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 The seller of brewing machines and single-serve coffee pods said
nothing about a little-known exemption in the U.S. tax code that for
many years has benefited Starbucks Corp and other U.S. companies who
trade in some commodities.
In internal presentations, Keurig said the move was aimed at
expanding into the European market and gaining access to
Switzerland’s talent pool of coffee traders, one source familiar
with the transition told Reuters. But as the move took shape it
became clear that tax savings were a key part of the plan, this
person said.
Accountants and professors specializing in taxation told Reuters
that Keurig is positioned to benefit from the 1970s-era exemption
for commodities trading. By moving coffee buying, Keurig can also
shift some income to Lausanne, where the tax rate is less than 10
percent. In Vermont, it faces a U.S. federal corporate income tax
rate of up to 35 percent, and a state tax rate of up to 8.5 percent.
Keurig’s new Swiss operation will be able to record profits by
purchasing green coffee beans at one price, and selling them at a
markup to the North American businesses that roast the coffee and
sell it to consumers, the source said. This effectively shifts
profits from the U.S. parent company to the Swiss entity in an
entirely legal maneuver.
“The fact that Keurig is doing this is pretty clearly due to a
loophole in the law that doesn’t make a whole lot of sense,” said
Matt Gardner, executive director of the Institute on Taxation and
Economic Policy, a nonpartisan Washington, D.C. think tank.
A Keurig spokeswoman declined to comment in response to a list of
questions emailed by Reuters. When Reuters first reported the shift
to Switzerland last December, the company declined to predict how
its tax bill would be affected. Its overall effective tax rate in
the fiscal year to September 2014 was 35.4 percent.
The U.S. tax code normally prohibits this type of activity,
requiring foreign subsidiaries that act as buying agents for
U.S.-based parents to send profits back to the United States to be
taxed.
But in 1975, Congress added an exemption, allowing offshore
subsidiaries to keep profits abroad if they came from the trade of
four commodities: black pepper, cocoa, coconut and tea. Coffee,
bananas and crude rubber were added in 1978.
Clearly, there are benefits to operating in Switzerland besides tax
savings. At least half the 90 million bags of coffee traded each
year goes through Switzerland-based companies, according to the
Swiss Trading and Shipping Association, and the country is a center
for commodity finance and logistics.
Still, the tax exemption provides an incentive for Keurig, the tax
experts said. Starbucks made a similar move in 2001, establishing
Starbucks Coffee Trading Company in Lausanne. A source familiar with
that move said the agricultural commodities exemption was a key
factor.
In a written statement in response to questions from Reuters about
its arrangement, Starbucks said “we comply with all relevant tax
rules, laws, OECD (Organization for Economic Co-operation and
Development) guidelines and pay a global effective tax rate of 34
percent.”
There is a downside to the tax strategy that can be associated with
the shift. The profits will need to be kept offshore, as once they
are brought back to the U.S. they can be taxed. That is fine if a
company needs the money for a big expansion overseas – which was the
case with Starbucks in the past 14 years.
Keurig, which did 87 percent of its business in the United States
last year, and almost all the rest in Canada, has said overseas
growth is a “key element” of its business strategy and last year
began introducing its brewers in the United Kingdom, South Korea,
Australia and Sweden, according to a corporate filing.
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Keurig has previously said a small group of staff would move from
the U.S. to Switzerland but it has declined to be specific about how
many positions will be eliminated in Vermont, telling local media it
will be fewer than 100. Keurig Trading has been hiring several
buyers in Switzerland from Swiss commodities traders.
While Keurig Trading will be arranging the shipment of beans from
places like Brazil or Colombia to where they are roasted and sold,
the coffee’s trajectory will not change and there are unlikely to be
any beans physically passing through Switzerland. That has largely
been the case for Starbucks, according to several sources with
knowledge of the arrangement.
It is unclear how much tax Keurig, whose shares have been sinking
for much of this year because of a drop in sales, will save in the
move. The tax specialists interviewed said it was difficult to
estimate Keurig’s total tax savings without knowing the internal
transfer price at which the Swiss arm sells coffee to the U.S.
parent, which Keurig has declined to disclose. In its last fiscal
year, Keurig committed to buying $407.7 million worth of coffee.
During a 2012 investigation into Starbucks’ United Kingdom tax
payments, Member of Parliament Margaret Hodge accused the world’s
largest coffee chain of “exporting your profits to minimize your
tax.”
Starbucks’ then-chief financial officer Troy Alstead testified that
its Swiss operation charges other Starbucks entities a 20 percent
markup on beans, which coffee traders say is well above industry
norms of more like 1-2 percent.
When the exemption was introduced in the 1970s, industry lobbyists
argued it was necessary because the commodities included were not
grown in the United States in “commercially marketable quantities.”
That logic might make sense if the companies set up subsidiaries in
countries where the agricultural commodities are grown and paid
local taxes there, the experts said. But in reality, buying
subsidiaries are normally set up in places like Switzerland, which
have “no connection to where the commodity is grown or where it is
destined,” said Bret Wells, associate law professor at the
University of Houston.
In addition to Starbucks and Keurig, companies with Swiss trading
subsidiaries that could benefit from the exemption include spice
seller McCormick & Co, the largest U.S. importer of black pepper,
and Chiquita Brands International, the largest U.S. importer of
bananas, which is owned by Brazilian juice company Cutrale Group and
investment firm Safra Group. McCormick and Chiquita did not respond
to requests for comment.
"It doesn't make sense. I don't know why it's there," said Larry
Pollack, tax partner at KPMG in New York, who said he once advised a
client to take advantage of the exemption. "Someone must have had a
strong lobby back then."
(Reporting by Luc Cohen; Editing by Josephine Mason and Martin
Howell)
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