Legitimacy theory helps to explain whether the actions of the company are right or wrong within the norms and values established by the society (Lanis & Richardson, 2013). Businesses require legitimacy to operate and loss of it can result in negative consequences for the business. When legitimacy is lost, the public support for such businesses and organizations are equally lost. Therefore, companies will always attempt to correct the company strategy whenever their legitimacy is threatened. Companies can enhance their legitimacy by pursuing corporate social responsibility (CSR) and by paying taxes. Therefore, tax crisis as was seen in Starbucks can threaten the legitimacy of a company.
Generally, tax declaration is a decision under uncertainty (Sharon, 2013). An individual or a business can fail to report the full income to the tax authorities without easily being noticed immediately. The taxpayer may decide to declare the actual income or declare less than the actual income. Only proper investigations can reveal whether the tax paper has declared the actual income or has concealed some vital information. The probability of detection of the companies avoiding taxes depends on the frequency of audits and investigations. Low frequency of audits and lack of thorough investigations leads low probability of being detected. The concern for the low costs of tax administration leads to the favor of the first alternative. The decision to avoid taxation depends on the perception of the behavior towards others. This paper analyzes the tax evasion by Starbucks and the response thereafter.
- The Case
- The Context
This issue broke out on the eve of the year 2012. A special report that was produced by the Reuters evidenced that Starbucks has paid evaded paying taxes for several years. The news agency also reports that the Seattle firm has paid no income tax for a period of three years after incurring sales of $1.2 billion (Financal Express, 2012). Starbucks is ranked as the second largest global café after McDonalds as it has a market capitalization of $40billion, which amounts to 24.8billion euros (Sunday Business Post, 2013). Again, the Starbucks nearest competitors are paying a multi-billion tax bill to the treasury, thus making their operations more legal and transparent as compared to Starbucks. Amazingly, the company has been using legal tax avoidance schemes by registering labyrinth companies, thus find a better way of evading the UK tax (The Economist, 2013). It was after Reuters conducted their analysis about the company that they realized the tax avoidance scheme. They made sure that they compared the company accounts with the transcripts of 46 conference calls with the investor and analysts. In doing so, it was easier to identify the reason as why the company was giving such reporting to evade tax and what it was telling the analysts in the briefing.
The reports that were analyzed evidence that Starbucks official routinely reported Starbucks as a high profitable company that was a model for the US market. However, the reports that were presented in public showed that Starbucks had made $150 million losses for the year 2008 while operating in the UK (Barker, 2012). In response to the analyst’s report, the Starbucks chief financial officer, Troy Alstead, said that his company followed strict accounting rules. He also explained that the company seeks to be good tax payers and pay all the due tax. Reuters had to question the company operation and its reporting of losses to evade the paying of taxes (Fairless, 2014). The response given asserted that the UK businesses was not good as it used to do in the past.
|23/10/2012||Chairman press release Starbucks website Press release|
|12/11/2012||Special report Sky News website Media|
|06/12/2012||HMRC announced to pay 20 million Sky News website Media|
|06/12/2012||Managing director TV interview Sky News Media|
|10/12/2012||Managing director Starbucks website Press release|
|31/12/2012||Financial statements for 2012 Annual report Annual report|
|31/12/2012||CCO letter Starbucks Global|
|17/09/2013||Open Letter from CEO Starbucks website|
- Framework Analysis
The happenings of the Starbucks tax evasion can be explained through impression management. This is a framework that an attempt to influence the perception of the people about the previous happenings. In this way, the people are able to control and regulate the information in social interaction. The impression management strategy is often necessary when there is a situation to be managed, whether real or imaginary. When Starbucks was caught in tax evasion, its reputation was so much at stake. Many people across the UK were angered by such news and even promised to protest in responses to the Starbucks case. The company was at risk of losing its brand identity that has taken it much time and resources to build. Therefore, they had to go an extra mile and prove to the public that they are a company with good intentions to help them rebuild and protect their brand image which is at stake. As part of their impression management strategy, Starbucks agreed to pay more corporate tax to create the impression that they are covering the amount they did not pay in taxes. The UK corporate tax stands at 20%. However, Starbucks agreed to pay 24% in taxes, which is 4% higher than the normal taxation in the UK (Mullen, 2013). By the end of the year 2015, Starbucks nearly paid as much corporation tax as it did in the previous 14years in the UK. The company wanted to create the impression that it was paying a fair amount of corporate tax from its earnings. This company was accused of using artificial corporate structures to shift their profits out of the UK to reduce their corporate tax responsibility. In response to this, the company also agreed to shut down the UK Company named labyrinthine networks designed to alter their tax responsibility. Such a desperate attempt is to make the company appear as it they were still aggressive in accounting for their corporate tax in the UK. On the same note, the company opened new stores and reported to have created 800 new jobs as part of their strategy to create a positive impression management (Peters, 2015). Therefore, the actions of the Starbucks after tax evasion can effectively be explained under impression management.
The findings of this study are that Starbuck indeed evaded taxation in the UK. This information was availed through the press release. The companies would try to evade taxes upon realizing that their probability of being caught is low and the profits are high. Therefore, they will devise ways and means to reduce their probability of being caught at enjoy the extra profits from low taxation. Therefore, Starbucks created labyrinth companies to help them transfer their tax liabilities outside the UK so that they can evade taxation. This enabled them to enjoy several years of tax evasion. However, they were soon caught and their brand image was at stake. Through the impression management strategy, the company had to come up with ways of altering the already created negative perception to enable them protect their brand identity. Therefore, the company had to pay 10 million pounds for the next two years to cater for the previously unpaid avoided tax. In addition, the company had to shut down the labyrinth companies, and create more jobs. This enabled them to create a positive outlook and helped to restore their brand image.
In conclusion, businesses and individuals may attempt to evade tax upon realizing that the benefits of doing so outweigh the risks involved. In this regard, they will devise strategies of ensuring that they do not pay the required tax such as creating labyrinth companies to enable them transfer their tax liability outside their host countries. However, it is upon the government through its institutions to ensure proper audit and investigations are carried out to ensure that such actions are avoided. When these companies are caught, they will also come up with strategies of rebranding their identity to create a positive impression among the consumers.
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