In the pursuit of their objectives organizations become so uncompromising that they only realize the importance of goodwill once it is lost. The same is the case with Starbucks. First, it took advantage of the loopholes in the accounting standards and taxation laws to minimize corporate tax liability and when caught doing so they actually admitted it by announcing that they would pay more corporation tax in 2013-2014, regardless of whether the company is profitable or not. (Armistead, 2012)
The company has not been successful in managing its reputation after the tax avoidance scandal. In fact, it is among the largest and highly reputable organizations of the world. Since the last few years, the customers in the United Kingdom have displayed a great deal of hostility in the aftermath of corporate scandals. To sustain its business and protect its corporate image Starbucks immediately announced that it would pay more tax in the coming period whether profitable or not. Unfortunately, this scheme did not work. Obviously, this is not a charity; it’s an obligation on every organization to pay its due taxes with transparency. The announcement proved to be detrimental to the organizational image and it even fueled competitor’s revenue. (Blueboxpsp)
The first failure of maintaining public relations was the false statement made by the global Chief Operating Officer, who claimed that Starbucks had been losing capital since the beginning of its operations in the United Kingdom, in every year except 2006. The question arises that if the business was not profitable then why did Starbucks continue to operate and even expand its operations in the United Kingdom? It is becoming more and more apparent that Starbucks needs to take steps to prevent the loss of goodwill, as well as make arrangements to pay the due amount to restore its brand image. Secondly, the company tried to justify its attempts by mentioning the name of Google and Amazon which are also facing the same charge. There should be no domino effect in unlawful practices. (Political scrapbook)
Starbucks denies having tax havens. The tax avoidance is the legal arrangement of affairs in such a way that the tax liability could be reduced. Instead of defending their position by adopting effective public relations tools, the company had behaved in a way that indicated it was guilty of evading tax. In this moment of crisis they should have used their brand equity and loyal customer base to defend their practices by highlighting efforts that contributed to the betterment of the economy such as employment, indirect taxes and service charges of different government agencies responsible for inspecting food and other confectionery items.(The Economist)
Kris Engskov came under fire after writing and defending Starbucks on social media. He was accused of blatantly lying to customers. In my opinion, he did the right thing because social media is the only forum from where he could share the facts defending the corporate image of the company. He elaborated that the United Kingdom market is highly competitive and firm has been striving hard to acquire a large market share in order to generate more revenue but the capital expenditure, new investments, provisions of new jobs, opening new stores and the introduction of new and innovative products to serve their customers left Starbucks nothing in terms of profit to pay corporation tax but that the company has paid huge amounts in terms of indirect taxes. (Thomas, 2012)
This is not the first incident of tax avoidance in the corporate world. If we dig into history, we will come to know that Nissan, Enron and many of FTSE 100 firms are guilty of tax scandals. The characteristics identified by Tench & Yeomans to secure the best possible outcome through the proper management of crisis are relevant to Starbuck’s case. In the following section we will discuss those characteristics and their application on Starbuck’s case in detail.
It is true that Starbucks has made arrangements to minimize taxation liabilities but in a very orthodox manner. There are other techniques such as Transfer Pricing, Special purpose Entities and Operating Segments which could be applied to minimize taxation legally. The heavy payments in terms of brand licensing have been very common as well as controversial. The proper knowledge of IAS 12 (Income tax) and managing the substance of the transactions and not their legal form might have produced favorable results for the company. (Malone, 2004)
The scandal is of very small scale but it seems from the highly defensive attitude of the management of Starbucks that there is lack of preparation to counter such aggressions with evidence and confidence. The fact of the matter is that Starbucks is not solely responsible for what has happened but the leniency showed by revenue authorities is also being questioned. To protect its image, Starbucks should come forward to achieve a winning outcome with the relevant stakeholders to resolve this matter and bring the business back on its course.
Professionally speaking, accountants need to be creative by exploiting loopholes of the reporting standards. Instead of making useless and impractical announcements such as commitment to pay unnecessary taxes in the succeeding periods, I would suggest Starbucks remain calm and try to justify its attempts in accordance with the reporting standards. This does not mean that I am encouraging tax evasion. Tax evasion is a crime but tax avoidance is the legal right of an entity to manage its monetary affairs in such a way to reduce corporate tax liability. Instead of making childish statements the company should wait for the right time to play its cards. So far some extra efforts to defend the position of the brand have been detrimental to the company’s image. (Watkins, 2012)
The corporate management of Starbuck’s has been prominent in defending the company’s position. If the company really thinks that they won’t be able to standby for what they have said so they should reshuffle the hierarchy or adopt hire and fire policy on the operational and middle level to retain its corporate image at the cost of few employees. They can be absorbed in subsidiaries or SBUs else where. An effective marketing campaign to offer new and innovative products at competitive prices will divert customer’s attention from the scandal. There is actually media hype against Starbucks which will disappear with the passage of time. The company should focus on its course of business and try to reposition its brand with new and effective marketing campaigns. (Kotler et al., 2001)
The communication tools have so far been under employed by Starbucks in dealing with this matter of tax avoidance. I can see a kind of detachment in Starbucks attitude from customers after this dilemma. The corporate management should clearly mention their genuine contribution in the community development of United Kingdom. The contributions made in terms Sales tax, Value added tax, Ad valorem taxes, Excise duties and Property tax. Moreover, the company must have been providing incentives to their existing employees and operating contributions and benefit plans as laid down in IAS 19 to secure the future of their employees. The post retirement benefits will stop people becoming a burden on the state. This will reduce state’s liability to much extent. (Turnaround)
RELATIONSHIP WITH STAKEHOLDERS
There are a number of Starbucks’s stake holders inside and outside the company who can affect the future business or are affected by the tax avoidance scandal. To rebuild its credibility, the company needs to assess the power of different stake holders. Obviously, the high power stake holders should be concentrated more than moderate or low power stakeholders. This does not mean that the later should be ignored completely. To please everyone in the market would not be a wise strategy for such a high profile company like Starbucks. Now the corporate managers of Starbucks should feel their responsibility and realize that organizations are obliged to behave as a good citizen because their permanent existence is only possible in the society if they operate without abusing their power. The power of stake holders can be assessed by their place in the hierarchy, legal rights, social standing, volume of business etc. Now we will discuss in detail that how Starbucks can rebuild its credibility with different stake holders as follows. (Norton and Hughes, 2008)
Not all customers are technically aware of taxation issues and remember Starbucks is charged of tax avoidance not tax evasion. Tax avoidance is a planning to legally arrange the affairs of the entity to minimize corporation tax liability. The management of Starbucks should come forward and tell their customers that they have not commit any thing intentionally and there could have been a difference of classification of assets , expenses and liabilities which would be sorted out soon and if we declared liable we would not waste a minute in paying the dues. At the same time the company should come up with different offers and packages at competitive prices to divert the attention of the customers. (Lovelock et al., 2006)
Again they should be dealt with in a way that is similar to customers. The main priority of suppliers would be frequent orders, prompt payment and fair prices. But there is one significant difference between the customers and suppliers that later must be well aware of the fact that how Starbucks may have exploited the loopholes in the accounting standards to minimize their taxation liabilities. The supplier might think that morally it is not good to work with a company who manipulates its financial statements to avoid paying taxes. May be in the future such manipulation would mislead the users by off balance sheet borrowings and create a potential for credit risk. Now it’s the responsibility of the management of Starbucks to ensure their suppliers that they are not guilty of tax evasion and this is just a hard time for the company and we hope that we could cope with this situation and ensure good relationship with our suppliers. (Levy and Weitz, 2004)
The government is the largest and the most powerful stake holder as far as the matter of taxation and legal issues are concerned, the revenue authorities have the power to examine records of entity extending back some years. Starbucks have to pay the entire tax including any penalty which will definitely be imposed. The clearance of all the liabilities will rebuild cordial relationship between Starbucks and Revenue authorities. To some extent revenue and taxation authorities are also responsible for this scam because there are many loopholes in the laws which are exploited by the corporations. Moreover, the company has been consistently reporting loss except one year and their sales and volume of customers was apparent so where these authorities were sleeping for number of years.
The employees of the firm mainly finance department is fully responsible for this dilemma. Over the years they have been watching that sale is increasing and Starbucks has been purchasing the lease of different companies as an expansion policy and reporting losses. Does this make sense? On the contrary, there are taxes that are directly deducted from the employee’s salary and their organization has been reporting losses. This is totally a matter of corporate governance. Starbucks have been failed to ensure proper corporate governance in directing and controlling their managerial functions.
The pressure groups for Starbucks could include Public representatives in the Parliament, Audit Firms, Nationalist elements, Media, Public Accounts Committee, International Accounting Standards Board, Chartered Institutes and even Human Rights Organizations.
A state finances its expenditure through taxation revenue and funds are allocated to different sectors of the economy and public welfare. If the resources are insufficient the amount sanctioned to these sectors is reduced. This is the case of human rights that if the government does not have enough resources to finance child welfare and women rights institutions and projects so these corporate culprits are responsible for such social damages to the society. Tax avoidance techniques are employed by accountants so chartered institutes have their code of conduct and they the right to disqualify such corrupt accountants who are a threat to national integrity. The audit firm examines the records of large companies so they are also responsible for indemnifying such manipulated transactions just for their service charges.
The public representatives and nationalist elements have exercised their influence on Starbucks to answer for what they have done. United Kingdom is not a heaven for corporate corruptions. Conservative MP Richard Bacon criticized Starbucks for their unethical actions and also expressed surprise at their decision to pay volunteer tax in the coming period (Neville and Malik, 2012).
The protestors of UK uncut strongly condemned the practice of Starbucks with particular focus on women cuts by the government. The only strategy for Starbucks to cope with the situation is to pay the entire tax bill otherwise ready for more aggression across the United Kingdom. (UK Uncut)
The share holders of the firm should have brought this matter before the management in the annual general meeting that you have been consistently growing but reporting losses to avoid taxation and dividends.
Starbucks needs to operate various campaigns simultaneously to restore its credibility and reputation. It is a fact that most of the corporations face tax scandals and the root cause for such scandals is the loopholes in reporting standards and options for tax heavens. I would recommend Starbucks to run a campaign to eliminate these loopholes and make sure that in every country organizations operate as a separate entity so avoidance arrangements can be minimized to much extent. Starbucks should seek support of every organization for this cause. Obviously, most of them will avoid supporting Starbucks’s stance because they also indulge in the luxuries of avoiding tax. After a very short span of time Starbucks can proudly announce that “See we took the initiative to close these loopholes but most of the firms did not support us” People are the best judges and after the initiation of such campaign they would criticize those who are taking advantage of contemporary Starbuck’s problems. Moreover, the advertisement to introduce new and creative products should be done to attract more customers. (Bovee et al., 2002)
The image demonstrates the commitment and the collective effort of all the stakeholders to eradicate the means of evading taxation. It also shows that those who join us are the ones promising to avoid taking advantages of tax heavens. We have no hesitation is saying that who over criticize us for this noble cause is actually a real culprit. Starbucks intend to expose the faces of those who accused other organizations for not operating in accordance with law but in reality they are guilty of breaching corporate and legislative norms.
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