Starbucks row exposes timidity of the taxman | Analysis

It’s too easy for multinationals to create a loss, or to minimise profits, in the UK via clever tax planning

It’s a victory for consumer power! Starbucks will cough up £10m of corporation tax in each of the next two years on a voluntary basis. So why not haul other suspects in front of Margaret Hodge’s public accounts committee for a duffing-up, broadcast the encounter and wait for the cash to flow into HMRC’s coffers? Corporate empires will quake!

Sadly, the moral of the Starbucks case is very different. What it really shows is the madness of the regime governing corporation tax and the timidity of HM Revenue & Customs. It’s too easy for multinationals to create a loss, or to minimise profits, in the UK via clever tax planning. In Starbucks’ case, the chief wheezes are a 20% mark-up on coffee bought from a Swiss subsidiary that never actually handles the product and a royalty payment of 4.7% of turnover paid to a Dutch operation.

Justin King, chief executive of Sainsbury’s, which pays its full whack, had it right the other day when he said: “Corporation tax is, to all intents and purposes, an elective tax. Quite legally, companies can choose in which country they want to pay it.”

But King was surely being too optimistic when he added that consumers, by voting with their wallets, can make a change more quickly than governments. A few managements, like Starbucks’, will sometimes judge that the heat, or risk of it, is bad for business – but that’s no way to run a fair, transparent and effective tax system, which ought to be the goal.

The best remedy, as Hodge’s committee put it this week, is for the government to “get a grip” on large corporations which generate significant income in the UK but pay little or no tax. The worst offender is not Starbucks, which has made some poor decisions on where to site its shops in London, as its UK boss has argued many times. But its case shows how the tax playing field is tilted in favour of multinationals.

Starbucks and Costa Coffee have similar turnovers in the UK; they pay their staff similar rates; and the price of coffee and milk, the main ingredients are set by reasonably efficient markets. Yet Costa, owned by UK parent Whitbread, paid corporation tax of £18m this year while Starbucks paid zilch, and has paid £8.6m during 14 years of operating in the UK.

One of the committee’s recommendations was for HMRC to establish “clear sector benchmarks for common charges such as royalty payments and intellectual property rights”. That would be a start.

At present there is no rhyme or reason as to how rates are set. Starbucks UK used to pay a 6% royalty but now pays 4.7% after a challenge by HMRC, it was revealed in testimony to the committee, but the company’s official could not explain the assumptions behind the calculations. It seemed to be finger-in-the-air stuff.

The bigger fish are the likes of Amazon and Google, where the argument concerns where the “economic activity” happens. In the case of the former, there ought to be a commonsense answer: when the customers, most employees and the distribution centres are in the UK, the Luxembourg operation is not at the heart of the business. It cannot be beyond the tax system to recognise that fact. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds

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