On Starbucks, territorial taxation and the creation of tax haven UK

Posted on

I am intrigued by reaction amongst the tax profession to what I wrote about Starbucks yesterday. You won't be surprised to know that those who have commented have said what I wrote was wrong. That always seems to be the case, so there was nothing new there.

For the record, the error it was claimed I made was to suggest that either a) a UK company is not taxable on its worldwide royalty income and / or b) suggesting a UK company is not more broadly taxable on its worldwide income.

The explanation for the alleged error is very simple. When I talk and write about a company using a generic term such as the normal corporate identity by which it is known (such as Barclays, BP, Google or Starbucks) then I am considering an economic entity as a whole or the specific part of it that is relevant e.g. Shell in Nigeria. That is what, of course, most people would do, because that is a reflection of the economic substance that is being considered. It has become habitual for me to do this: it is one reason why I support the concept of unitary taxation.

Tax professionals do however live in an artificial world where transactions are segregated not with regard to their economic substance but according to the legal form in which they are constructed. So, company in this context means a specific entity.

In that case when tax professionals saw me refer to Starbucks in the UK they presumed I was referring to just one entity. I did not think that way or as a consequence seek to suggest that. I would have thought it self-evident that if Starbucks moves its European HQ to the UK there will be more than one company owned by Starbucks in this country: I cannot imagine why anyone should think that would not be the case. Not do I imagine that such a move would mean that the whole HQ function will exist solely and only in one UK based operation if there is tax advantage to splitting parts of it, if only for legal purposes. Again, I cannot imagine why anyone should think that would be the case when I imagine that to find a situation where that was not true would be nigh on impossible. What I was implicitly referring to - presuming it would be understood as I intended - was the whole structure of entities that will now be controlled from the UK as a result of the European HQ being relocated here could achieve the result I suggested. This may well, of course, be by way of controlling the existing structure in the Nethelands; we have no way of knowing at present.

But, to be explicit, that means that when I said that I thought Starbucks could arrange its affairs in the UK so that it did not pay tax in the UK resident company that might manage its affairs in Europe on income arising outside this country this meant that I thought that a structure of companies could be out in place to achieve that economic goal. It did not mean I thought this possible using just one entity.

Why do I think that this goal could be achieved? Very largely because it seems that many of the changes in corporation tax over the last few years have been made precisely to help achieve this goal. Those who remember the minor spate of corporate evits from the UK in about 2007 and 2008 that so spooked Gordon Brown and Alistair Darling might also recall that many of the companies had significant IP interests held offshore that they thought might fall within the scope of UK tax as a result of potential changes then in the offing regrading UK controlled foreign company rules as a consequence of EU pressure for reform.

That exodus, which cost the UK almost nothing in lost revenue at the time precisely because most of the companies involved paid little UK corporation tax because they were then holding much of their IP offshore and were not remitting the profits made on them back to the UK, gave rise to an absurd panic reaction.

First Alistair Darling relaxed the rules on intra-group dividends from non-UK subsidiaries, exempting them from tax in the UK.

Second under the Coalition the controlled foreign company rules of the UK were largely gutted to eliminate the threat that most management of intellectual property from sources outside the UK could be brought into the UK tax charge.

And, thirdly, territorial tax was introduced with the specific aim of ensuring that no UK based group of companies would pay tax in the UK on income arising to it from outside this country if they structured their affairs with that goal in mind.

Put these changes together and the reality was that the threat to UK companies owning actively managed IP offshore ( which in this case simply means outside the UK) that this income might be brought within the scope of UK tax virtually (one should never say absolutely) vanished. I do not think that was by chance: that was by trumpeted design. Because of the changes at least some of those who left the UK have now come back whilst the use of the UK as a tax haven does seem to be increasing because of the effective ring fence excluding the possibility of non-UK income being subject to tax here that these rules now permit.

It was this broader context in which I commented. I find it absurd, to put it nicely, that the literalism of some in the tax profession appears to deem it inappropriate that I should view groups of companies in this way and that I should be denied the chance to presume such structuring will take place when it is the completely routine practice of that profession to suggest structures designed to achieve such goals.

If someone wants to still suggest that such structuring is not possible I will be intrigued to know how and why the UK has apparently created a tax system where all UK companies are taxed on their IP income from the whole world wherever it might be legally received, but I really do not expect that counter-argument to be offered because I do not believe that to be true. It is quite clear that the UK now has no intention of imposing such charges if the appropriate structures to prevent such a charge happening are now put in place - the creation of which opportunity being precisely what I criticised George Osborne for.

In that case I'll suggest, unless convincingly corrected, that my comments were correct and that supposed criticisms were based on quite inappropriate assumptions.