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Starbucks and tax

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I wouldn’t start from here ...

Starbucks’ announcement on Thursday 6 December that they are going to pay more tax than is legally due regardless of whether they make a profit was extraordinary. It shows the power of consumer sentiment and the dramatic extent to which the landscape has shifted on tax. It also raises some complex questions.

First, is this just an admission that the transfer pricing was wrong? I think the answer is no as, apparently, the royalty rates had been agreed with HMRC applying internationally accepted transfer pricing principles. HMRC is tough but fair in policing these rules.

Secondly, does this indicate that the rules are wrong and need changing? There is an ongoing debate about how the effectiveness of traditional tax rules to modern businesses and the knowledge economy, in particular to intellectual property. The OECD will issue a report next year on base erosion and profit shifting and it may be some changes need to be made. But fundamentally the system is not broken.

Thirdly, is the payment not in fact tax, as it is voluntary? If so, should HMRC accept the payment? Tax is levied according to law. Starbucks is undertaking to pay an amount even if it has losses.

The conclusion must be this is a voluntary payment. The only other similar incident I can think of is when some MPs volunteered to pay ‘capital gains tax’ after ‘flipping’ their second homes. I believe these voluntary payments went into a fund to reduce the public debt but were not actually accounted for as tax.

Finally has the Starbucks’ announcement helped or hindered the debate? Above all, I think it has shown that the terms of the debate need to change. No one seems to be happy with the situation where a company makes a voluntary payment.

On the one hand, we cannot have a situation where a tax liability is decided according to public opinion and not according to law.

But on the other, tax is complicated and often there is no one answer, but rather a range, especially in applying transfer pricing rules. I think companies will need to take more account of the views of all their stakeholders in setting their tax strategies.

Equally I think companies are going to have to be more proactive and transparent in explaining their tax charge so as to inform the debate. Companies already pay around 30% of all taxes collected in the UK in the form of corporation tax, employers NIC, business rates and other levies. They also generate and collect much of the remaining tax in the form of PAYE and VAT. There is mounting evidence that the UK tax regime is becoming increasingly attractive. And this is very welcome because we need inward investment and for companies to be successful.

We must not let the heat in the current debate damage our position. Now companies need to fully engage to ensure we continue to have a competitive regime but one that carries the trust of all stakeholders.

Chris Morgan, head of tax policy, KPMG