I have been asked today whether the General Anti-Tax Avoidance Principle Bill that I wrote for Michael Meacher MP and which is currently before parliament would provide any additional powers for HM Revenue & Customs to tackle and tax avoidance Starbucks might have undertaken.
I'd remind you that it's been suggested that Starbucks did three things to turn a profitable UK business, according to its reports to shareholders, into a loss making one in thirteen out of the last fourteen years according to its UK accounts. They are:
a) Paid a 6% royalty to another Starbuck's company for use of the intellectual property attaching to the brand;
b) May have overpaid for coffee beans to a Starbuck's owned supply chain channelled through the Netherlands and Switzerland;
c) Paid a high rate of interest on large intra-group loans to finance the business.
In principle each of these could be challenged using transfer pricing arrangements. But, that as is well known, difficult to say the least: comparative prices have to be proved and that is a long and arbitrary process.
What the Bill I wrote for Michael Meacher would let HMRC do instead is look at the motive for this arrangement. First, given that the business is being very obviously run for profit and is obviously profitable or the chain would not currently be subject to expansion plans the motive for these structures that seem to turn profit into loss cannot be profit: that has already been achieved. So, using the motive test in the Bill these transactions fail: they do not appear profit driven, they appear tax driven. If they really do turn profit into tax loss then their purpose would fail the General Anti-Tax Avoidance Principle Bill. Their purpose must be tax avodiance. In that case the option of ignoring them for the purposes of tax assessment would arise. They could be ignored.
I happen to think that might be a weak argument for the beans: there must be a basis for pricing them without recourse to this Bill - transfer pricing rules should work there.
But the royalty would be a prime target for attack: it has no commercial purpose at all. The profit stays within the group, and it cannot be justified as commercial since no one would pay a royalty for thirteen out of fourteen years to make continuing losses. In that case the Bill I have written would be a perfect mechanism for targeting such arrangements that represent what seems to be tax abuse.
I'd add, it might also be possible to use it on the whole financing structure but I'd look at thin capitalisation and transfer pricing rules first.
But would what I have written be useful? Yes, is my answer: it could be a game changer.
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Sorry I realise you’re an accountant and not a lawyer …but do Starbucks (or others) play this same game with all other EU countries? Or are there other EU countries with similar anti-avoidance laws to those you describe? And is the way foreign companies are taxed purely a matter for national governments or are there agreements that need to be followed?
Sorry loads of questions…
I will be dealing with these points – maybe tomorrow
I am not sure what tax avoidance principles they have in the US – but didn’t the IRS get GlaxoSmithKline on paying royalties overseas because they were able to argue sucessfully that brand and hence the right to the royalty was a US asset because it had been developed by marketing and advertising spend in the US rather than overseas. It would appear to me that the same might well apply to the StarbucksUK brand – as I somehow doubt that featuring in a few episodes of Friends and the like would be sufficient to ecourage people to drink their version of coffee.
I find it very instructive how all these US multinationals with low UK tax on their operations don’t appear to be so effective at avoiding tax on their US operations.
Indeed
And the US doesn’t have a General Anti Avoidance Rule.
Which is why they have a massive tax gap
Richard if ‘your bill’ were adopted I’m sure that those lovely people at KPMG, PWC and Deloitte will find a loophole, and the overstretched HMRC will roll over and accept it. Especially as most of our current govt probably have vested interests in companies that can afford to hire the aforementioned scam-meisters.
Howabout (as you’ve mentioned before) a UN style approach to tax. All countries gang up on multi-nationals, and get them to either pay tax or cease trading.
Obviously this could mean Vodafone moving their HQ to, say North Korea… But hey, they probably deserve eachother.
While a good anti-avoidance rule would help deal with relatively marginal issues of interpretation, I think it would be asking too much to expect it to deal with fundamental flaws in the law. The Starbucks case clearly points to the fundamental flaw inherent in trying to tax an integrated multinational company like Starbucks as if it were a series of independent companies in each country. Starbucks has obviously exploited to the full the flexibility offered by the ridiculous `arm’s length’ principle on which transfer pricing regulation is based. The answer is unitary taxation with formula apportionment. This was advocated by the FT in its editorial on Starbucks a couple of days ago, and a couple of letters in that paper now provide further support, including (wonder of wonders) one from Michael Devereux, who says that the system needs `fundamental reform’.
Sol
You are right
I have elaborated this point in another blog just done
What is interesting is that the environment for change is being created
Best
Richard
Sol
I agree – of course. You are right
I have elaborated the point in a blog tonight
The good thing is that the environment for change is being created
Best
Richard