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There is no need to change UK tax law for multinationals, says tax expert

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The current controversy over tax paid by multinationals does not justify a change in tax law, a corporation tax expert has said. Heather Self, of the law firm Pinsent Masons, told the Financial Times that recent media reports underlined the need for proper enforcement. ‘HMRC needs the skills to assess the information it is being presented with,’ she said.

Tax campaigners have called for major reform of the system of taxing multinationals’ profits. According to the Tax Justice Network, ‘combined reporting with formulary apportionment and unitary taxation’ would ‘prioritise the economic substance of a multinational and its transactions, instead of prioritising the legal form in which a multinational organises itself and its transactions’.

But Self, who has worked at HMRC on complex disputes with FTSE 100 companies, told Tax Journal that under current UK law the same tax principles apply to small and large companies: ‘They should both pay tax on the profits they earn in the UK. The question for Starbucks is whether its profit has been properly calculated on well-known OECD principles.’

Several reports have focused on royalties paid by Starbucks in the UK to other companies in the Starbucks group.

Critics have suggested that tax relief for such payments – which do not leave the group but may be received by companies in low-tax jurisdictions – provides multinationals with an unfair advantage over businesses that are based wholly on the UK. Richard Murphy, director of Tax Research UK, told Reuters that Starbucks was ‘charging itself a royalty for using its own name’.

But Self said that in principle a royalty paid by Starbucks UK for the use of the name was ‘no different from a small business deciding it was worth paying a franchise fee to the owner of a brand, rather than setting up as an independent – for example, Subway charges its franchisees an 8% royalty’.

The FT noted that Starbucks was facing calls for a consumer boycott, and that HMRC was likely to face questioning by MPs on the Public Accounts Committee and the Treasury Committee about Starbucks’ tax affairs. It quoted Stephen Williams, the Liberal Democrat MP, as saying that ‘consumer power’ would force Starbucks ‘to come clean about their tax avoidance activities’.

As Tax Journal reported yesterday, a spokesman for the Forum of Private Business said that, until Starbucks paid more tax, people could not be blamed for ‘voting with their feet and moving to support an alternative local coffee shop that does pay its dues’.

HMRC said: ‘For legal reasons we cannot comment on the tax affairs of individual businesses, but we make sure that multinationals pay the right tax to the UK in accordance with UK tax law. Our tax rules combat tax avoidance and we employ specialist tax professionals to ensure that multinationals play by the rules.’

On the issue of taxation of small and large businesses, an HMRC spokesman told Tax Journal: ‘HMRC treats all businesses the same regardless of their size or what trade they are in. We apply the tax rules fairly and consistently and target our resources to where there is the greatest risk of tax loss. This works across the board from the largest corporate to the sole trader.’