Starbucks and Amazon Face Tax Fury

By Howard Bilton

Poor old Starbucks and Amazon (and we can add a few other notable heavyweights to that list) are getting it in the neck.

The two cases are very different. Both are accused of aggressive or “unfair” tax avoidance. Unfair seems to be a term used by commentators when they can’t think of anything specific to complain about.

The main complaint seems to be that both companies generate revenues in the UK and don’t pay much UK corporation tax. They do both contribute to the UK plc by employing people in the UK who pay tax, by paying VAT and National Insurance and by spending money with providers of goods and services. They do contribute, but do they contribute enough or a “fair amount”?

Importantly, neither are UK companies. They are both headquartered in the US.


Starbucks extract royalties out of the UK which reduce or eliminate most of its profits. Many of the Starbucks coffee shops in the UK are franchises – joint ventures with a local corporate partner (apparently they won’t grant franchises to individual entrepreneurs).

The franchise agreement would typically provide that Starbucks will provide expertise, systems, know-how and the use of the Starbucks name in return for a royalty. A royalty is charged on turnover and is an expense to the operator which, obviously, reduces local taxable profit as do its other overheads such as rent and wages.

Starbucks also operates its own coffee shops in the UK and is allowed to charge the same royalty, but no more, as it would charge a franchisee. Apparently the royalty is 4.7% of turnover.

Tax agreements, normal practice and logic all dictate that it is reasonable for a company that has spent millions, probably billions, advertising and marketing its brand to be able to charge for the use of that brand.

Starbucks in the US has made the brand valuable by aggressively promoting it as a sign of quality. All big brands do the same. People visit the Starbucks coffee shops because they are called Starbucks. Without the Starbucks name, business would probably reduce. Certainly the franchisees value the use of the name and for Starbucks’ expertise etc and are prepared to pay for that use. It is a condition of the franchise agreement. If you don’t value what Starbucks provide don’t sign the agreement.

International tax agreements, which override local tax legislation, dictate how royalties are treated and give companies tax certainty. The UK and the US have signed a tax treaty which provides that royalties can be paid gross and without withholding tax.

The receipt of the royalty in the US would add to the profits made by Starbucks in the US and be subject to US corporation tax. In theory, the royalty will not escape taxation – it will just be taxed in the US rather than the UK. What seems to have offended here is that the royalties are not being sent to the US but rather to the Netherlands.

The UK and Netherlands have concluded a similar tax treaty. Royalties can be sent to the Netherlands tax free. Those royalties are subject to tax in the Netherlands but the Netherlands allows royalties and interest to be paid onwards and deducted as an expense, without tax being withheld on either.

We don’t know what happens to the income received in the Netherlands but standard planning is for the Netherlands company to be paying away most of the royalty income it receives to a zero tax company. This would leave little or no taxable profit in the Netherlands so the royalty being paid out of the UK escapes tax in both the UK and the Netherlands.

These arrangements may be obnoxious to the UK but it doesn’t cost the UK any tax. If the royalty was paid directly to the US, no UK tax would be payable on that amount. The US might well complain if it is not getting tax on the royalties sent to the Netherlands but that is a matter for the US IRS.

The US has rules designed to capture and tax the profits of offshore companies used by Starbucks. They can bring those rules to bear if they can and wish. It is not clear whether anybody has ascertained whether or not the royalty payments going out of the UK are being taxed in the US.

All we know is that they are not being taxed in the UK which is both logical and legal. A UK company doing business in the US would receive similar treatment and can extract royalty payments without suffering US. It could receive the royalties in the Netherlands if it wished.


The Amazon case is quite different. Amazon trades with the UK and not in the UK. It sells books, CDs and other items in the UK but has not set up a taxable entity in the UK. Generally, if a US company sends goods to the UK, payment is sent to the US and is revenue belonging to and taxable only in the US after expenses. Tax is not payable on revenue only on profit.

International tax treaties contain a “permanent establishment article”. That article clearly states what you are allowed to do within a country without being subject to tax in that country. Typically, the treaty will state that a treaty partner company can maintain “facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise” without creating a taxable presence.

On the other hand, it may not maintain a place of management; a branch; an office; a factory; a workshop; without creating a Permanent Establishment and thereby becoming taxable.

Amazon has set up a subsidiary in Luxembourg. It is the Luxembourg company which sells the goods to UK residents. If a customer logs on to and buys something, that transaction is processed through a Luxembourg server owned by a Luxembourg company and managed by persons resident in Luxembourg. The sales process is automated so does not require much by way of personnel.

The warehousing and distribution of the goods in the UK probably requires many more people. That is not particularly unusual. If the US and Luxembourg treaties signed by the UK provided that UK tax had to be paid if the foreign company had a warehouse and distribution centre in the UK, Amazon would probably move that facility out of the UK.

Delivery of goods would be slower but it could easily fulfil orders through a server in Luxembourg and a warehouse in, for example, Ireland. If the Luxembourg company was removed from the equation, there would still be no UK tax payable as sales would be made to UK persons by the US company, and any and all profits made from those sales would be taxed in the US, not in the UK. Again the UK is not losing revenue because of the Luxembourg arrangements.

The tax treaties which allow Starbucks and Amazon to avoid tax in the UK were signed to encourage trade between the tax treaty partners and give certainty as to which country was able to tax the revenue. They have achieved that.

Advisors are using these treaties creatively to try and reduce the overall tax burden by parking profits in a third country. It could be argued that Amazon and Starbucks are “borrowing” the Luxembourg and Netherlands treaties respectively and shouldn’t be allowed to use those treaties because their main and head office is not located there. But they do have companies in those countries and it would seem unrealistic to deny them the use of the treaty because they have less personnel in those countries then they do in others.

Perhaps if they couldn’t plan like this they would just move their company to a lower tax country instead.

We saw quite a number of companies exiting the UK and now individuals exiting France to escape tax hikes. Countries compete to attract business and investment. Tax is one factor. Expertise, living standards, infrastructure and even the weather also play a part in attracting people and businesses.

The UK could increase taxable profit by denying a deduction for the royalty payable to Starbucks. That would discourage big companies from doing business with the UK unless all other countries in the world did the same.

Amazon employs a large number of people in the UK. Amazon is different to Starbucks in that they probably don’t need an operation in the UK and would not have one if it led to having to pay large amounts of tax which they could otherwise avoid.

Starbucks cannot sell and deliver hot coffee over the internet. Starbucks need shops in the UK which must pay UK tax on profits made in the UK so the only question is how that profit is taxable and who gets the right to tax profits.

I think the reality is, and politicians and HMRC know this, that businesses are very mobile and it does not pay to kill the golden goose by increasing tax rates or denying reasonable deductions against taxable profit. It makes great headlines for newspapers and politicians to knock the greedy corporate who has huge revenues but little tax (in the UK) but the reality is a bit different.

It is interesting to note that the Guardian – which seems to have been the main critic of both these companies – has a turnover of £195 million but pays no tax. Its accounts show it is making a loss. It would probably argue that there is nothing “artificial” about these accounts but if it was advocating a tax on turnover, it may no longer be in existence due to its losses being greatly increased by that tax.

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Howard Bilton is a UK and Gibraltar barrister, Professor of Law at Thomas Jefferson School of Law, San Diego and Chairman of The Sovereign Group.