This week is the start of term at LSE, so I’m back blogging. While I was away, Chris Lenon started his own blog. Lenon was Head of Tax at Rio Tinto, and then chaired the tax committee of BIAC, the industry group that lobbies at the OECD. We used to bump into each other quite a bit, and every time I log into LinkedIn it now asks me to endorse him with the question, “does Chris Lenon know about tax?”
Chris’ first post was about Starbucks, and I found it very interesting. He makes a point that I’ve also heard from other former tax officials (Lenon used to work at the Inland Revenue):
Starbucks has allegedly not made taxable profits in most of its 15 years of operations in the UK. In the real world companies can sustain start up losses for a period of time (say 3 to 5 years) but after that one has to question whether they would perservere trading at a loss, or cut their losses? It is questionsable whether a subsidiary which continues loss making beyond start up is operating at arms length as non connected parties do and it would certainly pose questions about its transfer pricing.
Over at Accountancy Age, Ben Saunders and Richard Murphy are debating whether the individual Starbucks payments were priced at arm’s length. Ben says that “Starbucks have unconnected third party licensees, an almost ideal situation for determining an arms-length price.” But perhaps there is a simpler jumping-off point, which is the business as a whole, not the individual parts and prices. And if you start there, it seems obvious that a company operating at arm’s length would not sustain losses for 15 years (even with a few profitable ones).