Wake up and smell the profit!

Starbucks zero %I listened to the Today programme on BBC Radio 4 this morning as Jim Naughtie interviewed Margaret Hodge MP, the chair of the Public Accounts Committee in parliament, and Bill Dodwell, head of tax policy at Deloitte, one of the ‘Big Four’  audit, tax, consulting and corporate finance service firms, along with PricewaterhouseCoopers (PwC), Ernst & Young, and KPMG.

During the interview, the discussion turned to Starbucks, whose tax and corporate services adviser is Deloitte. The point was made that global companies are driving a coach and horses through tax legislation, allowing them to escape paying their fair share of the tax burden by using ‘transfer pricing’, which refers to internal transactions within global businesses. Prices are charged for goods and services between businesses that are under the same overall ownership but operating in different countries. Clearly different nation states have different tax implications for such businesses. As the prices are set by those within an international corporate structure, it is wholly possible that they do not reflect the price that would be found externally in a competitive market. Clearly this ‘inter-trading’ gives tax authorities an enormous headache: Multi-national corporations have the ability to set costs for goods, known as transfer prices, on cross-border transactions from one jurisdiction to reduce taxable profits in another jurisdiction.

Jim Naughtie broached the subject of Starbucks, citing their record of loss-making and the fact that they paid just £8.6m in corporation tax in the UK over 14 years and made no profit in the last five years. Starbucks had made over £3bn in UK sales since 1998 but had paid less than 1% in corporation tax. The coffee giant had posted losses in each of the last five years and therefore did not have to pay any corporation tax, yet executives told analysts that the UK business was ‘successful’, ‘profitable’ and they were ‘very pleased with the performance’.

Bill Dodwell argued that Starbucks made losses because “their rents are much higher than their competitors and their staff costs.” He was quite serious when he claimed that Starbucks had been a loss-making venture for many years. James Naughtie asked him “Do you think that Starbucks does not make a profit in this country?” to which Dodwell replied “Yes”.

Tax campaigner Richard Murphy from Tax Research UK said: “Starbucks are playing the game here. This is tax avoidance, they’re doing nothing illegal. That doesn’t mean to say it’s right, in my opinion” .  He said it showed that the current rules on tax did not work and it was up to politicians to put it right. “When we have a tax system that lets very large companies like Starbucks be on our High Street and pay no tax and are competing with small locally owned businesses who are paying tax on all their profits, then there’s something very clearly wrong with our tax system.”

Starbucks is not alone in legally avoiding its obligations. Facebook was recently criticised for paying just £238,000 in tax last year in the UK despite estimates of making £175m in sales, while earlier this year Google was also criticised for paying just £6m tax on UK revenues of £2.3bn.

You can listen to the interview in an extract from the programme here.


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