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Corporation tax is ‘a largely voluntary gesture’ for multinationals, says FT

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There is ‘nothing wrong’ with high-profile public shaming as ‘a weapon in the armoury against the exploitation of [tax] loopholes', according to an editorial in today’s Financial Times. But public anger ‘might equally be directed at the tax system itself, especially the way it treats multinationals’.

The FT’s stance is not new. Almost two years ago an editorial suggested that country-by-country reporting of profits and corporate taxes might expose what it called ‘the scandalous tax treatment of multinationals in the rich world’. It argued that for some multinationals, current practice turns corporation tax ‘largely into a voluntary gesture’.

The editorial posted last night on the FT website noted that the UK arm of Starbucks had for the past week been ‘battling charges of aggressive and anti-social tax avoidance’.

‘Quite whether it has done anything abusive to achieve its all but invisible liability to UK corporation tax is a question that is still being debated. Starbucks itself insists that it has not and that the problem lies in its unprofitable business model,’ it said.

‘It is all too easy to shuffle income off to low-tax jurisdictions through intra-group debt financing and the transfer pricing of intangibles such as intellectual property.'

Financial Times editorial

As Tax Journal reported yesterday, a spokesperson for UK Uncut was quoted in The Guardian as saying: ‘Companies such as Starbucks are definitely targets in our sights for future protests.’ UK Uncut was preparing to join today’s TUC march against ‘government cuts and austerity’.

‘Instead of enforcing their unpopular cuts, the government should be putting their energy into stopping tax dodging by big corporations, like Starbucks, and super-rich individuals,’ UK Uncut said in a press release today.

‘Too easy to shuffle income’

The FT editorial said current practice had turned tax into ‘a largely voluntary gesture’ for multinationals. ‘It is all too easy to shuffle income off to low-tax jurisdictions through intra-group debt financing and the transfer pricing of intangibles such as intellectual property.

‘Rather than relying on the taxman and the public to police the fuzzy boundary between legitimate tax avoidance and illegal evasion, a more rational method of linking the tax multinationals pay to real economic activity must be found. The EU has been considering the adoption of a system of “formulary apportionment” by which multinationals’ tax bases would be divvied up according to where they do business. This agenda, which needs a group of states to join forces, should be keenly pursued.’

Reuters revealed last week, after a four-month investigation, that Starbucks reported no profit in the UK and paid no corporation tax for the last three years, despite sales of £1.2bn. Transcripts of investor and analyst calls over 12 years showed that Starbucks officials ‘regularly talked about the UK business as "profitable", said they were very pleased with it, or even cited it as an example to follow for operations back home in the United States’, according to Reuters correspondent Tom Bergin.

Bergin reported that Starbucks ‘makes its UK unit and other overseas operations pay a royalty fee … of 6% of total sales … for the use of its “intellectual property” such as its brand and business processes.’ A second reason for the ‘disparity’, he said, was the allocation of profit among group entities via transfer pricing, and a third was tax relief for interest paid on inter-company loans.

‘Brand catastrophe’

There was no suggestion that Starbucks had broken any laws. However, last night the Financial Times reported that according to a respected market research company, Starbucks was facing a ‘brand catastrophe’.

Vanessa Houlder at the FT said doubts had emerged over ‘whether the company aggressively avoided tax at all’. She quoted Michael Devereux, of the Oxford University Centre for Business Taxation, as saying that the tax arrangements detailed by Reuters would not, by themselves, account for reported losses in recent years.

Domestic companies

Houlder noted, however, that big companies often pay no corporation tax: ‘In 2005/06, a quarter of the 700 largest businesses in the UK paid nothing, mostly because of current or historic tax losses. Small domestic companies have less opportunity to exploit tax rules.’

She quoted Jason Collins of the law firm Pinsent Masons as saying: ‘Generally speaking a foreign-owned company will have a great deal more opportunity to do tax planning than a domestic company.’

Collins’s colleague Heather Self told Tax Journal on Thursday that under current UK tax law the same principles applied to small and large companies. The question for Starbucks was whether its profit had been calculated on well-known OECD principles, she said.

A royalty paid by Starbucks in the UK for use of the name was, in principle, no different from a franchise fee paid by a small business, Self added.

But critics such as ActionAid say Starbucks’ tax arrangements provide evidence for a review of tax law, which would require further international co-operation.

As Tax Journal reported yesterday, The Guardian’s financial editor Nils Pratley acknowledged that it was common practice to pay royalties for the use of a brand, but he asked: ‘Why do some of the payments appear to end up in Switzerland?’