Tom Bergin

 Tom Bergin is a Reuters journalist, based in London, who writes about corporate and economic affairs. He is also the author of “Spills & Spin: The Inside Story of BP”, a critically-acclaimed history of the British oil major. In March 2013, he was named “Business Journalist of the Year” at the British Press Awards and won a Society of American Business Editors and Writers award for explanatory reporting, and won the Orwell Prize for his reporting on Starbucks’ tax avoidance system.

(interview conducted by Bruce Livesey)

LIVESEY: How did you identify Starbucks as a company to look at?

BERGIN: One of the reasons that Starbucks caught my eye was just its lack of profitability here in the UK. When I realised that this company had been operating here for 14 years and never once reported a profit, it just sort of stood out.

I’ve been covering companies for many years and it generally, if a company is not making money, its parent will shut it down or itself will go bankrupt. So for a company to not make profit for 14 years is very usual. That doesn’t mean anything is wrong of course, but it is the case that the base way not to pay tax is not to declare a profit.

So when a company is declaring very low profits or no profits for a period of years, that sometimes can be an indication that they’re engaging in tax avoidance.

LIVESEY: How were you able to go deeper than that?

BERGIN: Looking through Starbucks’ accounts and seeing that year after year they had made a loss, that didn’t prove anything. The question was, you know…the fact that Starbucks was reporting losses every year didn’t actually prove that they were involved in any kind of tax avoidance. It would only be the case potentially if they were genuinely making profits while telling the tax authorities they were not making profits.

So I tried to ascertain, well, are they, you know, actually making profits? So I looked at the company’s business model.

One of the things that immediately stuck out was that the senior managers at the Starbucks operation here in the UK kept on getting promoted even though the company was telling the tax authorities that it was losing money every year. Now, one thing that anybody knows in business is if you as a manager lose money repeatedly year after year, your job is not safe.

So that was unusual to see. Again, it didn’t prove anything but it was just a little bit strange.

Eventually one of the ways that we decided to look at Starbucks and try and ascertain what was really going on within the company was to see what was it telling investors. So we looked, went through transcripts of back 10, 12 years of calls that they, the company had had with investors and it was really clear from these that the company had told investors that the UK was a profitable market.

So we had a very clear message to one audience which was the tax authority and the company was saying we’re, not making any money. But when the company was talking to investors, they were saying they were making good money. So this was a very strange situation that really required us to do a lot more digging.

LIVESEY: Starbucks doesn’t separate out their division finances so how were you able to sort out what their UK numbers actually were?

BERGIN: We went to the company very early on in this investigation to tell them what we were looking at and we asked them for information about the true finances of the company. The company initially was not very cooperative. We spent several months working on this and didn’t get very far with the company.

We were forced to go through the company accounts of a Starbucks’ unit, Starbucks units in every country where these were available. So we went through Starbucks units in, in Germany, Starbucks in France, in Belgium, in Holland to see, well, where is the money flowing. So that was…

We essentially got a better understanding of how the money moves around and how the tax was being minimised by going through all these various different units’ accounts.

LIVESEY: Tell us about Companies House?

BERGIN: Fortunately, in Europe companies are forced by law to file company accounts with registers throughout different European countries. So for example, here in the UK, every company must file accounts with Companies House.

I was able to go to Companies House and get the accounts of Starbucks UK unit going back, you know, 12 or 14 years and I was able to do the same thing for Germany, for France, for the Netherlands, elsewhere. Of course one can’t get the accounts for certain countries like the United States or Canada, and also of course countries that sometimes help companies with tax minimisation, not least Switzerland, and that was very much a brick wall that we hit in this investigation.

LIVESEY: What did you find in the Starbucks subsidiaries’ accounts?

BERGIN: When I looked through the company accounts for Starbucks for its UK unit, what I saw was that year after year in the UK they were reporting losses, sometimes quite significant losses of tens of millions of dollars. Now, that was, that was unusual and we tried to understand why that would be.

When we crosschecked those documents with the messages they were giving to investors via conference calls and analyst presentations, we saw that the company was saying a very different message. It was saying the United Kingdom was a very profitable market for the company.

So we had two different, conflicting messages that, that we could see there. Further more, when we dug into the company accounts of the UK unit, we saw a number of features that were consistent with tax optimisation or tax minimisation strategies that big companies internationally use.

LIVESEY: What did Starbucks do?

BERGIN: Starbucks had a number of features that we’d seen before. One of them Starbucks charged its-, itself, effectively, to use its own brand name. So the, the operation here in the UK had to give 3p out of every pound to another Starbucks affiliate just to use the Starbucks name. Now, 3 per cent doesn’t sound like a lot to most people, but if you think about the margins on, which a business like this operates, 3 per cent is actually a lot.

So that kind of practice of charging yourself to use your own brand name can, is commonly used to shift profits and can be a very effective way to do that. Invariably, that money will go between different jurisdictions and very often ends up in a tax haven.

The other thing that we noticed about the Starbucks’ accounts was that the UK operation was highly leveraged. What that means is it had a lot of debt. This meant that a very large amount of the company’s cash flow was being used up just to pay interest on, on debt. Now, this wasn’t debt that Starbucks had raised at banks here in the UK. Starbucks was actually borrowing off itself.

Now, the use of inter-company debt is another common way in which companies shift profits between different jurisdictions, so seeing this was another sort of a red flag that raised questions. You know, why was Starbucks a company that’s very cash rich, why was it actually operating purely on debt in the UK? That was certainly something that caught our eye.

The other area that caught our eye was something complicated called transfer pricing. And basically this means the way in which companies do business between, between its different units.

What we saw when we looked at Starbucks accounts was that it was buying a lot of products from other units, so it was buying principally, you know, roasted coffee was one of the main ones. And this was all being bought via the Netherlands but from a Swiss company.

So clearly Switzerland is a jurisdiction which is renowned for helping companies to cut their tax bill. So again we had raised questions about how come Starbucks in the UK was paying so much for coffee if, through a chain that ultimately ended up in Switzerland.

Starbucks had grown very quickly in the United Kingdom. Over a 14-year period it had added up over 700 stores. Total sales of the co-, company here in the UK was around $5 billion. So on the top line, Starbucks in the UK was a company that was doing incredibly well.

However, when you looked at the bottom line, the declared profit, that wasn’t looking so good, and because the profitability was so bad, it paid almost no tax. Over that 14-year period, there were tax payments of around $15 million. So essentially a company of $5 billion sales against $15 million taxation.

LIVESEY: Give some details about your investigations, it isn’t easy to figure this stuff out.

BERGIN: We spent over four months investigating this case. Basically, it required going through the company accounts of dozens of different companies, not just Starbucks but also of course its competitors so we could make fair comparisons. It required going through transcripts of calls that the company’s management had with investors, going back again over 12 years.

We had to speak to many previous managers of the company to just try and make sure that we understood what all this information really meant — and of course, you know, months of badgering the company to try and get it to speak to us. At one point we had to chase the chief executive down the street with a TV camera to get-, convince one of the top managers to actually talk to us seriously about this.

So from our perspective, it was an enormous amount of effort and we should also not underestimate that this is legally very challenging work for journalists. Here in Britain, there have been court cases where journalists have written stories about company’s tax affairs and they’ve ended up in court and they’ve had some very expensive legal action.

So this also means of course we needed to spend a lot of time with our lawyers to make sure that everything was rigorous and legally safe. So this was for us an enormous investigation that took quite a lot of resources.

LIVESEY: When governments say it’s difficult to track down this money, is it difficult to sort out?

BERGIN: Complexity is one of the big problems of the corporate tax avoidance issue. You’ve got so many different jurisdictions with different legal frameworks, it is genuinely very difficult for any government, particularly sort of smaller governments or mid-sized governments, to try and get their heads around this problem and think about what they might do to solve it.

Meanwhile, you know, corporations have armies of lawyers and accountants that can help them develop new structures. So there, there clearly is an imbalance here between the resources that are available to governments and to the corporate sector, and indeed that’s something that, you know, parliamentary inquiries here in the UK have found is a problem.

So this is, this is a difficult fight for any government to engage in.

LIVESEY: Your story was published in October 2012, what was the public reaction to your story?

BERGIN: The public reaction to this, to the Starbucks stories that we did was quite a surprise. Taxation is, is a very complicated area. You sometimes think maybe it’s a specialist audience that might be interested in that or a narrow political audience. The, the reaction was immediate and, and enormous.

Every TV station here in Britain, every newspaper was putting this on their, you know, their front page and the top of the news bulletins. We saw then that the story was going international, it got a lot of coverage across Europe, not least because the same practices which were being applied here by Starbucks in Britain were also being used elsewhere.

But it also of course got, got a lot of play in North America.

So there was a huge, you know, public interest in that story and that public interest helped get, get a head of steam really politically on this issue, which had been sort of bouncing around for some period of time. But we did see afterwards a significant up swell.

And I think the sort of the significance of the Starbucks case in raising corporate tax avoidance up the, up the agenda was very clear when David Cameron, the British Prime Minister, told world leaders at Davos that he wanted companies to wake up and smell the coffee on tax avoidance. And that was, you know, really I think, you know, marking the, the relevance of this story to the debate.

LIVESEY: What effect did it have on Starbucks UK?

BERGIN: Starbucks did not enjoy the attention they received after our story went out. They at first attempted to say that this was, you know, everything was, you know, totally normal, there was nothing unusual here, and that everything was very much in consistence with the law but also of the spirit of the law.

That message wasn’t received very well. I think people were very skeptical about those assurances and over time the company realised it, it might have to do something more. So a couple of months after our story went out Starbucks said that it would begin paying tax in the UK and they made promises to pay £20 million taxation and stop using some of the, the devices that we’d highlighted in our story that helped get them that low tax bill in previous years.

LIVESEY: In Canada we unfortunately Starbucks Canada doesn’t hand over its financial statements to a private audit, when we spoke to them the company said they were paying all taxes. Is it safe to assume the Canadian subsidiary uses the same techniques?

BERGIN: Starbucks told us that the practices that they used in the UK — and that means the practice of charging themselves to use their own brand name, inter-company debt, and also the, the purchase of-, purchasing of coffee through Switzerland — that those practices were common across divisions all over the world.

So it’s, it would seem, unless Canada was a special case, that the practices which were being used in the UK could very well be applied there.

LIVESEY: Of large well-known multinationals what percent are using the same tax loopholes you discovered with Starbucks?

BERGIN: Over the past 18 months I’ve gone through the accounts in great detail of many dozen big international companies. And what’s clear from going through those accounts is that in almost every case, if not every case, companies have been engaged in some form of tax optimisation, and that includes using tax havens to cut their tax bill.

It varies of course from sector to sector in terms of how extreme it is. The technology sector is probably the one where there, they, there’s the most opportunity for companies to cut their tax bill and, indeed, when I looked through the 50 biggest US tech companies operating in Europe, I found that 75 per cent of them didn’t even declare a tax residence in their main business in the countries where they operate and make their sales.

So the kinds of tax optimisation strategies that, that Google and that Starbucks use are absolutely pervasive.

LIVESEY: And the savings for an Apple or a Google or Face book or Starbucks what sort of tax savings are we talking about?

BERGIN: In the case of the biggest companies, the savings here in literally the tens of billions of dollars. A company like Apple is probably the most effective company at cutting its tax bill. It has used Irish structures to save literally tens of billions of dollars in tax over the years.

Individual companies like Google are probably saving several billion a year by using tax optimisation structures compared to what they would pay if they paid the head line tax rates in the different countries where they, they have operations.

So the savings to companies are truly enormous. Now, one might debate where that tax should really be paid but what’s clear is there is a very significant loss to individual governments’ exchequers, and of course that’s bad news for other taxpayers who have to pick up the slack.

LIVESEY: Has the OECD been effective in any way in curbing the use of offshore tax havens?

BERGIN: The rapid increase in the use of offshore tax structures over recent decades does show that the current rules don’t work very well. Now, the OECD helped devise these rules and really until quite recently defended those international tax rules. So you’d have to say it’s, you know, the effectiveness of the OECD in stopping that hasn’t been very strong.

The OECD now is working hard to try and, and curb the use of international tax havens and to shift profits, but its a very big challenge for them.

LIVESEY: In recent years there’s been increased pressure to improve rules is that the case and has there been a response from business?

BERGIN: The OECD has admitted that the current tax rules that it helped devise don’t work very well when it comes to big international companies shifting profits around. So the OECD has said there is a problem, the OECD has said that a lot of the tax structures that big companies use are basically phony, that they are artificial and contrived.

So the, the OECD has said now that it really wants to get on top of this pro-, problem. It has received vocal backing from, from several large countries so it does seem now to be committed to that action.

Of course when the OECD says it wants to crack down on international tax avoidance by big corporations, you know, big corporations are not gonna stay silent on that, and, indeed, they haven’t.

There’s been quite a significant lobbying effort over the past year or so on the OECD, both directly, you know, through representation to the OECD and also of course indirectly by business lobby groups going to governments and, and expressing their concerns about attempts to crack down on tax avoidance.

Companies have enormous influence on the OECD. The, the OECD has a number — a very small number — of official advisory bodies and one of them of course is BIAC, the Business Advisory Group. So through that there is an opportunity for business to speak directly to senior OECD members who are drafting the new rules.

So the, the business groups can be very effective directly. Business groups also of course exert a lot of influence on the OECD indirectly by lobbying the governments, which actually make up the OECD. So both ways, either directly or indirectly, business groups have a very big impact on the agenda of the OECD.

LIVESEY: Which way is the taxation of companies going?

BERGIN: The evidence does suggest that there is increasing tax avoidance. This is the view of many of the practitioners and people at the OECD, etc, who, who follow this subject. There are of course no official databases on tax avoidance. Companies don’t public figures on how much tax they’ve saved.

But what we can see is that a lot of the companies who have, who use complicated tax structures are growing very fast. We can see that they’ve paying very low tax rates. So, you know, if you look at Apple, it’s the biggest company in the world, it’s much bigger now than it was 10 years ago, the amount of tax it’s saving through it’s Irish structures is much bigger than in the past. The trend does seem to be in one direction.

The nature of international business, the changing nature of international business is such that it is increasingly fertile for tax avoidance. Increasingly companies are making their money, or at least saying they’re making their money out of things like brands or computer algorithms, things that don’t naturally reside anywhere, unlike a factory, for example, or a shop.

And that means that there’s great scope to, for companies to sort of park these, these items, often called intellectual property, to park that in tax havens and then send all their profits there. A hundred years ago that wouldn’t really have been possible. Twenty years ago it wouldn’t have been as easy to do as it is now.

So the situation we have, the changing structure of international business makes it much easier for companies to shift profit.

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