Exactly 20 years ago, Kris Engskov, the head of Starbucks in the UK, was one of Bill Clinton’s most trusted lieutenants on the campaign trail that took both men to the Oval Office – Clinton as president, and his fellow Arkansas native as his most loyal aide.
One of the key points for the Clinton campaign team then was the charge that President George Bush Sr was soft on taxing big business. Clinton bragged that, given the chance, he could collect an additional £45bn in tax from foreign multinationals in just four years.
This very week in 1992, his campaign started a blitz of 30-second TV adverts. Viewers were told: “This is the $825bn question. That’s how much foreign corporations operating in the US took in one year. But 72% of them didn’t pay a dime in taxes. Not one dime …”
While he never quite clawed back £45bn, many felt Clinton put his finger on an important issue. Yet two decades on, US senator Carl Levin could still claim recently that multinationals “engage in shams and gimmicks to avoid paying the taxes they owe”. And that was the charge levelled at Starbucks UK last week, which became the latest target of fury, following Amazon and Google, for paying derisory levels of tax in the UK.
A Reuters investigation uncovered apparent discrepancies between what Starbucks was telling US investors on the one hand and what it was declaring to HM Revenue Customs on the other.
By a curious coincidence Starbucks and Britain’s home-grown competitor, Costa Coffee, achieved similar sales last year – £398m and £377m respectively. The cost of achieving these sales, however, was £319m at Starbucks, more than three times the cost recorded by Costa. As a consequence, Costa’s accounts show a tax charge of £15m, while no tax is charged against Starbucks’ loss-making UK division.
That gap is in part explained by the US firm sourcing roasted coffee from a sister company in the Netherlands, and a consequent requirement to allocate some profits from the UK back to Amsterdam. Costa, meanwhile, operates a roastery in south London.
More unsettling, however, is the payment of almost £26m in “royalties and licence fees” by Starbucks UK in 2011 to other parts of the group. Engskov has defended this by pointing out that royalties are levied at the same percentage of revenues everywhere Starbucks operates in the world. Significantly, however, he does not say whether these payments are made back to Seattle or to a low-tax haven.
Royalties are not unusual: such payments are also levied on McDonald’s UK and Walmart-owned Asda by their parent companies. What sets them apart from Starbucks, however, is that they remain big UK tax contributors after the payments are made.
By contrast, Engskov looks to be struggling to make the case that Starbucks UK is serious about building profits, or that its royalty and licensing arrangements are directed to that goal. Pre-tax charges on the business have been a significant reason that the exchequer has been able to collect just £8.3m since Starbucks came to the UK in 1998, despite sales of more than £3bn in that period.
On Friday, Starbucks chairman Howard Schultz spoke for the first time about the allegations, when cornered – again by Reuters – at the opening of the group’s first store in India. In placatory mood, he said: “We will absolutely comply with any government inquiry with transparency and respect.” As clear a signal as any, surely, that he would turn up to give an account to a parliamentary committee if asked.
Surely it would be churlish now for MPs not to take him at his word, and demand a clear explanation from Starbucks and the other multinationals that, at first glance at least, appear to be gaming Britain’s tax system?
An alliance with the Kremlin? Be careful what you wish for, BP
The future’s bright, the future’s Igor Sechin: that could be the motto for BP’s latest adventure in Russia. The details are still being thrashed out, but BP is set to sell its 50% holding in TNK-BP, Russia’s third largest oil producer, to Rosneft. It will receive a pile of cash ($10bn-$15bn) plus a 10%-20% stake in Rosneft – the national oil champion and a company led by Sechin, ally of President Putin.
The appeal of Sechin and Rosneft is easy to understand: they are powerful. Sechin has been the Kremlin guiding hand shaping Russia’s energy industry in recent years. Rosneft, if it ends up swallowing 100% of TNK-BP, will control half the country’s oil output and be the world’s largest producer.
By contrast, the TNK-BP joint venture has descended into instability in the past four years. The oligarchs at AAR, owners of the other 50% of the company, have been prickly partners. There have been rows over strategy and dividends, and BP chief Bob Dudley, when he was the firm’s man in Moscow, was obliged to flee Russia for a time in 2008.
So, you might think, saying goodbye to AAR and embracing Rosneft is entirely sensible. What’s not to like?
Here’s the drawback. TNK-BP, for all the strife, has been a wonderful investment for BP. The UK company invested $8bn in 2003 and has harvested $19bn in dividends, thanks in part to upgrades of management and infrastructure. By contrast, Rosneft is seen as bureaucratic, inefficient and lacking commercial nous. The Kremlin owns 75% of the shares and has seen their value flatline for half a decade.
The hope, naturally, is that an alliance with BP marks the moment when Rosneft becomes serious about operational efficiencies. But, if it were that easy, the company would be further down the track already.
In reality, BP probably has no choice but to run with Rosneft and tie up a amount of capital in an investment it cannot easily exit. But it’s a gamble and the true odds on long-term success are unclear. That’s Russia, where the truism that oil is really about politics applies in spades.
Knight errant
After spending the entire financial crisis serving as the public face of the most hated industry in Britain – the banks – you might think Angela Knight would have sought out a job as the spokeswoman for fluffy kittens, say, or sunshine.
Instead, the ex-Tory MP and staunch defender of free markets popped up last week in her latest role, as chief executive of Energy UK, the body set up to boost the image of another group of unloveable profiteers — the Big Six energy suppliers. With their byzantine tariff structures and useless call centres, the energy firms give even the banks a run for their money. And David Cameron’s populist pledge to force them to put customers on cheaper deals exposed the fact that even the Conservatives think this is a market that’s failing its consumers.
As Knight defended the actions of the banks at the height of the crisis, when their bosses were nowhere to be seen, it was almost possible to feel sorry for a woman who had joined the British Bankers’ Association in early 2007, before the scale of malpractice became clear. But this time around, she knows exactly what she’s walking into. Either Knight is a masochist, or she’s one of the few people who believe that the utilities – and the banks – are great British business champions. Either way, she’s a brave woman.