From the Mail on Sunday (and it’s good to see these issues arising in such places):
A year after its boss attacked the British economy, Starbucks is in the sights of Revenue & Customs over the arcane taxation issue of transfer pricing.
In a note to its annual British accounts, Starbucks said: 'The company is in discussion with HM Revenue & Customs regarding its transfer pricing policy.'
According to the accounts for the year ending September 27, 2009, the Starbucks Coffee Company (UK) received a tax credit last year of £115,000, up from a tax bill the previous year of £20.6 million. The company's overall loss for the year was £52 million, up from £26 million the previous year.
The notes in the accounts state that if its transfer pricing policy was adjusted by the taxman, 'the company believes it has sufficient unrecognised deferred tax assets that it could utilise'. In other words, it could cope with a bigger tax bill.
But the company is defending its position. A spokesman said: 'We are in discussions with HM Revenue & Customs regarding Starbucks' transfer pricing policy, which we believe to be reasonable.'
I see this as good news for three reasons. The first is that taking on high profile targets is good for HMRC, and its staff’s morale. Second, it gets appropriate publicity for these issues. Third, chains such as Starbucks where the brand is the supposed value but which have losses in the UK when there is considerable profit in the group as a whole should be subject to such scrutiny.
Of course, country-by-country reporting would resolve all reasonable questions on the allocation of profits. This is why we need it. It’s why HMRC should be demanding it. But the ConDems are backing down from it, after previous incumbents at the Treasury gave it so much support.
Why is that I wonder?
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Starbucks paid $168.4 million in worldwide income taxes on profits of $559 million, an effective tax rate of 30.1%. The UK corporation tax rate is 28%, 27% from 1 April 2011, so your point is?
“I see this as good news for three reasons. The first is that taking on high profile targets is good for HMRC, and its staff’s morale. Second, it gets appropriate publicity for these issues. Third, chains such as Starbucks where the brand is the supposed value but which have losses in the UK when there is considerable profit in the group as a whole should be subject to such scrutiny.”
All multinational companies expect to be challenged on their intra-group sales, but a tax authority that takes on public companies to gain publicity or boost the morale of its staff is bound to make its host nation less popular with the group and less likely to be a venue for investment. The brutish behaviour of Revenue Canada and its agents has cost that country billions of dollars of inbound investment.
@Alex
Is there any method of collecting tax of which you do approve Alex?
I’ve not yet noted it if there is
“Is there any method of collecting tax of which you do approve Alex?”
In accordance with the law and as intended by parliament. Most tax inspectors appear to be reasonable, but there are the occasional mavericks who try to interpret the law according to what they think it should be, and then there are the Rottweilers who don’t particularly care for what the law is. The latter are the types sent in to “negotiate” a settlement – typically a 50:50 split over the amounts at issue. It is easy to see why having too many of these types can put off a serious, modern company from investing in a country.
As one American FD put it to me, there is no point in having first world infrastructure to attract inbound investors if your revenue service is going to use third world tactics which frighten them away.
@Alex
If the client does not agree there are ample means of appeal
I have used them in my time
So I really have incredible difficulty believing you
@Alex
Perhaps your American friend doesn’t understand the ‘third world’ tax situation then. It is a widely recognised problem that many developing countries lack the legal framework, expertise and influence to challenge transfer pricing abuses.
Perhaps you don’t feel any government ought to have the right to challenge a corporation’s transfer pricing assumptions?
Btw. There is clearly defined case law on cross border product recharges, overhead allocations and management charges in the UK. If HMRC are challenging – then it is unlikely to be on a whim.
It’s never as simpl as that. Let me give you an example. The Barclays v Mawson case (a leasing case) dragged on for years, eventually reaching the House of Lords, where the Revenue lost to nobody’s great surprise. The case took many years to come to its conclusion, and the Revenue refused to agree the computations of may other leasing companies on the basis that the same principles applied to the transactions in their companies, although arguably in many cases that was not the case.
The lessees under those leases were left with enormous contingent liabilities indemnifying the lessors for the loss of allowances, which of corse never arose but the lessees, particularly those that reported under US GAAP had to show in their accounts.
The whole situation caused one mooted $4 billion merger not to go ahead (I worked on the due diligence) while a former major US investor in the UK said it was the last straw that caused him to sell the last of his assets in the UK.
I think he was referring to the common practice for the local tax inspector to haggle for what he thinks is a fair amount of tax, regardless of what the law says.
No, I think you will see from my previous comment that most corporations expect to be asked to justify their intra-group pricing from time to time.
@Alex
I venture to suggest that if the businesses had been tax compliant these issues would not have arisen
Tax compliance is seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes.
@Alex S
“I think it is pretty obvious from Richard’s post that Starbucks might have difficulty justifying how they are making losses in the UK. They sell coffee not semiconductors! You insult our intellignce by suggesting that the world’s largest coffee chain is unable to break even in the UK using arm’s length pricing.”
The cost of coffee beans is one of the smaller costs in their business. A £2 cup of coffee from Starbucks contains about 20p worth of coffee, the res is local salaries and rent. Their annual report shows that their international stores, mostly in Canada and the UK had $1,920 of revenue and $1,880 of expenses.
“How is this good for the UK? Who benefits apart from Starbucks and their professional advisors?”
Their customers, who choose to sit in their comfy seats, use their Wifi etc, none of which were supplied by the coffee shops you say they displaced. Starbucks aren’t my favourite coffee shop, but they serve their clientele, and I probably wouldn’t go to my favourite coffee shop if it hadn’t been forced to up its game by Starbucks and their ilk.