Tax Avoidance Michael Cashman, Head of Tax at Kemp Little LLP
Starbucks Tax Avoidance
Over the last few months there have been a number of controversies over the amount of UK tax paid by some high profile multi-national companies such as Facebook and Google. These controversies generally involve a revelation that a multi-national company has significant sales and revenue in the UK, but pays little or no UK tax, and is followed by either defensiveness and/or contrition by the company involved. After this, things carry on as before.
Reuters, which revealed that despite £3 billion worth of sales in the UK over the last 14 years, Starbucks has paid only £8.6 million in tax1
T .
Further, in the last three years, Starbucks had sales totalling £1.2 billion but reported no profit and paid no corporation tax at all2 possible?
In Starbucks’ case, the significant difference between sales and taxable profits arose because a number of payments were made by Starbucks UK to other Starbucks companies located in various countries outside the UK, which completely eliminated any profits. These payments work in three ways: 1. Starbucks UK pays royalties to another Starbucks company in the Netherlands for the use of its intellectual property, such as the brand and its business processes;
2. payments were also made to a Swiss company for the purchase of coffee beans; and
3. the UK operations are funded by high cost debt, which results in significant payments of interest being made to other group companies.
Starbucks has not broken the law in making these payments, and in fact, inter-company
1 2 3 . How is this
he most recent company to attract unfavourable scrutiny of its UK tax profile is Starbucks.
The revelation came courtesy of
payments of this type are not unusual within multi-national groups. However, to avoid paying tax in the UK the payments must be tax deductible, which requires the payments to be calculated on a commercial basis, applying a commercial rate which is similar to that which it would pay to an unconnected third party. Questions have been raised on the level of these payments – with a suggestion by some commentators that the payments may exceed what might be considered “reasonable” in the circumstances.
The suggestion of excessive inter-company charges was raised particularly in relation to the royalty payments for the use of the intellectual property. According to Reuters, Starbucks UK paid an amount equal to 6% of the total sales made in the UK in royalties and licence fees for the right to use the Starbucks brand in the UK3
.
This level of royalty payments does appear somewhat steep, especially given Reuters understanding that McDonalds charges its UK operations a significantly lower rate of royalties (4% – 5%) for the use of its brand4
.
Questions have also been raised as to the level of interest paid on the inter-company debt – with Reuters reporting that Starbucks UK pays interest at LIBOR plus 4 percentage points, with both KFC (LIBOR plus 2 percentage points) and McDonalds (LIBOR or below LIBOR) charging
http://uk.reuters.com/article/2012/10/15/us-britain-starbucks-tax-idUKBRE89E0EX20121015 http://uk.reuters.com/article/2012/10/15/us-britain-starbucks-tax-idUKBRE89E0EX20121015 http://uk.reuters.com/article/2012/10/15/us-britain-starbucks-tax-idUKBRE89E0EX20121015
significantly less interest on their inter-company debt5
.
Ultimately, the reasonableness of the inter- company payments is a question for the UK tax authorities, and it would appear they are satisfied that the inter-company charges have been made on a commercial basis.
This current debate may force a review of the way in which multi-nationals are subject to tax. There is a perception that it is too easy for a multi-national to structure its operations to avoid paying tax in high tax jurisdictions, by shifting its income to low tax countries through the use of inter-company charges – such as the inter-company charges used by Starbucks. A change in the way multi nationals are taxed may be achieved by aligning tax payments with economic activity – perhaps applying a formulaic approach to allocate income to the countries where they do business. Such an approach will require the agreement of a number of countries, and is unlikely to happen in the immediate future.
In the meantime, it will be left to the individual tax authorities to ensure that multi-nationals pay their “fair amount” of tax in each country – per- haps spurred on by the outrage of the press and the politicians.
4
http://uk.reuters.com/article/2012/10/15/us-britain-starbucks-tax-idUKBRE89E0EX20121015 5
http://uk.reuters.com/article/2012/10/15/us-britain-starbucks-tax-idUKBRE89E0EX20121015
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92 |
Page 93 |
Page 94 |
Page 95 |
Page 96 |
Page 97 |
Page 98 |
Page 99 |
Page 100 |
Page 101 |
Page 102 |
Page 103 |
Page 104 |
Page 105 |
Page 106 |
Page 107 |
Page 108 |
Page 109 |
Page 110 |
Page 111 |
Page 112 |
Page 113 |
Page 114 |
Page 115 |
Page 116 |
Page 117 |
Page 118 |
Page 119 |
Page 120 |
Page 121 |
Page 122 |
Page 123 |
Page 124 |
Page 125 |
Page 126 |
Page 127 |
Page 128 |
Page 129 |
Page 130 |
Page 131 |
Page 132 |
Page 133 |
Page 134