In 2013 and 2014 Starbucks will not claim the tax deductions for royalties or payments
related to our intercompany charges for interest and mark-up on the coffee we buy.
- Kris Engskov, Managing Director of Starbucks UK
So today it was announced that international coffee bar chain Starbucks has paid £5million in corporation tax and will pay a further £5million later this year. This is more tax than they have paid in the last fourteen years of operating in the United Kingdom. This move comes after a good deal of anger was directed at the chain by the customers and the government.
The idea of corporation tax, in the UK, is that businesses pay 26% of their profits to the treasury. Given that company accounts are publicly available you might have thought that this would be pretty simple, but people are more clever than that. There are all sorts of tricks that companies can use to pretend their profits are less than they really are. For example, Starbucks UK pays royalties to another Starbucks company incorporated somewhere where taxes are lower. This is perfectly legal. Of course, if those royalties happen to measure more than the profit they would otherwise have made in the UK, it means that they are not liable to Corporation Tax.
It seems pretty obvious to me that this should not be legal. Whilst there might of course be valid reasons for a company to pay royalties to another, this is clearly not it. A company that was consistently making a loss to the extent that Starbucks apparently is in the UK would either have folded years ago, or compelled the royalty holder to lower their prices. The fact of the matter is that Starbucks as a global entity does make a significant amount of money from having its business in the UK. Otherwise they would not stay in operation here. At the moment though, there is no mechanism for the treasury to reliably obtain this figure. The deeply unsatisfactory solution so far has been to put pressure on Starbucks to voluntarily determine how much tax it wants to pay.
The thing is, I really don't see why there isn't such a mechanism. Her Majesty's Revenue and Customs is full of the sort of clever people who could estimate the amount of money Starbucks makes in the UK, and they could use this to send them a bill. Starbucks would be free to dispute it, but ultimately, it's unlikely they could seriously argue that they have made no money through their UK presence. If we are clever about it, we could come damned close to making them liable for tax on what they actually earn here.
Now the usual complaint against audacious schemes to make the wealthy pay their taxes is that, barring a serious degree of international cooperation, they will just up and leave. In Starbucks' case, I do not really believe this. Provided we are careful to genuinely tax profits, then they will not make more money by not exploiting the UK market. However, I would like to suggest something more radical. If Starbucks continue to refuse to pay their share of tax, proportionate to the benefit they gain from operating in the UK, we should kick them out.
If Starbucks wants to exploit our market, then they have to pay their dues. If they refuse to do so, claiming that they are not deriving a benefit from being here, we should ask them to leave. The best thing about this is that they cannot really complain; they claim they don't make anything from being here in the first place! Of course, they might argue that they contribute in other ways, creating jobs or providing a unique and important service, and sometimes this might be sufficient mitigation to allow a company to stay. In Starbucks case though I don't think these arguments hold water. There are plenty of coffee-chains who would, I am sure, be more than happy to take over Starbucks' and pay taxes for the privilege.
In the greater scheme of things, this incident highlights a greater problem. Since the 1980s there has been a consensus that taxes are an imposition and there is nothing immoral in minimising them. This attitude needs to change. Taxes reflect the fact that wealth is unfairly and unevenly distributed, with individuals and companies able to make significant sums through luck rather than exertion. In my view, wealth amassed through luck should be used for the common good, and allowances can be made where it is privately put to charitable use, but simply avoiding tax for personal or corporate gain has to be brought to an end.