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.
As MPs called for HMRC to investigate how Starbucks reportedly avoided paying corporation tax, the United Nations has published a new draft transfer pricing manual to determine how goods and services are charged by one part of a company to another part in a different country. The document is being discussed at the Committee of Experts on International Cooperation in Tax Matters in Geneva this week.
Critics say lax transfer pricing rules let multinationals structure their businesses so that profits are moved to low or no‐tax jurisdictions to reduce their liabilities. Losses can appear to be incurred in high‐tax jurisdictions to increase allowable tax deductions.
The UN manual, which aims to make transfer pricing rules clearer, warns there is “clearly great scope for mispricing of intra-firm transactions to severely impact on domestic revenues for development”.
Multinationals that do not use fair “arm’s length” transfer prices may undermine tax revenues for developing countries, the UN warned.
Reuters, which broke the Starbucks tax story, alleged that the US-based coffee told analysts that the UK business was “successful”, “profitable” and they were “very pleased with the performance”, yet reported losses in this country.
There is no suggestion that Starbucks illegally evaded tax and the company has denied any wrong-doing. “We have paid and will continue to pay our fair share of taxes in full compliance with all UK tax laws, as we always have,” Starbucks said in a statement.
Richard Murphy, a chartered accountant and director of Tax Research UK, blogged that Starbucks “can on the one hand sing the praises of its profitable UK operation and yet manage to pay no tax. Yet again the credibility of the tax system is undermined as a result”.
Although transfer pricing is simple in theory - charge a sensible amount for inter-company transactions - agreeing a realistic price can be hard in practice because the price for the product or service is in effect “artificial” because it doesn’t exist in the market outside the company, Whiting said
Starbucks is not the only big corporate to be accused of not paying its fair share of tax. Last week it emerged that Facebook UK generated revenues of just £20.4m last year and paid just £238,000 in tax to HMRC, reports said. Again, the social networking giant was not breaking any rules but paid less tax because its European headquarters is not in the UK but in Ireland, which has a lower business tax rate.