“Many businesses aren’t making a full contribution to the country from which they take so much. Starbucks, for example, is a notorious example of this phenomenon”
What phenomenon? Business not making profit does not pay a tax on the profits it isn’t making. This is notorious in what manner?
This was in fact investigated in depth. There were two major claims that Starbucks was sending profits out of the UK by two methods. The first was royalties for the brand to Holland. HMRC had approved their calculation. And a subsequent EU investigation showed that Starbucks UK paid the same royalty as Starbucks franchises in other countries also had to pay. For their not to be doing so would in fact have been a breach of the transfer pricing rules. Something we’ll come to in a moment.
The second was that they paid a 20% margin to Switzerland to the unit that bought the coffee beans. One point is that coffee beans make up perhaps 5 p of that £4 latte. Meaning that it’s unlikely to have much of an effect. However, not to be making such a margin would again be in breach of the transfer pricing rules. For this is how the international tax system works.
If you’ve got various subsidiaries of the one company trading with each other then in order to stop profit shifting they are supposed to price transactions at the “arms length price”. That is, as if they are not co-subsidiaries, but are independent companies. So, Starbucks UK should be buying coffee beans from Starbucks Switzerland Coffee Bean Brokers (whatever they were called) at a similar enough price to what they would buy them from an independent bean broker would demand. And yes, Switzerland is the world’s centre for coffee been brokering and no, none of the independents do offer to trade with you if they make no margin. It would actually be illegal for Starbucks not to pay a margin on such bean purchases because that would not reflect arm’s length pricing. and the same goes for the brand rights and royalties. That they were paying the same amount they charge franchises is right and proper, not to do so is illegal.
Finally, as Vince Cable pointed out, once you added these back in Starbucks was *still* making a loss in the UK. So no tax would have been payable even if.
Companies that don’t make profits don’t get charged a profits tax on the profits they’re not making.
As to why they weren’t making a profit the first chapter of Tim Harford’s “Undercover Economist” gives a lovely explanation. It’s straight Ricardo on rent. Location is everything, so all the profits of the coffee trade go to those who own the properties. And yes, landlords really do pay UK tax on their profits. Starbucks simply paid too much for too many prime properties.
It’s fine for people to have differences on how corporations should be taxed, of course it is, but it does help if people are actually informed. Who knows, next we’ll be told that Vodafone owed £6 billion in UK tax (it didn’t, an invention by Richard Brooks at Private Eye) or that Margaret, Lady Hodge, didn’t use the Luxembourg Disclosure Facility (she did, she’s said she did).
Letter sent to the editor of CapX