Tax Analysis and Profit Shifting Starbucks Corporation
Yuliana Theresia and Danny Septriadi
Accounting Department of Accounting, Faculty of Economic and Business, University of Indonesia, Jakarta, Indonesia
Keywords: Tax Avoidance, Thin Capitalization, Transfer Pricing.
Abstract: This research is an analysis of tax avoidance case and profit shifting Starbucks Corporation. The selected case
analyzed its tax avoidance structure and analyzed whether current tax measures in Indonesia could prevent
tax avoidance structure such as that of Starbucks Corporation. This research aims to analyze the structure of
tax avoidance and transfer pricing conducted by Starbucks Corporation and analyze what regulations can be
applied by Indonesian tax authorities if such cases occur in Indonesia. This research is a qualitative research
with literature study approach. The results of the study found that Starbucks Corporation made profit shifting
by marking up the price of coffee, thin capitalization through high lending rates between group companies,
royalty fees and from this research resulted the conclusion that the existing tax policies and policies in
Indonesia enough to overcome the structure of tax evasion with a scheme like the one done by Starbucks
Corporation but it is necessary to add rules governing rate valuation royalty.
1 INTRODUCTION
This research is important to conduct because it can
provide knowledge about profit shifting schemes
especially with transfer pricing and thin capitalization
scheme as do by multinational company Starbucks
Corporation. This research refers to the previous
research which analyze “Tax Regulation of Thin
Capitalization Transactions in Indonesian Tax Law”.
Previous research has only conducted an analysis of
the thin capitalization regulations in Indonesia and in
some countries while the current research, the
analysis focuses on profit shifting with transfer
pricing, thin capitalization schemes and Indonesian
tax rules that can be applied to prevent the
occurrence.
In the current era of globalization, trade relations
between countries with one another are increasingly
open and no longer recognize national borders. In
some countries, this international trade plays an
important role in increasing Gross Domestic Product.
Within the scope of taxation, this international
transaction raises its own problems. This relates to the
country of source of income, the subject of income
tax, and which country obtains the right to taxation on
that income.
Each country may tax the income from the
transaction. The source country (the country in which
the income is earned) may impose a tax because there
is a close relationship between countries and
transactions that provide income. This is in line with
the logic that the country in which the tax subject
transacts has provided a place, the resources so that
the tax subject can earn income. So this is the reason
why the source country can impose a tax on that
income, which is known as the benefit theory of
taxation. (Darussalam, 2010)
On the other hand, the country in which the tax
subject is established or domiciled, resident may also
impose a tax on income derived from abroad by the
domestic tax subject. State where the tax subject is
established or domiciled, domiciled or resident is
referred to as a domicile country. The relationship of
taxation rights to a country resulting from the related
tax subject matter is named as a personal attachment.
In addition to revenue from international trade, the
state also gets tax revenue from global investment.
Countries compete to get global investment because
the competition between countries is very tight. For
this reason, to win the competition, there are certain
countries that are willing to provide excessive tax
incentives by providing tax free or tax facilities at a
very low rate (low tax rate), the guarantee of
confidentiality of information (secrecy of
information), and the availability of a highly
sophisticated financial infrastructure. This group of
countries is known as tax haven countries.
Theresia, Y. and Septriadi, D.
Tax Analysis and Profit Shifting Starbucks Corporation.
In Proceedings of the Jour nal of Contemporary Accounting and Economics Symposium 2018 on Special Session for Indonesian Study (JCAE 2018) - Contemporary Accounting Studies in
Indonesia, pages 429-437
ISBN: 978-989-758-339-1
Copyright © 2018 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
429

Due to the varied tax treaty facilities between
countries, investors are encouraged/ interested in
doing treaty shopping to get the most profitable
incentives for their business. Investors actions can be
categorized as "against the law" because they are
conducted solely to enjoy the benefits of tax facilities
and are contrary to the purpose of providing such
incentives.
In addition to tax treaty, vacancy tax regulations
can also be used by companies to avoid taxes to be
paid. The company takes advantage of this empty gap
by creating sophisticated financial transaction
schemes in the context of tax avoidance.
In international taxation, there are various
schemes commonly used by multinational companies
in order to make tax savings (Anang Mury, 2015, p.
4): (1) transfer pricing; (2) thin capitalization; (3)
treaty shopping; (4) controlled foreign corporation;
and (5) special purpose company.
Many multinational corporations do tax
avoidance by using transfer pricing schemes. Transfer
pricing is usually done with the aim of minimizing the
tax burden of the company, usually multinational
companies apply it by way of determining the
subsidiary in the country where the cost center or
profit center. Usually a subsidiary in a country whose
tax rate is lower that will be profit center and vice
versa. In this way, the company can adjust the tax
burden that will be paid.
Multinational companies do transfer pricing by
conducting transactions between groups of
companies, such as royalty payments, goods/services
sales transactions, debt lending, and so on. The price
of transactions applied to these transactions
sometimes costs below the market price.
The object of research is tax avoidance and profit
shifting conducted by Starbucks with transfer pricing.
For three consecutive years (2008-2010) Starbucks
UK claimed a big loss but different things delivered
to investors in the United States. For 14 years
Starbucks has been doing business in the UK,
Starbucks only paying a total tax of £ 8.6 million.
(Reuters, 2012).
Because of this, Starbucks UK is suspected doing
unaccepted tax avoidance by paying a royalty to
Starbucks Holland called Starbucks Coffee EMEA
BV while Starbucks Coffee EMEA BV's
headquarters is based in the UK, besides that British
Starbucks buys coffee beans from Swiss-based
Starbucks unit which is then roasted and distributed
to Starbucks UK at a price already marked 20%,
and Starbucks UK said to finance all its efforts with
debt loans from other Starbucks subsidiaries, it
causing Starbucks UK to pay substantial interest
expense to the subsidiary. Therefore, Starbucks UK
was showered with criticism and judged to have
committed an immoral act. Tax authorities in the UK
require Starbucks to pay its taxes.
In accordance with the background that has been
described above, then the issues to be raised are as
follows: (1) What is the tax avoidance and profit
shifting structure undertaken by Starbucks
Corporation? (2) How can Indonesia avoid the
possibility of tax avoidance when a case like
Starbucks Corporation happens in Indonesia?
2 LITERATURE REVIEW
The purpose of the company is to get profit as much
as possible so that tax is considered as a burden for
the company. Therefore, many companies, both
domestic and multinational companies will always try
to minimize the tax burden either legal or illegal.
Efforts to minimize this tax can also be called tax
avoidance. Although tax rules have been established,
a regulation usually selects a loop hole that is
ultimately used by tax subjects (multinational
companies) in the interest of its economy.
According to Brian J. Arnold (2015), "Tax
avoidance is a transaction or arrangement by a
taxpayer to minimize the amount of tax to be paid but
in a manner consistent with the legal corridor.
Meanwhile, according to Mohammad Zain
(2008), citing the opinion of Ernest R. Mortenson, tax
avoidance with regards to the arrangement of a
transaction or condition to minimize the tax burden to
be paid by the company with regard to or take into
account the consequences. So tax avoidance is a false
act because it is done in a way that is not contrary to
the law.
Meanwhile, according to Roy Rohatgi in his book
Basic International Taxation (2005, p. 332), tax
avoidance is defined as follows:
"Tax avoidance implies that a tax payer has
arranged his affairs in such a way that his tax
burden is less than it would otherwise have been,
or that no tax is payable because of such
arrangement.
In many countries, tax avoidance schemes can be
divided into 2 (Darussalam, 2010, p. 197): (1)
acceptable tax avoidance or commonly called
defensive tax planning; and (2) unacceptable tax
avoidance or commonly also called aggressive tax
planning.
There are several factors that influence/encourage
the occurrence of profit shifting as quoted from
JCAE Symposium 2018 – Journal of Contemporary Accounting and Economics Symposium 2018 on Special Session for Indonesian Study
430

Bawono Kristiaji (2015) is the differences of tax rate
and the emergence of tax haven countries.
2.1 Differences of Tax Rate
In this era of globalization, every company competing
for each other's market. This is not just happening to
multinational companies alone, countries also
compete to get capital investment in their respective
countries. Each country needs investment for
development and progress country. In order to
achieve these objectives, every country is trying to
earn its income through tax income. Each country
must have its own taxation provisions with different
tax rates.In order to get an investment, eventually
each country mutually offer low tax rates to attract
foreign investors.In the end this is beneficial for
foreign investors.
Because of this varied tax rate offer, multinational
companies are encouraged to make profit shifting to
countries that offer low tax rates and profitable for the
company so that tax avoidance happens.
2.2 Tax Haven Country (THC)
Another factor that affects the occurrence of profit
shifting is the emergence of tax haven country. The
OECD says that the THC is "a country which imposes
a low or no tax, and is used by corporations to avoid
taxes that otherwise would be payable in high tax
country. According to Barry Larking, the definition
of Tax Haven Country is "a place where tax is levied
at low tax rate or not at all, or where it is hard for
foreign jurisdictions to access information about
citizens taxable income.
According to the OECD, some tax haven country
characteristics are: (1) low-cost or no-tax-only taxes
(no or only nominal taxes); (2) lack of exchange of
information (lack of effective exchange of
information); (3) lack of transparency; (4) no
meaningful economic activity (no substantial
activities). There are several popular ways that
multinational companies can shift their profits by:
2.2.1 Manipulating transfer pricing
Transfer pricing is one of the international tax
issues facing multinational companies today
(paragraph 11 OECD Transfer of TP Guidelines,
2017). According to the OECD, transfer pricing is the
price at which a company transfers/delivers tangible
or intangible goods or services to its affiliated
companies.
According to Gunadi (2007), transfer pricing is
the amount of price on the delivery of goods/services
agreed by both parties in a business transaction in
which case both parties have a special relationship.
According to Carmine Rotorando (2000, p. 2), a
special relationship is a major point for the tax
authorities to be able to distinguish whether a sale
transaction is likely to manipulate transfer rates or
not. A country's tax authority has the authority to
make corrections to transactions that do not reflect
fair prices during which the transactions are related
parties.
2.2.2 Shifting their debts
According to Prof. Dr. Gunadi, 2007, p. 279, thin
capitalization is an act of financing larger subsidiaries
using interest-bearing debt from related companies
rather than funding with share capital.
Thin capitalization is done through a tendency to
finance its subsidiary by granting loans by a parent
company to a subsidiary domiciled in another country
compared to a capital payment on the grounds that the
interest expense on the loan may be deducted from
the taxable income of the subsidiary receiving the
loan. (Hutagaol, 2007)
3 RESEARCH METHODS
The research approach is a case study approach
because it intends to analyze what phenomenon
experienced by the research subject. The unit of
analysis used is single case in single unit. Based on
the purpose, this research is qualitative and
descriptive research which aims to give an analysis
about a problem as clear as possible and provide an
overview of a problem solving or solution to an
existing problem. Based on the benefits, this research
includes pure research oriented to science and is
expected to contribute to education. Methods of data
collection in the form of literature study by reading
books or literature, journals and papers related to the
subject of research problems.
The selection of research with case study
approach is also based on the consideration that the
researcher wants to give an idea how the issue of
transfer pricing for transactions between subsidiaries
in multinational companies and how the solution is
solve if such problems occur in Indonesia.
Data collection methods used by the researcher is
qualitative data with secondary data types derived
from reading books or literatures, journals and papers
related to the subject matter of research that is about
Tax Analysis and Profit Shifting Starbucks Corporation
431

transfer pricing, tax avoidance, and thin
capitalization.
According to Miles and Huberman, there are 3
techniques in analyzing data, namely:
1. Data reduction
Data reduction is the process of selecting and
classifying / categorizing data.
2. Presentation of data
Presentation of data is a way of presenting data,
for example in the form of narration, images,
graphics, charts, and others.
3. Conclusion
The conclusion is the process of concluding from
the analysis that can be used as the solution of the
problem.
4 ANALYSIS AND DISCUSSION
Starbucks has opened its business in the UK since
1998 and has opened 800 outlets, but Starbucks pays
only £ 8.6 million in taxes. The amount is very small,
considering Starbucks is the second largest restaurant
after McDonald's in UK which was followed by KFC
who finished third. The tax paid by McDonald's UK
is £ 80 million, 10 times larger than Starbucks and, by
comparison, KFC pays taxes in the UK £ 36 million.
This is one of the background of the Starbucks tax
case in the UK revealed. (Bergin, 2012). For 3
consecutive years (2008-2010), Starbucks UK
admitted suffered considerable losses. This loss is
caused by enormous operating costs. Starbucks's
operating expenses consist of royalty fees, interest
payments on loans.
In 2008, Starbucks posted a gross profit of £ 77.8
million and net pretax loss on ordinary activities of £
26.3 million, but CEO Schultz told investors in the
United States that units in the UK had profits to fund
Starbucks expansion at other overseas markets. In
2009, Starbucks posted a gross profit of £ 69.7 million
and net pretax loss on ordinary activities of £ 52.2
million, but CFO Alstead told investors in the United
States that a UK unit was "profitable".In 2010,
Starbucks posted a gross profit of £ 76.7 million and
also recognized profit loss after administrative
expenses of £ 25.7 million and net pretax loss on
ordinary activities of £ 34.2 million, but Starbucks
told investors that sales continue to increase. In 2011,
Starbucks still claimed losses, but John Culver (head
of the Starbucks International division) told analysts
that "we are very pleased with the performance of
business units in UK." These statements are in stark
contrast to the financial reports reported by Starbucks
UK.
When the media tried to confirm the statement,
Starbucks issued a statement very different from the
previous statement, the Starbucks stated that the unit
in UK is very disappointing and is trying to improve
the condition of business units in UK.
Table 1. Fact versus Starbucks UK Reports to the UK Tax
Authority
Fact on NASDAQ
Version of Starbucks
UK
Reuters interviewed 46
Starbucks investors in
the US as well as stocks
analysis, it turned out
that Starbucks UK is big
profits. For 3 years
Starbucks reported sales
of up to £ 1.2 billion.
Peter Bocian as
Starbucks CFO at the
time, it was revealed
that the profits from
business units in the UK
so massive, so the funds
can be used to finance
the expansion of
Starbucks in other
countries
Report to UK taxpayer,
Starbucks claimed their
business in Britain was
losing frenzy.
In 2008, they claimed a
loss of up to £ 26
million and in 2009
again lost £ 52 million,
and in 2010 suffered
another loss up to £ 34
million. The total loss
reported by Starbucks
for three years was £
112 million.
According to a report from Reuters and the House
of Common, there are 3 focus points on allegations
against Starbucks UK which stressed that Starbucks
UK has made a substantial payment to the group of
companies to deliberately make losses in the UK that
is (Kleinbard 2013): (1) royalties and license fees
paid to a Dutch affiliate; (2) mark-ups of coffee beans
purchased through other Dutch affiliates and Swiss
affiliates; (3) interest paid on a loan from Starbucks
Group.
JCAE Symposium 2018 – Journal of Contemporary Accounting and Economics Symposium 2018 on Special Session for Indonesian Study
432

Figure 1. Starbucks Structure
roasted beans
other finished product :
food, tea, cup, etc
Green beans
Alki
(UK)
Starbucks
Coffee EMEA BV
(Netherlands)
Starbucks
Manufacturing
EMEA BV
(Netherlands)
Starbucks Coffee
Trading
(Switzerland)
Starbucks
Coffee Shops
(Inggris)
Third party
vendors
Starbucks
Group
other finished product :
food, tea, cup, etc
Figure 1: Starbuck Structure
4.1 Starbucks UK’s Tax Avoidance and
Profit Shifting Scheme:
One of the factors that cause Starbucks UK losses is
the payment of royalty fees. During running its
business, Starbucks UK has to pay a royalty fee to
Starbucks Coffee BV (Amsterdam) based on a
percentage of total sales. This is one element that
enlarges the nominal loss of Starbucks. The royalty
fee Starbucks UK pays to Starbucks Coffee BV
(Amsterdam) is 6% of total sales, this percentage is
quite high when compared to similar businesses. The
royalty fee paid by McDonald's UK is only 4%.
In addition to royalty fees, there are other factors
that cause losses on Starbucks UK. Starbucks UK
pays other operational costs of buying roasted coffee
beans, coffee beans purchased from SMBV. To
analyze whether the price of coffee beans purchased
by Starbucks UK is reasonable or not, it is necessary
to do value chain analysis as follows:
Figure 2: Value Chain Anlysis
From the above value chain analysis, it can be
seen that the coffee beans used by Starbucks UK are
purchased from Starbucks affiliated companies in
Switzerland that have been mark up 20%, then the
coffee beans are roasted by SMBV that located in
Amsterdam which price has been added with the
roasting service fee then distributed to Starbucks UK.
This is the way to make the cost of buying coffee
beans paid by Starbucks UK to be very high and
allegedly there is manipulation of the transfer price of
coffee beans.
Starbucks said the transfer price is in accordance
with the principle of fair price (arm's length). To test
whether the added margin resale at the price of the
beans is reasonable, it is necessary to benchmark
some coffee trader companies. In addition to testing
the margin resale, benchmarking of some similar
companies that provide coffee roasting services is
necessary to see if the mark up is added to normal
roasting services. From benchmarking results can
only be determined whether the price of coffee beans
purchased by Starbucks UK reasonable or not.
The last factor that causes losses to Starbucks UK
is interest payments on loans provided by Starbucks
Group. Starbucks UK further confirmed its loss by
stating that its business operations have been almost
entirely funded by the debt of the Starbucks Group.
The interest charged to Starbucks UK is + 4% from
LIBOR, the interest rate is quite high when compared
to the 2% interest rate of McDonald's.
Tax Analysis and Profit Shifting Starbucks Corporation
433

STARBUCKS COFFEE COMPANY (UK) LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD ENDED 28 SEPTEMBER 2008 (continued)
6. INTEREST
Period ended
28 September
2008
Period ended
30 September
2007
£ £
Bank interest receivable 419.553 319.937
Bank interest payable (92.278) (43.511)
Interest payable to group companies (3.900.372) (1.321.916)
Interest payable (3.992.650) (1.365.427)
Interest on borrowings from group companies is calculated at LIBOR (one year rate) plus 4%
as adjusted for changes in LIBOR each fiscal quarter
Figure 3: Details of Interest Expenses paid by Starbucks
UK 2007 - 2008
STARBUCKS COFFEE COMPANY (UK) LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD ENDED 03 OCTOBER 2010 (continued)
6. INTEREST
Period ended
03 October
2010
Period ended
27 September
2009
£ £
Bank interest receivable 18.130 192.644
Interest receivable from third parties 15.463 -
33.593 192.644
Third party interest payable (31.364) -
Interest payable to group companies (4.630.489) (6.266.908)
Interest payable (4.661.853) (6.266.908)
Figure 4: Details of Interest Expenses paid by Starbucks
UK 2009 - 2010
4.2 The Tax Policy on Starbucks Decided
by the European Commissions to
Obtain State Revenue Optimally
In examining the case of Starbucks Corporation, the
European Commissions (EU) has made several
comparison of Starbucks transactions with similar
companies (Starbucks Co. competitors). The EU
compares the royalty fees paid by SMBV to Alki LP
for a coffee roasting license with several Starbucks
competitors namely Company Y and Alois Dallmayr
Kaffee oHG. Company Y that does the same roasting
activity as Starbucks says it does not pay any royalties
to its group to find out how to process roasting.
Likewise Dallmayr says that royalty payments by
companies that roast coffee beans are unusual (odd),
because usually buyers of roasted coffee beans will
pay to a coffee grill company instead of the other way
around.
Therefore the EU through Article 16 (1) of
Regulation no. 2015/1589 establishes the obligation
of the Commission to order the restoration of
unlawful and inappropriate aid. The provision also
provides that the Member State concerned shall take
all necessary measures to recover any unlawful
assistance which is found to be inappropriate. Article
16 (2) of Regulation No. 2015/1589 provides that
such assistance should be recovered, including
interest from the date of the unauthorized removal to
the effective date of its recovery.
The recovery methods applied to Starbucks are as
follows:
1. The transaction comparison method used to check
whether it is in accordance with the principle of
fairness is the CUP method.
2. According to the comparison of transactions with
the CUP method with several independent
independent companies, it is found that SMBV
does not need to pay the royalty fee to Alki LP for
the coffee roasting license.
3. Upon the above decision, the tax authorities in the
Netherlands shall impose a tax on SMBV profits
without deducting royalty fees (formerly the
Netherlands withholds the SMBV tax after
deducting the royalty fee paid to Alki LP).
Based on the above decision, the Dutch tax
authorities finally made a recovery/refund of € 25.7
million from Starbucks Co which was obtained from
the ruling with the Dutch Government.
JCAE Symposium 2018 – Journal of Contemporary Accounting and Economics Symposium 2018 on Special Session for Indonesian Study
434

4.3 Anti Tax Avoidance Terms in UK and
Netherland
4.3.1 UK
UK has a focus on issues of tax reduction through
debt from shareholders, royalty payments on
intangible assets that can reduce taxes in the UK. For
transfer pricing rule, all transfer pricing methods in
OECD are accepted but the most effective method
according to the UK is the comparable uncontrolled
price (CUP) method.
The UK does not have a financing ratio between
debt and capital so there are no restrictions on interest
reduction. Reduction of interest is limited in terms of
debt and interest rate that has met the fairness/arm's
length (Andrew Casley, 2007 quoted from Fajar
Budiman). This provision regulates loans and debt
payments to affiliated companies. In 2004, the
Government terminated the special provisions of thin
capitalization arrangements and improved the
provision of transfer pricing in order to accommodate
the provision of thin capitalization.
4.3.2 Netherlands
The Netherlands has a General Anti-Avoidance Rule
(GAAR) which is about transfer pricing rules only. In
2002, a provision was applied in the Dutch tax rules
to facilitate the tax authorities to check the transfer
price, whose contents are as follows: "Where an
entity participates, directly or indirectly, in the
management, control or capital of another entity and
conditions are made or imposed between these
entities in their commercial and financial relations
(transfer prices) which differ from conditions which
would be made between independent parties , the
profit of these entities will be done as if the last
mentioned conditions were made. "
The Netherlands uses the 5 methods of transfer
pricing. But the best method of transfer pricing
according to the Netherlands is CUP method, the
resale price method, the cost plus method.
4.4 Anti Tax Avoidance Terms in
Indonesia
Some of the existing anti-profit shifting rules in
Indonesia that can be used to prevent tax avoidance
schemes such as those committed by Starbucks
Corporation are as follows:
4.4.1 Prevention of Thin Capitalization
Transactions
To prevent tax avoidance by multinational
corporations with funding from very large debts,
countries make rules on DER (Debt to Equity Ratio).
In Indonesia, its domestic tax rules set the ratio of
capital and debt ratio of 4:1.
Based on the PMK No. 169/PMK.010/2015
Article 2 paragraph 1 states the ratio between capital
and debt is set at the maximum of 4: 1. This rule can
be regarded as a powerful enough rule to prevent tax
avoidance by thin capitalization scheme. Given a
fixed ratio that can prevent the tax payer from getting
excessive deductions on his taxable income. In the
case of Starbucks, with this rule, Starbucks can not
avoid taxes with this scheme in Indonesia.
4.4.2 Rules to Prevent Manipulation of
Transfer Price of Coffee Beans and
Mark up roasted coffee bean price for
roasting service
Transfer pricing can be prevented by PER-32 / PJ /
2011 through:
1. In article 11, there are already established methods
of pricing transfer which may be used together with
appropriate conditions for applying such methods
2. The most important articles which may prevent the
transfer price manipulation are article 20 and 21. This
article emphasizes that: "Directorate General of
Taxation is authorized to re-determine the amount of
income and deductions to calculate the amount of
taxable income on transactions conducted between
related parties."
Article 11 describes what methods can be used for
fair pricing, when analyzed from several countries, in
this case the UK, the Netherlands, these two countries
choose to apply the CUP method.
In Indonesia, if a case like Starbucks UK happen
in Indonesia, the tax authorities may use the CUP
method to test the fairness of the purchase price of its
coffee beans. CUP method is commonly used for
testing the reasonableness of the prices of industrial
goods or commodity goods. To test it, the tax
authorities can compare product transactions similar
to independent parties.
For the coffee roasting service provided, SMBV
charges the price of coffee beans already in mark-up
by 20%. To test whether the price is reasonable or not
we need to do comparison intra-group service
transactions. Testing steps for intra-group service
transactions are set up in SE-50 / PJ / 2013 and PER-
22 / PJ / 2013 by: (1) Check if the service is properly
Tax Analysis and Profit Shifting Starbucks Corporation
435

provided; (2) Recalculate the fairness of the service
payments
In the case of Starbucks, proper coffee roasting
services have been done, but to recalculate the
fairness of service payments, it must be done by
benchmarking on similar service companies (roasted
services).
4.4.3 Rules to Prevent Transfer Price
Manipulation of Royalty
The fairness of royalty fees can be tested with
Comparable Uncontrolled transactions (CUT) and the
TNMM method. Royalty fees can be compared to
CUT by comparing the percentage of royalty fees of
similar companies whose transactions are conducted
by independent parties. These methods are set out in
PER 32 PJ / 2011.
In addition to comparing the above method, the
transfer price manipulation of royalties can be tested
using Transactional Net Margin Method (TNMM
method) by comparing percentage of operating profit
to sales. A further concern is whether the royalty
payments provide a corresponding rate of return (SE-
50/PJ/2013).
5 CONCLUSIONS
Based on the results of the analysis it can be
concluded that tax avoidance and profit shifting
structures undertaken by Starbucks corporation are:
Starbucks UK manipulates transfer pricing for royalty
payments at a much higher percentage than similar
industries at comparable market levels, performing
thin capitalization schemes with considerable interest
expense. Starbucks recognizes interest expense of +
4% of LIBOR when other similar companies only
charge 2% interest, and manipulates transfer pricing
by marking up the price of coffee beans and roasted
coffee beans at very high price. Mark up on resale
margin and roasting services should be benchmarked
against similar companies to be able to assess whether
the mark up is reasonable.
Rules that can be applied by Indonesian tax
authorities if such cases as Starbucks UK occur in
Indonesia are:
a. The current Thin Capitalization Rule is sufficient
after the issuance of PMK No. 169/
PMK.010/2015 because in this rule the amount of
ratio of capital and debt (DER) is 4:1.
b. To prevent the transfer price manipulation in
royalty payments, the fairness of royalty fees can
be tested with CUT and the TNMM method. This
method is set in PER 32 PJ/2011
c. To prevent impropriety on the sale of coffee
beans, the tax authorities can test it using the CUP
and TNMM methods. To test it, the tax authorities
can compare product transactions similar to
independent parties and compare net margin of
transactions similar to independent parties. Steps
to perform the tests have been made in SE-
50/PJ/2013
d. The current rules on transfer pricing are getting
better and more stringent with the issuance of new
rules on the transfer pricing document
prerequisite of PMK No. 213/PMK03/2016. With
this rule, the tax authorities can see where the
company's largest profit from the report per
country.
The tax rules of transfer pricing and thin
capitalization in Indonesia are sufficient, but a rule
that regulates the rate valuation of royalties and the
clear provisions of what factors should be considered
and compared to be able to get a fair percentage rate
for certain companies royalty.
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Report, London: Reuters, 2012.
Budiman, Fajar. " Thin Capitalization Tax Avoidance Tax
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Commission, European. Commission Decision. Brussels,
2015.
Darussalam, John Hutagaol, Danny Septriadi. “Concepts
and Applications of International Taxation.” Jakarta:
Danny Darussalam Tax Center, 2010
Directorate General of Taxation. "Regulation of the
Director General of Taxation Number PER-32/ PJ/2011
dated November 11, 2011 concerning the
Implementation of Principle of Fairness and Business
Candidate in Transactions between Taxpayers and
Related Parties."
Directorate General of Taxation. "Circular Letter of the
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