access to more than 20 core coffee blends, seasonal products and rare single origin Starbucks Reserve coffees.

Expertise to deliver excellent customer service through store operations, in-depth study of front and back of house operations, quality control, management, merchandising, budgeting, and expense control; including comprehensive training programmes and detailed manuals covering every aspect of retail operations.

Use of the Starbucks proprietary business model, including numerous standard and promotional beverages and other offerings, including an integrated customer loyalty programme and mobile payment platform.

Store design concepts which provide customers with a comfortable and accessible environment which address the needs of the local market.

Our royalty rate is subject to the scrutiny of tax jurisdictions across the world. Our consistent royalty rate with over 20 unrelated third parties around the globe is the best evidence that the “transfer pricing” of our 6% royalty rate is arm’s length—a market rate royalty. When marketing fees are included, our royalty rate also compares favourably to other multinational licensors.

We have not created an analysis of the breakdown of the underpinnings of our royalty for either commercial or internal purposes. Nor have we needed to do so. For example, in negotiations of our royalty rate with unrelated third parties, we present a combined number of all the value received for the royalty. In these negotiations, we do not attempt to breakdown the underpinnings of the value of the royalty, as this is not typically requested by our commercial licensees. However, as an indication of the scale of some of these activities, we spend approximately $500 million per year for costs related to marketing, brand and product development, store design, and research and development.

Even if it is assumed our UK business paid no royalty during the last 10 years, given the poor performance of our UK business Starbucks UK would have only paid 2 million GBP of total additional corporate income tax during this period.

Q239: Coffee Costs:

The price that Starbucks UK pays for coffee is consistent with the price we charge to over 20 unrelated third party licensees. Many of these third party operators are large, sophisticated companies that know very well how to value the Starbucks-branded coffee and they purchase approximately 25 million pounds of coffee at rates similar to those paid by our UK business. The fact that Starbucks has centralised its roasting for our EMEA region in Amsterdam does not impact Starbucks UK’s corporate income tax results. For example, if Starbucks UK purchased coffee from Starbucks roasting facilities located in the U.S, the coffee price would be consistent and Starbucks UK’s corporate income tax results would be the same.

In fiscal year 2011, we paid an average of $2.38 per pound for green coffee. We rightly pay a premium for the beans used in all our UK espresso beverages because they are 100% Fair Trade Certified. Coffee is one of our major cost components and, while we could acquire cheaper coffee, our belief has always been that we should source the highest quality, ethically-sourced coffee. We believe that by establishing direct relationships with coffee producers and by establishing quality standards we can help to ensure the sustainability and future supply of high-quality coffees. Our comprehensive approach to ethical sourcing—including farmer support centres, farmer loans and forest carbon programmes (through which farmers are incentivised to keep forests)—promote best practices in coffee production.

Q246: The Netherlands:

We pay both Dutch and US taxes on the royalties received in our Amsterdam structure. The transfer pricing of transactions within the structure are arm’s length and in accordance with transfer pricing guidelines set by the Organization for Economic Cooperation & Development (OECD). The overall effective tax rate we have paid on the royalties received by our Amsterdam regional structure has averaged 16% over the past five years.

Q276: Switzerland:

The total income tax liability for FY2011 for our coffee procurement company in Switzerland was 11.6 million CHF.

Q282: Research & Development:

Our research and development costs relate primarily to innovation in our products and equipment. Examples of innovations include our Frappuccino® blended beverages, Starbucks Refresha™ beverages, Starbucks VIA® Ready Brew and Verismo® System by Starbucks in-home coffee and espresso machines. Any information provided relating to our research and development costs do not include any intercompany profits. The costs are actual costs incurred by Starbucks.

Q284–286: Confidentiality of the Netherlands agreement:

As with all tax authorities around the world, there is a mutual understanding of confidentiality relating to information shared with and received from the Dutch tax authorities in our confidential but arm’s length negotiations with them. While we do not have a formal written confidentiality agreement with the Dutch tax authorities, we believe this mutual understanding is an important underpinning of our professional relationship with the Dutch tax authorities as it is with all tax authorities we work with.

Q318: The Netherland tax paid and confidentiality agreement:

The amount of tax we paid to the Netherlands government is publicly disclosed in the Annual Accounts (financial statements) filed with the Dutch government each year. In 2011 we paid 715,876 Euros in tax to The Netherlands. Please see the response to the question above regarding confidentiality with the Dutch tax authorities. HMRC has established channels with the Dutch tax authorities through which it can request additional information.

Summary

In summary, we are committed to improving our business and becoming profitable, and in turn, increasing payment of UK taxes on these profits. As for payment and taxation of royalties for the services that are provided by our EMEA headquarters and US business to our markets, including the UK, taxation occurs primarily under the laws where business activities that generate the royalties occur. This global principle of taxation for companies operating in several markets is reflected in how Starbucks pays taxes.

We are committed to working with local tax authorities to determine the amount of tax revenue each jurisdiction is entitled to, based upon the nature of activities carried on in each market. While we do avail ourselves of the benefits of the tax laws in each country in which we do business, unlike many companies and individuals, Starbucks does not use island offshore tax havens which welcome shell companies usually run by one person with multiple entities under his or her control, and that traditionally have a tax rate of zero. Such tax havens are drastically different from Starbucks situation. We have centrally located Starbucks 8,719 square-metre EMEA regional headquarters, distribution center and coffee roasting plant in the Netherlands, where we employ approximately 220 multi-language partners and distribute approximately 15 million pounds of coffee to the 33 countries in which we operate across the region.

I hope this information is helpful to the Committee.

20 November 2012

Prepared 3rd December 2012