When tax avoidance debate is about Google, Facebook and Apple it can be argued that the UK has no equivalent companies so that there is nothing that can be done about what's going on. We must, it is said by some in those cases, put up with what US companies will do for the benefit of having them here in the UK. It's not an argument I agree with, but it's one that is right if only to the extent that it's true that there are no UK equivalent entities.
Suggestions that Starbucks is avoiding tax changes that. We do have home grown coffee shops in the UK. A lot of them. And they have to pay their taxes in full here in the UK. They can't make payments to offshore entities for the use of their logos or advice on how to add hot water to coffee just to avoid tax: they have to pay in full on what they earn in this country. What Starbucks is doing may be legal, but what it also shows is that business does not operate on a level playing field in the UK.
Reuters are suggesting that Starbucks use offshore licencing, transfer pricing that routes profits to Switzerland and intra-group funding to reduce their UK profits. The result is that despite Starbucks apparently being a highly successful operation — something they do not just acknowledge, but make a point of saying — they haven't paid tax here for the last three years.
And let's straight away dismiss the “but their employees pay income tax and NIC and their customers pay VAT” argument: that's equally true of their UK based competitors who must also pay corporation tax.
What's clear from what's happening is something that's been glaringly obvious to a few for a long time, but for which there hasn't been a clear example, and that is that multinational companies and the rules by which they can trade very obviously provide a clear, unfair and wholly unjustifiable competitive advantage to such corporations over smaller, locally owned and nationally based businesses.
This makes no economic sense. First, even the most pro-market person will say that tax should not distort markets. On this occasion I agree with them: there is no reason at all why the UK tax system should favour one company over another in this country when they are in direct competition one with another.
More than that though, if there is to be any such competition it should be the smaller, home grown business that should very clearly get the support of the tax system. But it isn't: the exact reverse is happening.
That's bad for British business, bad for the prospects for growth in this economy, bad for the creation of an atmosphere of tax compliance in the small business community when they can clearly see the tax system picks on them, and bad for communities of the UK that need local initiatives to ensure that they prosper and thrive.
The UK international tax system is failing us. HMRC say they can't do anything about that: candidly I don't believe them. They could stop sacking staff, for a start. But even if that were true they would still have a duty to point out the fact that the system is not working fairly and to suggest to ministers ways in which the system should be reformed.
Saying that does, however, that points this whole issue back to where change has to happen, which is at the top, in the field of tax policy making, which is firmly located in the political domain.
And there are serious questions to be raised at this level, targeted most heavily at the current government. The last Labour government made a policy mistake by excluding the dividends received by UK companies from their overseas subsidiaries from tax, which at a stroke made the use of tax havens much more attractive. But this government has exacerbated that, considerably. It has made clear that almost no questions will now be asked about the use of tax havens by multinational companies by virtually abandoning the UK's controlled foreign company rules and it has actively encouraged multinational companies in the UK to move their treasury functions out of the UK and into tax havens. At the same time it has made sure that the barriers to smaller companies doing this remain in place. The charge that can be leveled against this government is then that it has deliberately widened this gap between large and small companies and national and multinational companies so that the small and nationally based companies are always penalised. They've even shifted corporate tax rates for large companies to ensure that this is the case too.
So the Starbucks tax case is important because it raises real issues of tax policy here in the UK that if not addressed will threaten the viability for UK small businesses. There can't be anything much more important than that when we're looking for UK business to help pull us out of the recession, but so far the government seems quite unable to see the seriousness of the situation they have created. And that leads to the inevitable question of why that is the case, and in whose interests they are governing.
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Buy me a coffee!
what we need are a whole suite of policies that actively discourage large companies. Places like Totnes are booming because their businesses are locally owned and unique to the area.
1,000 independently owned coffee shops mean 1,000 owners taking business decisions, engaging their own set of ethics, dealing fairly with staff and customers, using small suppliers for cakes and biscuits and add ons, allowing coffee shops to become community hubs.
1,000 Starbucks or Costas are just a load of employees following orders from high, selling a global, commoditised products with profit margins squeezed the whole way, subject to suffocating “group policies” that mean nothing and sucking life out of the community.
Buy local, buy small. You can’t do that with computers or cars, but you can with food and drink.
Agreed
I apply the rule wherever possible
Especially for beer – but then the best beer in the world comes from East Anglia
I would argue that , although adnams St Peters etc are indeed very good beers indeed, one can not ignore the fine beers produced in Herefordshire, Shropshire, and from a host of breweries in The Lake District and The North – Hawkshead being one. Plus, that are some mighty fine brews coming from Wales too
(and quite often pubs can’t sell their locally produced ale as the pub freeholds are owned by large stock market floated corporations that only sell the biggest brands!)
Perhaps we need a “locally sourced produce bill” in Parliament, forcing businesses to sell local produce if available – might that not deal with part of the Starbucks problem?
Would be good
No local coffee beans though
Sorry, Richard, but I must strongly disagree with you on this one. It’s Kent and Shepherd Neame. 20 years ago it was Sussex and King and Barnes.
Oh no
Adnams leads the way for a strong East Anglina field in which St Peter’s Brewery is also a stellar performer
You obviously forget the days when it was called the Watney’s desert – forced me to drink rather too much Greene King IPA in my youth!
Yuck – that was the 70s
Ghastly – I agree
Much like my feeling about Greene King IPA, even now
Roger, I agree, but it’s not ‘policies’ we need to discourage large companies, it’s individual action. Listen to Castells at http://t.co/QToHvhFy
Waiting for political policies is too slow and many politicians are too easily ‘bought’. And many solutions aren’t just local, they’re matters of individual choices and actions that go well beyond food and drink.
For example: – Don’t use Google, use DuckDuckGo. Don’t use Amazon, use your local bookshop or Waterstones (Amazon only seems sometimes cheaper, because what they don’t contribute to the taxes that pay for roads, schools and hospitals – we pay instead in higher personal taxes!) Change your bank to a mutual or a co-operative. Don’t buy Sky or VirginMedia, use a local aerial firm (or do it yourself as I did) and use Freesat.
I too apply the rule wherever possible. If the 99% change what they do, the world changes, with or without policies.
fully agree, though some things are easier to change than others.
and of course, make your own beer. easy and cheap and virtually tax free and the end product is the equal of the best British beer.
If the 99% change what they do, the world changes
Is this still true? It used to be true in the capital markets, which were dominated by ‘The Institutions’ – us, or rather: our money, managed by inurance funds, pensions, mutual investments. This is no longer the case: the markets are dominated by, and run for the benefit of, the 0.1%.
Do they *really* still need consumers?
Think about that: the ‘1%’ or 0.01% devote their efforts to concentrating wealth, to the detriment of the productive economy. Visibly, to the detriment of circulating cash, productive or otherwise – their economic actions Re hoarding, speculation, and rent-seeking, with a decorative garnish of status goods that are a net ‘sink’ of value.
It may well be the case that the concentration of wealth has reached a point that rent-seeking in an irretrievably depressed economy is enough to keep the super-rich in yachts, trophy wives, call-girls, security guards, and domestic servants.
It is visibly the case that they are getting richer in the recessionary economy we live in *now*. Will you ‘win’ if you deepen that recession by refusing to consume?
Nile, You ask do they really need consumers? Certainly there is a self-sustaining casino element in the global economy. But much of that is still fed by the consumption of goods and services. Most of us can’t ‘refuse to consume’ Banking, Media use, Schools, Hospitals, Roads and bridges (toll) and Policing all of which big business is now seeking to capture. Do we turn a blind eye to their global exploitation of all that as well as consumer goods and just pay their profit-bearing prices for essential services?
As for deepening the recession we’re a long way from 99% or even 99.9% of us doing that. Richard Tweets this morning https://twitter.com/RichardJMurphy that his local Starbucks is as busy as ever. What’s really deepening the UK recession is Tory dogma. They’re just not listening, and your average citizen thinks that just him/her doing something about that won’t make a difference. The truth is that every decision or non-decision adds up. Listen to Castells at http://t.co/QToHvhFy
At present the conventional economy is the only game in town, with too many of us finding excuses not to opt out of it, due to laziness or the unwillingness to give up status and fashion goods and services. There’s also a tremendous appetite to just argue about the issue and hair-split but do little. The likes of Starbucks know they can rely on our vanity, inertia, mutual-distraction and apathy.
In France they do have such a thing; corporation tax is based not just on the profit of the organisation but on the ownership of the organisation.
“If the capital was provided by the owners and at least 75% continues to be held by individuals then the rate of taxation is 15% for profits up to €38,120 per annum and 33% thereafter.If the entire capital was not entirely provided by the owners or less then 75% continues to be held by individuals, then the rate of taxation is 33%.”
http://www.french-property.com/guides/france/working-in-france/starting-a-business/taxation/company-tax/
There are also a range of other incentives for micro and local businesses in France. So it is possible to do this even in the free-market competition rules that pervade across Europe. Like many other things the decision to make it so depends upon the political will of the ruling class.
Richard, I heard you on R5Live this morning stating categorically that what Starbucks have done is legal. But you’re not in a position to say that. The best one can say is that HMRC have not challenged the practice. So we can’t say whether it’s mispricing which is evasion or fraud or just a legal use of available legislation. For a company like Starbucks to declare a trading loss year after year, one will argue there is a prima facie case of mispricing or fraud.
I stand by what I said
Perhaps she should have a look at Royal Mail’s accounts – 9.5 bill turnover, just over 200 mill in operating profit and no tax payable, been like that for a while. Would you suggest that this is the result of mispricing or fraud.
Companies do actually trade and make a loss.
Starbucks says it made a profit
Anyone remotely familiar with the way the Tribunals (formerly Special Commissioners), the High Court, the Court of Appeal and the Supreme Court (formerly House of Lords) routinely reach conflicting decisions when those tax avoidance cases reach the courts (sometimes within the same court as happened in the Arctic Systems case where the senior Special Commissioner used her casting vote) will be careful in making categorical statements about the legality or ortherwise of a scheme or practice that has yet to be investigated by HMRC let alone forensically considered in court. That was my point. We have a self assessment system so taking Starbucks word for it is not the same thing as concluding that it’s legal. We just don’t know!
OK
That’s a very fair and reasoned point
And what exactly is this profit?
Gross Profit, EBITDA, EBIT, Tax Profit?
Does anybody know?
Respectfully, stop wasting my time
No one invests in 300 more stores if they’re making a loss
You are really going to have to return to the time wasters list for a while I think
@Mat Hat
No, what it means is that the UK operation is only viable because of the brand. The brand is only taxable in the UK under the royalty provisions.
The UK has signed an agreement with Switzerland saying that Switzerand can tax these royalties and not the UK, and Switzerland declines to do so.
It’s one entity
Taxing as if it is not makes no sense
That’s why we need unitary taxation
Not sure what you are trying to say here.
The way the tax rules work is to tax the UK bit of the group in the UK, the Swiss bit in Switzerland and the American bit in the US. It doesn’t matter whether you hive off bits of the trade into other groups, it’s only the profits that are made in a particular country which are taxed there.
Are you really suggesting that a coffee shop which is owned by a UK company should be taxable in a different way than one which is owned by an American company? That a UK company opening a shop in France should suddenly be taxable in France on a proportion of its worldwide profits?
That is what unitary taxation is all about, and it’s utterly bizarre, which is why no-one does it.
You’re absolutely correct on the capture corporate tax policy making by big business. The Treasury’s current practice is to cede policy making in this area to the Hundred Group and the Oxford University Centre for Business Taxation (supposedly independent experts but in fact funded by the Hundred Group).
If I want to set up a coffee shop and brand it as Starbucks then I have to pay them for the right to use their name. That’s just an application of the law of property. So under the independent entity rules, which treat a company’s operations in each country in isolation, it’s right that Starbucks’ UK operations should have a deduction for the cost of the licence.
If you deny a deduction for the licence, you are putting international retailers at a competitive disadvantage compared to pure franchise companies, and compared to UK companies. That’s protectionism, pure and simple.
If the recharge amount is fair, and you can bet HMRC will have looked at it, then the UK arm of Starbucks isn’t making profits. Why must tax be due on a business with high revenues but low profits? If you impose a tax on such companies you’ll either make it uneconomic for them to work in the UK, or increase pressure on costs here.
The problem is not in the UK, it’s the fact that the royalty income is not taxable in Switzerland. And this is changing — proposals to normalise the Swiss tax system are before cantonal authorities right now.
And as for
“And let’s straight away dismiss the “but their employees pay income tax and NIC and their customers pay VAT” argument: that’s equally true of their UK based competitors who must also pay corporation tax.”
This is just completely incorrect. I’m actually shocked that you have said this, given your experience in tax. Bonuses and salaries are deductible for corporation tax purposes. The cost of paying bonuses is actually lower for a taxpaying company than a company who, for whatever reason, does not pay tax.
That is an extraordinary rose eyed view
Let’s look at the alternative – that there is no independent entity, because that’s a fact
And then let’s stop making silly excuses, like yours are
Including what you’re saying about Switzerland
And I say all this because I have worked in tax – and know exactly what I’m talking about
If they are silly excuses, what about the fact that Starbucks are in the middle of a rapid and expensive expansion, with plans to open over 300 new outlets employing over 5000 new staff? Along with the tax, nics, vat that these new jobs will bring in, also consider the amount of job seekers and other benefits will not need paying to these people. As a point of interest, the average age of a Starbucks employee is 24, so that is also a lot of young people finally finding work.
I agree that companies should contribute their fair share. But if more companies would contribute in the way Starbucks is, growth would soon return to the uk economy.
They are investing because they are profitable
And they are not paying tax
That means they are free riding and not contributing to the UK economy
I’m not making “silly excuses”, what I’m saying is that tax should be based on real-world substance over legal form.
It’s the real economic profits of the business that should be taxed. The fact appears to be (based on what you are saying) that the UK business doesn’t make a profit. Why then, should the group’s profits that are made in other countries be taxed here?
Switzerland has made the choice not to tax profits of activities in that country. That’s their choice. If they decided to tax those profits then companies would not shift asset management or treasury operations to Switzerland. What you are proposing is that the tax system should move away from the clear and understandable position of only taxing real economic activity in a jurisdiction in order to fix the problem of tax competition between countries.
It’s an entire counter-intuitive solution, and I can promise you that every time I have seen the introduction of tax legislation which does not make economic sense I have seen red-tape, complexity, unfair outcomes and opportunities for tax avoidance.
Because the tax is made here…as Starbucks have very clearly said
The above was your last comment – I don’t suffer fools gladly
And just how profitable are the UK operations of Starbucks?
This is nothing more than conjecture – prove that they are profitable for tax purposes.
Produce a pro-forma tax computation, not run-of-the-mill BS.
At present you have delivered absolutely no evidence of Strabucks actual profitability in the UK and their consequent tax liability. As usual, just a fiction.
Starbucks say they are highly profitable in the UK – they tell their shareholders that
They’re adding 300 stores – they wouldn’t do that if not, would they
Get real, I say
Reuters is convinced of the evidence over 12 years
So am I
Adam
Before they came here Starbucks brand in the UK was worth a pretty minimal amount – the reason why it now has a value (and I can except that something that allows you sell over priced dishwater (imho) as quality coffee does have a commercial value) is largely because of all the marketing and promotion spend that Starbucks have incurred in the UK (and my guess that is quite a lot since they certainly don’t spend much on the raw ingredients or their staff) and I daresay has been treated as tax allowable in StarbucksUK accounts.
It is worth not that SmithKlineGlaxo had to pay $3bn to the US tax authorities precisely because the IRS were able to argue that their brands were based in the US because that was where the marketing spend to create those brands had been incurred. That case also stands as a pretty big monument as to why supposed tax experts are often no such thing and are only playing games in order to promote their own and their clients short term interests.
Starbucks only has a value in the UK because its customers are in the UK
So the brand is in the UK
Starbucks is a good example of a company to avoid. This makes a good case for a Tax Compliance Accreditation Organization which we the 99% could then join. We would then know which companies to trade with and have dealings with, and which to avoid. Companies would then be forced to become tax compliant, or lose business. They would then have their accreditation badge to wear as a badge of respect, and they may even become proud of their contribution to society. or is that just dreaming.
I’m working on it….
Will Starbucks get a Menschion in their defence? @LouiseMensch http://www.youtube.com/watch?v=8WvAkhW-XNI
Richard
I do not know if you have seen the Business News on BBC News 24 but they are suggesting that Starbucks has a fiduciary duty (to its shareholders) to minimise its tax payments. The person interviewd (from Chatered Institute of Taxation I think) said while this is true it also has duty to wider stakeholders. Your thoughts please
Blog coming
you should perhaps take a look at this one again; perhaps over a long latte. The “tax avoidance” claims have no substance – they are comparing apples with pears. The best they have is a transfer pricing question, but even that looks insubstantial.
Have to say I am confused by your line. You seem to be suggesting that compliance with the law gives multinationals an unfair advantage. But if they don’t comply with the law then how on earth would they be tax compliant?
Sophistry is my one word reply to that
Richard, I know that you analyse these matters deeply and you may have chosen not to turn over one or two stones, but the process you are describing here should be ringing alarm bells in the office of those who investigate money laundering and the processing of profits from illegal drugs production. Coffee beans and heroine/cocaine tend to originate in the same parts of the world and this process would conveniently lose the profits.
When tax avoidance debate is about Google, Facebook and Apple it can be argued that the UK has no equivalent companies so that there is nothing that can be done about what’s going on.
Something to ponder over a dram of Johnnie Walker I think
Some very brief comments, Richard.
1. Wonderful article.
2. I’m sick of hearing the ” our employees pay income tax and NIC and our customers pay VAT” argument. That’s the point the employees and the customers pay the tax (except for the employer’s NIC contribution which is dwarfed by what the employees and customers pay).
3. Your statement “business does not operate on a level playing field in the UK” is at the heart of the problem. Small businesses pay tax on their profits at a minimum rate of 20%. Starbucks, in effect, makes 20p in the £ more profit than the independent coffee shop.
Just one final point though, both Labour and the Conservative politicians have created this situation. It hasn’t happened since May 2010, it’s been going on for years as shown by transfer pricing which was part of my exam syllabus in 1974!
Afree on last point – and have said so on air
[…] Young (16/10/12)Starbucks ‘paid just £8.6m UK tax in 14 years’ BBC News (16/10/12)What the Starbucks tax expose means for ordinary companies Tax Research UK, Richard Murphy (16/10/12)Starbucks ‘pays £8.6m tax on £3bn sales’ […]
Letter in today’s Indy (warning try and keep calm):
“Starbucks is right to pay no tax in UK
It is probably reasonable that Starbucks makes no profit, and therefore pays no tax, in the UK (“Starbucks has paid no tax in Britain since 2009″, 16 October).
Running a coffee shop makes little or no profit, after you have paid for stock and equipment, rent and rates, staff and management. Starbucks’ profit comes from its global nature; the bulk buying, the brand, the homogeneity that allows people from around the world to walk into a Starbucks and know what to expect. All the things, indeed, that many of us hate about it.
That global image, the profitable part of the business, was not made in the UK and so it would be unreasonable for us to tax it.
Richard Teather
Senior Lecturer in Tax, Bournemouth University”
That is the devout Catholic who wrote for the IEA a few years ago we are all in the debt of offshore tax evaders and the social benefit they create
He’s also a chartered accountant who clearly can’t see that the spread of the coffee shop would not have happened if there was no money being made
More coffee shops in UK, more royalties for the parent company.
More free riding in the UK economy
More destruction of value
brokers and analysts routinely use EBIT and EBITDA as a measure of a companies performance rather than PBT – so I think the media are barking up the wrong tree trying to use analyst briefings as ammunition……… the standard of tax journalism in this country remains pathetically low (with very few exceptions).
Not at all
What we’re saying is EBITDA is a reliable indicator that is being manipulated by the time it reaches PBT
Journalists exactly get that
Odd how tax professionals don’t