Starbucks tax bill stirs transfer pricing spat

Anger over how Starbucks reportedly paid just £8.6m in taxes on £3bn+ UK income since 1998 has re-ignited debate about multinationals’ transfer pricing transactions.

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hey hey more compliance by multi-nationals!    1 thanks

david5541 | | Permalink

we ll live in a tough macro-economic environment so maybe its time for all the big employers of part time staff in UK to demonstrate corporate reponsibility in their tax reporting and structure!

Maybe the problem is too high a corporation tax rate in the UK

newmoon | | Permalink

If corporation tax wasn't high in the UK there wouldn't be the incentive to organise multi national affairs so that profits are taxed outside the UK.

On the contrary, the incentive would be to shift profits into the UK to get them taxed at a lower level here.

The UK corporation tax rate must presumably be missing the sweet point where revenue is maximised, regardless of the percentage rate charged.

I don't deal with international tax, but looking at Wikipaedia the Republic of Ireland has a 10% corporation tax rate for international service companies resident there. That's a very significant saving on the UK large companies corporation tax rate.

Maybe in four or so years time there will be another much lower corporation tax rate for Scottish companies, and then companies will be relocating across that border also. 

Tax Rates    1 thanks

jberezny | | Permalink

The bidding war starts the race to the bottom, with each nation trying to outdo the other with lower and lower rates, more incentives for firms to locate in their jurisdictions.

In the USA, the competition is between states who offer incentives and grants for factories and firms to do business within their borders. After the tax breaks expire, the firms begin a bidding battle with other states to get a better deal and only the corporation wins; government panders to this model and loses tax revenue as the firm moves out and abandons its facilities.

The solution is to level tax rates across nations, uniting and cooperating rather than competing and restructuring tax law around cost center accounting so that true profitability is taxed regardless of location.

Hmmm....the 'sweet point'    3 thanks

justsotax | | Permalink

is as low as what that company is able to justify whilst taking on the costs of relocating etc.  

 

It is quite comical to suggest that there is a level at which companies (and individuals for that matter) are 'happy' to pay tax....for those who have the realistic option, they will do anything to avoid tax and realistically will simply balance the savings in tax vs costs of relocating etc to decide where they trade/operate/manage etc

frustratedwithhmrc's picture

It's probably not the UK Corporation Tax they are avoiding...

frustratedwithhmrc | | Permalink

In fairness to Starbucks, It's probably not UK Corporation Tax they are avoiding as most of the companies that use these complex transfer pricing arrangements are US companies who are avoiding paying US Corporation Tax of 35%.

The fact that their solution to the problem also bypasses payment of corporation tax in the UK is probably just a side-effect (albeit a happy one for shareholders of Starbucks probably).

Transfer pricing rules are a bad solution to a real problem, specifically the movement of corporate income from high-tax jurisdictions to low/no-tax jurisdictions.

http://online.wsj.com/article/SB10000872396390444799904578050353189826008.html

US Corporate Taxes

jberezny | | Permalink

It is true that the US Corporate tax rate is a staggering 35% of net profits. It was said that when the tax rate was reduced from 50% to 35% in the USA, corporations would flourish, invest more and do more domestic business. Thus begins the race to the bottom. Additionally, accelerated depreciation and other tax breaks were instituted. The net effect was a real rate of 10% for most and 0% for a few.

Rather than prosper, operations moved offshore to lower wage, lower tax jurisdictions just as quickly as if rates had remained.

bookmarklee's picture

Ahem

bookmarklee | | Permalink

The UK's Transfer Pricing rules PREVENT or, at least, LIMIT the extent to which UK taxable businesses can get tax relief for the sums paid to overseas based group companies. 

frustratedwithhmrc's picture

Edwin Seligman’s “The Shifting And Incidence Of Taxation”    2 thanks

frustratedwithhmrc | | Permalink

jberezny wrote:
Thus begins the race to the bottom. Additionally, accelerated depreciation and other tax breaks were instituted. The net effect was a real rate of 10% for most and 0% for a few.

We should also remember our Introduction to Economics 101,  We’ve known since 1899 and Edwin Seligman’s “The Shifting And Incidence Of Taxation”, that corporation taxes are not paid by corporations, but by either shareholders (in the form of lower returns), employees (in the form of lower salaries) or customers (in the form of higher prices).

This makes taxes directly against corporations (including employers NI) very poor as they depress economic growth and you end up with the race to the bottom. It would be better for the UK to have a zero rate of corporation taxes and Employers NI and pick up the difference in increased economic activity (smaller piece of a larger pie).

The reason we can't do this is that politicians use the ignorance of the electorate to pretend that corporations or "The Rich" will end up paying for hikes in corporate taxes, whereas it's most commonly the man in the street that bears the economic incidence.

No you don't know

J Lessels | | Permalink

This has been asserted but hardly established. IN ADDITION, it is counter-intuitive. Companies seem dead keen to avoid corporation tax. Why? Because they do pay it, in fact.

Why buy Starbucks coffee?    2 thanks

waltere | | Permalink

I'm not a tax expert (just a tax payer), so my perspective on these stories is perhaps a little different to you guys.  When I heard that Jimmy Carr was sheltering £2m in a complex tax avoidance scheme, my first reaction was "How the hell does Jimmy Carr earn £2m?  He's not even particularly funny."  And it's the same when I heard that Starbucks have made over £3bn in profits since 1998.  How?  Their coffee is like... well, lets just say it's not very nice.

This morning I went to a local independent coffee shop on our High Street.  "No newspaper this morning?" I asked.  The manager went out, bought a selection and brought them over to my table for me to choose.  That's service!  I'm sure he does everything he can to minimise his tax bill, but he's no MNC, so I suspect he pays his full whack of corporation tax.  And he doesn't serve brown swill in large buckets.  If you don't like the way these large corporations are treating the UK, don't buy their products.  

Starbucks sales not profits

lynamn | | Permalink

The £3Bn was stated to be sales revenue, not profits on BBC earlier in the week.

nigel's picture

Why not abolish CT?    2 thanks

nigel | | Permalink

There was an interesting suggestion by a speaker at the Digita conference earlier this year, that we abolish Corporation Tax altogether. Companies would then stop wasting time and money creating artificial structures and transactions, and concentrate instead on making profits and employing people. HMRC would then collect more PAYE and VAT, which is much easier to manage and enforce.

It's not going to happen, of course, but it's an interesting idea.

Corporate taxation    3 thanks

jberezny | | Permalink

I would disagree with that old chestnut that taxes depress economic growth. Usurious tax rates and zero tax rates have exactly the same effect in that the exceptionally high rates will be avoided at all costs to the point of creating a shadow economy out of reach of the taxman, encourage cheating and disregard for success.

Zero tax rates encourage nothing in that the infrastructure of defense, roads, inspections, courts and the common good are beggared by a lack of funding. Without the basic infrastructure, little business can be conducted and again there is a death spiral.

I disagree that taxes on net profits are a burden on shareholders and employees and offer that corporations would retain the excess profits thus generated by a zero tax rate in order to fund higher salaries for the top executives. In other words, the CEO, President and so on would justify the enormous profits thus produced as having been a result of their own efforts alone and so be deserving of higher salary, lest they should go to another company to work the same accounting magic.

There is a sweet spot that with intelligent application of straightforward tax rules and rates as well as tax money well spent, which will encourage prosperity in business and the population as a whole. The rich must pay their fair share as they gain more profit from a stable government, educated population, good roads, uncorrupted legal system and defense than the less wealthy. They are wealthy because of this and not in spite of it. They have applied their own efforts to achieve that wealth, certainly, but could not do so on a grand scale in a chaotic and broken environment.

Political reality    4 thanks

pwainewright | | Permalink

The Seligman argument that shareholders, employees and consumers end up paying for corporation tax ignores the political reality that if corporations pay no tax, then the public wonders why they should too. Perceptions of fairness are important in politics, even if they do not make sense in accounting terms. 

There's also the very sensible point raised by jberezny that if corporate profits are inflated by zero tax rates then executives will just cream off more in salaries. 

Arguing for 0% corporation tax grabs attention but is hopelessly naive about how real people behave in the real world. 

Paul Scholes's picture

Now Ebay

Paul Scholes | | Permalink

As commented above Starbucks, for various reasons (milk no coffee - unfair trade etc) has been a no-go area for years so my money goes to pay Cafe Nero's UK tax.....I hope.

But now I see Ebay is also up to it, time to close my account, will have to put my old camera kit in the Oxfam shop.

How about a FRS for Corp Tax, the bank's computers track the cash movement and deduct a FRS rate of CT every time the money passes through a different state, with credit for the lowest rates.  In that way the transaction ends up suffering the highest rate of tax, rather than the other way around...you heard it here first!

 

 

Corp tax level vs. personal tax levels

mikewhit | | Permalink

@newmoon

"If corporation tax wasn't high in the UK"

UK corporation tax is significantly lower than standard rate personal income tax when NI is also accounted for.