Amongst all the politically-charged and media-fuelled hype about Starbucks and its tax liabilities, there are some facts which need to be explained.
“How is Corporation Tax Calculated?”
In theory, Corporation Tax is very straight forward – one simply applies the rate of Corporation Tax – for large companies like Starbucks, currently 24% – to the profits for a year. The problem is in defining what are the profits. To the layman, this would seem straight forward – income less expenses (turnover less overheads or whatever else you want to call it). In practice it is not so easy because in this highly-sophisticated financial world, there are many ways of accounting for different types of income and different types of expenses. These are too numerous to discuss in this piece but suffice to say that the UK and international accounting bodies have gradually evolved a series of accounting standards that aim to take away some of the scope for creative accounting – what some might call ‘manipulating profits’. These standards go a long way to helping but are not 100% fool-proof.
In the UK, the tax authorities broadly accept that if accounts of companies are produced in accordance with these accounting standards, they will accept the resultant profit figures.
So, what have Starbucks done differently?
They have done some ‘tax-rate shopping’. In other words, they have looked around the world to see where corporate tax rates are low and then structured their operations to take advantage of this. It is nothing new. It is a practice that is adopted by many, many companies around the world and it is unlikely to stop, and it is defined in terms of fixing the prices for sales and purchases within groups of companies, something known officially as ‘transfer pricing’. In the case of Starbucks, some of the publicized methods they have used include:-
- Sourcing their coffee through Switzerland (did anyone know Switzerland was a major coffee producer?). The price that their supplier (seemingly part of the Starbucks chain) charges to the UK company is such that there appears to be very little profit per cup of coffee.
- Paying a royalty to a company in Holland (again, part of the Starbucks chain) for the use of ‘the brand’.
No doubt, somewhere down the chain there are also a number of management charges to head offices or HR departments around the globe.
They do not appear to have done anything illegal. And yes, they have contributed huge amounts to the UK economy in terms of other taxes such as VAT, PAYE, business rates, etc., as well as employing thousands of people.
But the issue is; why were they allowed to get away with this? or,
Why didn’t the Inland Revenue do anything?
That is the great unanswered question. HM Revenue & Customs have had in their armoury a whole series of statutory rules backed-up by detailed transfer-pricing guidelines issued by the OECD.
Many of these rules go back to 1988 and earlier. The aim of the rules is to essentially ensure that parties who are connected transact with each other as if they were independent persons. In other words, Starbucks in Switzerland should not be charging Starbucks in the UK neither more nor less for its coffee than it would charge any other company anywhere else in the world.
That, of course, simplifies the nature of what Starbucks have been doing but HM Revenue & Customs have the powers to investigate the pricing that UK companies between themselves and multi-national companies can use for a whole series of transactions.
So, is Corporation Tax voluntary?
Again, a difficult question. It would seem that Starbucks believe so. We are all aware that they have offered to pay £20m over 2 years and have published an open letter stating that they are “taking action to pay Corporation Tax in the UK – above what is currently required by tax law”. Now, it is often the case that when HM Revenue & Customs investigate companies in a whole series of different areas, a settlement agreement is reached and a tax sum payable that may be a negotiated figure rather than something scientifically calculated according to exact tax rules. So, whilst no tax is voluntary, sometimes commercial reality takes over. There is nothing wrong with this approach. However, it is clear that if Starbucks are prepared to offer £20m then they feel that this is a good result. HM Revenue & Customs should use the powers they already have to check further and it is surprising that they have not agreed with Starbucks in the past a sensible method of transfer-pricing.
In their open letter (which was published in The Times and other newspapers on Saturday 8 December), Starbucks confirmed that they would continue “to open our books to HM Treasury and HM Revenue & Customs on an on-going basis”. How generous of them, given that HM Revenue & Customs have the powers to investigate their books anyway!
Footnote: One thought to ponder – maybe, in fact, Starbucks did not make that much profit in the first place! Either way, HM Revenue & Customs seem to have failed in their duty to apply tax laws sensibly.
Keith Graham – Managing Partner
Westbury Accountants and Business Advisors is an accountancy practice based in London. Westbury have been providing Accounting and Tax solutions to small and medium sized businesses since 1936. Talk to the team at Westbury on 0207 253 7272 or visit http://www.westbury.co.uk.