Hidden behind Starbucks’s “ethical sourcing” program is a massive global tax dodge that shifts profits from coffee-producing countries to Switzerland. Customers pay an “ethical” premium, while Starbucks’s “Swiss Swindle” helps perpetuate poverty among farmers and workers who grow and harvest the coffee beans. The Swiss scheme also deprives governments in coffee-producing countries of much-needed revenues to fund schools, hospitals and other public services that help tackle growing inequality and create a path towards a sustainable future.

As is often the case, corporations with aggressive tax avoidance practices often treat all stakeholders with the same disregard, shifting profits to executives and shareholders and externalizing costs onto society. Despite its claims, there appears to be nothing ethical about Starbucks.

The global coffee giant has been charged with massive labor violations in its supply chain and now faces multiple class-action lawsuits for misleading consumers about human rights claims. It has paid record fines for violating the rights of its direct employees in US stores and has refused to bargain in good faith with the growing and currently striking Starbucks Workers United union. If that wasn’t enough, Starbucks’ CEO gets paid more than 6,666 times the median worker, a ratio higher than any other S&P500 company.

The role of Switzerland in profit shifting

The incredibly harmful role of Switzerland — as a commodity trading center, a tax haven and a secrecy jurisdiction — in aiding and abetting multinational corporations to shift profits away from producers in the Global South is too frequently overlooked. Starbucks provides a clear example of a much bigger global problem. However, while commodity trading and profit shifting are standard practice for many large multinationals, Starbucks appears to push this further than most others, with a stunning 18% mark-up on coffee beans in Switzerland, despite the beans never actually making their way up the Swiss Alps.

This 18% mark-up by Starbucks’s Coffee Trading Company (SCTC) in Switzerland on all global coffee purchases before reselling to other Starbucks subsidiaries for roasting and retailing has been in place since 2011. A previous Starbucks report by us at the Centre for International Corporate Tax Accountability & Research (CICTAR) estimated that this scheme had shifted at least $1.3 billion in profits to the Swiss subsidiary over the last decade, or between $100–150 million per year. The profits booked in Switzerland are also one way Starbucks reduces its taxable income, where customers actually buy their Pumpkin Spice lattes or other coffee drinks.

The 18% mark-up would not have been known without a European Commission investigation into Starbucks in 2015, following the 2012 expose of Starbucks’s UK tax dodging. Starbucks was compelled to provide financial information from the Swiss subsidiary to the European Commission, which would otherwise not be publicly available.

However, since Switzerland is not part of the EU, the investigation focused on the issue of illegal state aid in the Netherlands. The inflated coffee prices paid by the Dutch subsidiary created losses and a tax shelter for the European operations. The Commission ruled against the Netherlands, but that was later — as with several other cases — overturned by the European court.

CICTAR’s previous analysis found evidence — through the tracking of ongoing dividend payments from the Swiss subsidiary through Dutch and UK subsidiaries — that the 18% Swiss mark-up was ongoing. Starbucks changed the ownership of the Swiss subsidiary to one directly owned by a subsidiary in Washington state, where there is no state income tax and no requirement for financial reporting, as there is in the Netherlands and the UK. The dividend flows from Switzerland, derived from the 18% mark-up, are no longer traceable, but there’s no reason to believe that the practice isn’t ongoing. The basic allegation was not contested by Starbucks. The Swiss subsidiary, despite its central role in Starbucks’s global corporate structure, is never mentioned in its recent annual report to shareholders.

The illusion of ethical sourcing

When Starbucks attempted to justify the introduction of the 18% mark-up (up from 3%) to the European Commission and in response to the CICTAR report, it argued that this was the cost of running Coffee and Farmer Equity (C.A.F.E.) Practices — its “ethical sourcing program” via the Swiss subsidiary — including the use of its intellectual property.

A brand new report by us, “The ‘Swiss Swindle’: Does Starbucks short-change coffee-producing countries?” set out to evaluate these claims. The report examines the only publicly available financial statements from Starbucks’ ten Farmer Support Centers, which it claims are at the heart of its “ethical” sourcing and are owned via the Swiss subsidiary.

Our analysis of the financial statements from Starbucks’s Farmer Support Centers in Colombia and Tanzania found negligible expenditures and limited benefits to farmers. The actual costs of the Farmer Support Centers are a tiny fraction of the 18% margin booked in Switzerland, where — on paper— the purchase of coffee beans occurs. The Farmer Support Centers appear more concerned about the quality and supply of coffee beans rather than anything to do with the welfare of coffee-producing communities. There was no evidence that Starbucks holds or values any intellectual property from its C.A.F.E. Practices program in Switzerland. If there is any intellectual property, it is created, held and used by the Farmer Support Centers in coffee-producing countries, not in Switzerland.

Our latest report concludes that the primary purpose of the Swiss set-up is not to support farmers but to book profits from the purchase and sale of green coffee beans in Switzerland, at very low tax rates and far from the reach of tax authorities in producer countries, where revenue for public services, including health, education and sanitation, is urgently needed. However, the existence of these Farmer Support Centers means that Starbucks has a legal physical presence in coffee-producing countries and that revenue from coffee sales currently shifted to Switzerland should be taxable where the beans are grown and value is genuinely created. This is the core principle, although not the practice, of the current global tax system.

The report recommends that governments from nations like Brazil, Vietnam, Colombia, Indonesia, Tanzania, Uganda, Ethiopia and others — which rely extensively on coffee production and export — fully explore all options under existing rules to tax the coffee-trading profits currently booked in Switzerland. Additionally, it calls for major global tax reforms through the current UN Tax Convention negotiations to end the profit shifting and extraction from commodity-exporting countries.

Starbucks as a case study

Starbucks provides an example — within one corporation’s global supply chain — of how the current global tax system is abused to shift profits from producer countries in the Global South to multinational corporations headquartered in the Global North. Switzerland, as a commodity trading center with low tax rates and high levels of secrecy, plays a major role in facilitating these practices.

If Starbucks wants to live up to its language on ethical sourcing, it could easily use the current 18% margin to pay farmers a significantly higher price and book those sales in the countries where they actually occur and where value is created. In the meantime, governments should immediately seek to tax profits artificially shifted by Starbucks to Switzerland, and everyone should push for reforms to the global tax system to end the ongoing exploitation of commodity-producing countries across the Global South.

[Tax Justice Network first published this piece.]

[Kaitlyn Diana edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.