Has Starbucks dragged Fairtrade into a tax avoidance scheme?

In the aftermath of the excellent Reuters story about Starbucks’ tax dodging in the UK, some columnists (best pun: ‘Starbucks makes a mochary of tax law’) have picked up on the apparent hypocrisy of the biggest buyer of Fairtrade coffee in the world also employing tax avoidance schemes.

Take note, however, that the link is even closer than that. All Starbucks’ UK espressos are Fairtrade certified, so it would appear to be Fairtrade coffee that, through the very Switzerland-Netherlands construct described by Reuters, contributes to the reduction of Starbucks’ UK tax bill.

This particular part of Starbucks’ tax strategy is an example of a widespread trend in businesses towards “tax efficient supply chain management.” This is when a multinational company centralises as many of its supply chain functions, such as sourcing, purchasing and accounting, into a ‘principal’ company located in a tax haven. The restructuring allows it to leverage its size to get lower prices from suppliers, but it also means that it can allocate a large chunk of its profits – those associated with the efficiency gains that come from being a large multinational – to the tax haven. Tax is part of a heady cocktail of factors driving this business centralisation.

Businesses like Starbucks like to talk up their projects to support local enterprise in developing countries, and I’m sure many of these projects have real benefits. But they also disguise what’s going on behind the scenes in those companies: a move in exactly the opposite direction, towards a more globalised supply chain in which supplier relationships are managed from Switzerland or Singapore, not by the local subsidiaries. I remember the embarassed look on the face of one company’s head of sustainable development when I challenged him on this point – “yes, that’s something we need to look at,” was all he had to say.

Fairtrade certification can’t be expected to do everything, and trying to take ethics into account when you shop always means trading off different priorities against each other. The original idea of fair trade centred around ‘cutting out the middleman’ between the producer and the retailer. Shouldn’t that apply just as much when the middleman is a tax planning construct owned by the retailer itself?