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Multi-national tax avoidance

22nd November 2012

This week the newspapers have been following the proceedings of the appearance of representatives from Starbucks and Amazon in front of the Public Accounts Committee. The UK based operations of these big multinational companies have managed to avoid paying more than a minimal amount of corporation tax to the UK through a variety of systems which although legal, are causing outrage among many people who see this as unfair, and are looking for the loopholes that allow this type of behaviour to be closed.

Amazon

Despite generating £3.3bn of sales last year, and total sales over the past three years of between £7.6bn and £10.3bn (yielding approximately £100m in corporation tax), in the nine years from 2003-2011, the company has reported a total tax bill of £3m. This has been achieved through a transaction in 2006 that transferred control of Amazon’s UK operations company from its US parent to its European subsidiary, based in Luxembourg. With this transfer, the UK business, employing over 15,000 people managing deliveries, warehousing and other aspects, has been effectively demoted to a service provider for the European company.

The advantage of a business being located in Luxembourg may not be immediately apparent. Their corporation tax rate is equivalent to that in the UK, however their tax system allows a much larger amount of allowable expenses, which reduce the profits liable to tax. As well as this, they can benefit from the lower VAT rates of 3% as opposed to the UKs 20% raised on lucrative ebook sales.

Starbucks

An investigation by Reuters found that since opening in 1998, the company has sales in the UK of over £3bn, yet has paid only £8.6m in tax, and has generated £398m in revenue since 2009, but has paid zero corporation tax. Also, despite accounts filed with Companies House consistently reporting losses, transcripts from investor and analyst calls show that the UK business was regularly described as profitable. There are three main ways that Starbucks minimised their liability;

  1. The US parent company charges its regional subsidiaries a 6% royalty fee for use of its intellectual property (such as brand). This charge reduces the UK tax bill. The fee is paid to Starbucks Amsterdam-based headquarters, with an amount being paid to a unit in Switzerland, which has a significantly lower tax rate on royalty fees.
  2. Investors require some funds generated in the UK to be allocated to other subsidiaries in their supply chain. In this case, the beans are roasted in the Netherlands, and bought from the Swiss unit. The Dutch operation has only reported a small profit, with 84% of its revenue going on buying goods such as coffee beans and packaging, the majority of which come from the Swiss unit. Swiss law does not require accounts to be published.
  3. Inter-company loans – the borrower can set any interest paid against taxable income, and the creditor can be based in a country that doesn’t tax interest highly.

Update: Starbucks now says it expects to pay around £10m in corporation tax for each of the next two years, a move described by tax experts as unprecedented.