On Friday evening Ben Saunders posted a really interesting reply to my post arguing the case for name and shame campaigns. If you haven’t already, you should go read it.
It’s interesting for two reasons. First, because Ben’s been thinking hard about Starbucks’ tax structure and the practical implementation of its dramatic commitment last week. Ben thinks that the tax planning jumped on by Reuters, the Public Accounts Committee and UK Uncut was actually pretty inefficient, and Starbucks could probably have been saving quite a bit more on its global tax bill. He also has some interesting things to say about what the company is planning to do now.
If I’d been UK Uncut, I’d have occupied someone else on Saturday. My own view is that, regardless of the sums involved, Starbucks has taken a qualitatively huge step by making a concession in response to the prevailing public opinion that its tax affairs were not responsible. No other company has done that, and campaigners should recognise how much Starbucks stuck its neck out. But, speaking to friends who’d been on the protests, they were looking at Starbucks’ £20m commitment in the context of all the tax it hasn’t paid in past years, rather than the next two, and taking the view that it’s too small a figure.
Saturday’s action brings us to the second interesting point about Ben’s post – the bit where I disagree with him. I think probably our disagreement explains a lot about the difference in the outlooks of tax professionals and campaigners. Ben says that when people start to boycott a company because of its tax planning:
At that point you are delivering a form of punishment for a transgression of some boundary that the individual didn’t know was there.
Sure there is no hard, tangible boundary. But Ben is responding to my post in which I argue that tax planning entails a choice, to decide how aggressive a structure to adopt, within the law. It’s not impossible for companies to ask themselves, “is this ethical?” or even, “will this look ethical when we explain it?” when setting their tax policies. Indeed, I remember the Financial Times’ Vanessa Houlder remarking at a public event years ago that, “this issue is ripe for a Brent Spar type campaign.” However fuzzy the boundary of public acceptability may be, not considering it when designing a tax structure is a choice, not an inevitability.
There’s some language a bit later in Ben’s post that I found particularly interesting:
They’ve probably paid more tax then they ought to and then been dragged before Parliament for avoiding tax.
It’s the use of the word “ought” that caught my attention. That’s a value statement,which appears to equate (1) the minimum that Starbucks could have paid if its tax planning was perfect, with (2) the amount that it’s right and proper for it to pay.
Arguably, the whole reason that we’re having this debate is that the legal framework has caused (1) to diverge too far from the public’s view of (2). I think this was a time bomb waiting to explode. I agree that defining (2) is a complex issue, but I don’t subscribe to the view that, absent a consensus on what (2) looks like, it defaults to (1).
Either the public and the tax profession need to have some serious dialogue and settle on a common view of what (2) looks like, or else (1) and (2) need to be brought closer together by tightened up the law, whether through a GAAR or through a better approach to transfer pricing.
The tax profession doesn’t seem to accept that the public opinion of how much tax companies “ought” to pay is a valid contribution to this debate. I think that’s a shame.
Martin Hearson 
Keep it coming gents. I’m rather enjoying that this debate can be conducted in cyberspace in quite civil terms. Very informative too.
Isn’t one of the difficulties with asking the public how much should be paid by a company the lack of understanding of what to business people look like reasonable, commercial approaches?
In Starbucks’ case, it surely makes sense for the group to have a central coffee buying operation. After all, their global 2011 accounts show $1 billion of forward purchases and their CFO said they have a team of 30, making a net margin of 7-8%. Almost all countries would insist that an operation of that sort makes an overall profit – and 7-8% doesn’t sound outrageous. Yet some people regard this commercial operation as tax avoidance. We can imagine that tax might have been a factor in choosing the location, but probably not the only factor, given that according to Starbucks’ CFO, 75% of the world’s coffee is traded in Switzerland. What should we do about a commercial operation in a lower tax location (12% vs. the UK’s current 24%)? Why should the Swiss, in this case, let the UK tax something that takes place in Switzerland?
The UK company’s accounts to October 2011 show total losses of £240 million and, assuming Reuters did add up sales correctly, it sounds as though the franchise fee would be £180 million (£3 billion at 6%). The CFO said that half the franchise fee went back to the US (from The Netherlands) and was taxed in the US, at a higher rate than in the UK. He said that the work supporting the franchise fee took place in the US. Despite the PAC’s silly comments, the company will no doubt know best how to develop its worldwide business. The Netherlands provided some EMEA management, so lets assume that accounts for £2 million pa. That leaves some £62 million as an ‘excess’ payment. If we add that back, the UK company still has a loss of £178 million.
Starbucks UK borrows some money from the group and pays about 5% pa for that – about £2 million in 2011. Despite the view of the Public Accounts committee, 5% isn’t an unreasonable rate; lots of businesses might be happy to pay that.
However you cut it, surely Starbucks has just run a loss-making business in the UK? The problem is that the public doesn’t seem to understand that.
Hi Bill, thanks for your comment.
I think you’re right both that the public sometimes misunderstand what is tax avoidance (I’ve written before on clarification of terms), and that the details of the Starbucks case are a little less straightforward (Ben has written on this).
But I don’t think you can maintain that there is never any tax planning, arbitrage, or similar practice that isn’t worth some public debate. In Starbucks’ case, for example, I think it’s fairly clear that some of the structure is very advantageous from a tax perspective (incidentally in Switzerland it depends which canton you’re in, but from what I’ve seen it’s more likely to work out at 8%). Why is most of the world’s coffee traded in Switzerland? I think it has something to do with that, and the 7-8% net margin.
On your broader point, I suppose it’s true that some complexities of the system will just be too tricky for lay people (of which I am one) to follow. But at the same time, if the system continuously produces outcomes that are intuitively perverse, the conflict becomes one over what principles should underpin the system. You can turn it around: the point is not that the public have misunderstood how the tax system works, it’s that those responsible for the system have lost touch with what those who elected them think the system should be achieving.
Martin – let’s assume that the Swiss location is completely for tax reasons. My point is simply that it sounds to me that there is a real commercial activity here, of value to a worldwide coffee group. The Swiss want to tax it, since its based there (the 12% rate came from the evidence to the PAC). If the UK, France, Germany etc. also tax the same 7-8% profit, there’s double taxation. There would be exactly the same answer if the coffee activity was in the UK. The UK would then want to tax the profit and, if France and Germany wanted their slice, double taxation would result. Why would it be logical to allocate profit to France, Germany just because they bought some coffee from the central team?
Perhaps the public might find it easier to consider if they think about a UK-based company which designs/makes stuff here and then sells it overseas. Shouldn’t that be ‘our’ tax revenue?
Hi Bill, oops, you’re right about the 12%!
I wouldn’t start from an existing corporate structure and debate how the profits should be attributed, because, as you say, there are rules for that. Don’t you think that the decisions about how that structure is set up, such as the choice to locate the procurement hub in Switzerland or to put the IP in the Netherlands, will have been taken with tax considerations in mind? If so, then it’s fair comment to criticise the decision.
As for your question about how much profit should be allocated where, isn’t that precisely the stuff of international tax negotiations, through treaties, transfer pricing standards and the like? I hope we can get MPs and the public more interested in them.
I really enjoyed reading this and I think that it’s a really good point about language used.
As somebody who has worked as a tax adviser all his (proper) working life, I’m quite aware that my opinions have been strongly shaped by that in some respects. However, I’ve moved around a bit and worked on the taxation of MNEs down to all levels of owner-managed businesses.
I think there are advantages and disadvantages in all structures, whether it is a MNE or a UK group. One of the distinct disadvantages of MNEs is the possibility of stranding losses in a jurisdiction, as I described. This basically means the group is taxed on more profit than it has made.
Starbucks as a global entity may well have this issue. Their group rate is higher than other US MNEs with similar structures, I have heard.
Anyway, with regards to the ‘ought’ I guess my natural comparison is with a UK group like, say, Sainsbury’s. The points raised by Justin King are all valid points. But it is worth remembering that if Sainsbury’s set up a UK subsidiary that makes losses, they can group relieve those losses to profitable UK companies.
Where you have an international group, losses get stranded, so MNEs do have disadvantages as a result.
Putting the rate that profits are taxed at, I referred partially to what Starbucks taxable profits ought to be, were you to compare it to a UK group. In this respect, you might be able to see that amending the intra-group transactions can be viewed as compensating for a disadvantage.
The thing is, large corporations don’t really get, or often deserve, sympathy because they are in a position to exploit advantages too. Now, I don’t actually think that Starbucks were exploiting an advantage (the differential in tax rates). I actually think they didn’t compensate for the disadvantage of creating taxable profits elsewhere.
I know that I’m thinking of a mathematical optimisation of tax liability, and I know that a company could only achieve this by manipulating their profits. However, I don’t think Starbucks manipulated their profit.
They look to have stuck to a method of apportionment because the principle looked fair, even though it was to their detriment.
Now, this brings me to the other part of the ‘ought’ I deployed…
Emotionally, my gut determines what is avoidance by reference to intention of the taxpayer. That’s not the technical position, and I don’t think I ever use it that way, but it’s the ‘smell test’ you keep hearing.
If Starbucks were intending to reduce their tax liability beyond what they felt was a fair principle at a previous point in time, they certainly should have reduced their intragroup transfers so that more ‘profit’ appeared in the UK.
In playing Devil’s advocate I suppose I was thinking that if Starbucks had the intention of minimising their tax liability they ought to have been reducing payments overseas.
It’s quite difficult to know exactly what you meant when you used a particular word sometimes. But it provides a bit of a snapshot. All those things were going through my mind at the time….
I think that the tax profession does accept that the contribution of how much tax should be paid is a valid concern. However, the tax profession will probably start off by saying that the amount of tax that ought to be paid is based on the amount of profit.
If Parliament want to tax sales, they tax VAT, which impacts directly on the consumer sometimes, but the business (including unincorporated businesses) will take a share of the cost of that.
The same principle is true for PAYE, besides employer’s NICs. Likewise, employers’ NICs are as much a tax on the employee as the employer, from that perspective. I’ve thought before tha tax actually occurs on the interaction between taxpayers, not the taxpayers themselves.
That’s all a bit Zen and the Art of Motorcycle Maintenance….
Ultimately, for me, it comes back to getting a balanced view of what drives businesses, including tax (especially tax), and how various country’s authorities try to drive their behaviour.
After all, not only is there a mathematically correct ‘optimal’ amount of tax for a company, there is an ‘optimal’ rate of tax for the authorities.
Ramble over…
As a tax professional, I tend to discount the public opinion of how much tax companies “ought” to pay because so far I’ve not seen a reasoned opinion from the public or the media. Or at least, they boil down to:
– Starbucks takes lots of money over the counter. Surely that must be taxable!
If there is any reasoning, it seems to take the form:
– Starbucks pay no tax, but I do
– They’re a big multinational company and I’m a normal person
– So the reason they pay no tax must be because they’re a big multinational company
– So they must be abusing the system, because that’s what BMNCs do
Anything beyond that seems just to be “I don’t understand X, so X must be a dodgy trick done to reduce tax”, whether this is capital allowances, royalties, not being UK-resident, or other such artificial deceits.
Mind you, I’ve only ever seen opinions that they’re not paying enough: I’ve not yet seen anyone suggest what they should have paid. I think this is because anyone who knows enough to do the computations very quickly realises that if you add back all the stuff you’re objecting to the taxable profit is still nil. So the only way to claim they should have paid tax is to look at the adjustment (royalties, markup on beans, etc) and say that this particular item might save tax of £X – but taking items in isolation is never going to give you a sensible answer.
I agree that public opinion should be taken into account, but I think for tax that’s always going to be very hard unless you can get into some sort of open debate so public opinion can be an informed one. Every single objection I’ve seen to Starbuck’s tax position falls away as soon as you prod it, and I think that if people realised that everything they’re calling for is already taken into account then public opinion would moderate quite significantly. For example, I’ve seen people saying that there should be a rule that any inter-company transactions should be done at the price you’d pay some on the open market, and that royalties should be agreed with HMRC before get a deduction for them, and that there should be some sort of international agreements over where profits are made.