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Starbucks UK tax pledge 'could reduce the group’s overall tax bill'

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Starbucks’ decision to pay more corporation tax in the UK than required by law could lead to the group paying less tax overall, according to experts at Tolley Tax. The ‘most likely losers’, the Daily Telegraph noted last night, were the Netherlands, Switzerland or the US.

The Telegraph quoted a Starbucks spokesman as saying: ‘The action we announced in the UK is isolated to our UK business and is not expected to have an impact on any of our affiliated businesses in other countries.’ The Financial Times reported on Thursday that Kris Engskov, managing director of Starbucks in the UK, insisted that the decision ‘would have no effect on its relationship with other countries’.

However, a report in The Guardian suggested last night that Starbucks ‘could be in for a showdown with tax authorities around the world’.

Starbucks ‘donation’ sets a bad precedent, tax experts warn as £20m pledge backfires

LexisNexis said in a press release yesterday  that Starbucks UK has said it will not claim ‘deductions for the royalties it pays, the coffee it purchases, the interest paid on intercompany loans, capital allowances, or brought forward trading losses in the next two years’.

As Tax Journal reported on Thursday, the company announced that it ‘will not claim tax deductions for royalties and standard intercompany charges’. In an open letter published on the company’s website and reproduced in national newspaper advertisements yesterday, Engskov added: ‘Furthermore, Starbucks will commit to paying a significant amount of tax during 2013 and 2014 regardless of whether the company is profitable during these years.’

Tolley Tax is part of LexisNexis, publisher of Tax Journal. LexisNexis said yesterday: ‘In order to prevent double taxation, where an intra-group transaction is amended for tax purposes in one company’s computations, a compensating adjustment is made in the other company’s computations. In the case of overseas companies, there needs to be a relevant clause in the double tax agreement (DTA) between the two countries, which both the Netherlands and Switzerland DTAs have.’

Tolley Tax business manager Ben Saunders said: ‘Effectively, this could mean that on account of disallowing costs in the UK, there is a corresponding reduction of profits in the Netherlands and Switzerland. This is provided that the Dutch and Swiss authorities accept these amendments.

‘A key question is whether Starbucks hope to make compensating adjustments in their Dutch and Swiss companies. If they do, there probably would be a “competent authority” procedure under which the Dutch and Swiss tax authorities negotiate with HMRC to ensure that they receive profits that are deemed to be fair under transfer pricing rules. If this were to happen, Starbucks may only be left one option under UK tax legislation to make good their commitment. They would need to unilaterally disallow these expenses. Starbucks could do this by declaring under self-assessment that the payments do not meet the requirement of being “wholly and exclusively for the purpose of the trade”.’

LexisNexis added: ‘In effect, they would never receive tax relief on these amounts. This unilateral action would be quite extreme and Starbucks should highlight this point if it is indeed the case. The permanent cost to their business could be significantly higher than the headline amounts of £10m they have said they will pay.’

Both possibilities were interesting, Saunders said. ‘If corresponding adjustments are made in the overseas companies, then Starbucks will not be increasing their tax base. They would basically be opting to have profits taxed in the UK rather than elsewhere. And depending on the rates they are taxed at, the overall tax rate of the group could even decrease.’

LexisNexis noted that at the recent public accounts committee hearing Troy Alstead, Starbucks' global chief financial officer, said that interest on intra-group loans was paid to the US, where it was taxed at a higher rate. ‘A compensating adjustment would shift profits from the US to the UK and act to reduce the group’s overall tax liability,' it added.