Benjamin Franklin wrote that, “In this world nothing can be said to be certain, except death and taxes”. But the world of tax is increasingly less certain, especially if the recent controversy about the tax payment practices of Starbucks and others is anything to go by.
Observing Margaret Hodge and the Public Accounts Committee attempt to grapple with international corporate tax is a bit like watching a man tie his shoelaces while wearing boxing gloves; clumsy and ill-informed. The only difference is that watching the man with the boxing gloves is amusing.
My anguish doesn’t derive from what the PAC are trying to do in challenging the way global corporates organise their tax affairs – I want multi-billion pound international organisations to pay their fair share of tax. And I do have more than a little disquiet at the fact that Starbucks can tell its investors that its UK organisation is highly profitable at the same time as continuing to post tax losses. But having spent a number of years working in a global corporate, some of that time in the tax-intensive environment of cross-border corporate reorganisation, I think I’ve gained a level of practical insight and experience in the area. And I despair at the PAC’s handling of the issue.
One of the complaints made by the PAC is about the fees Starbucks UK pays its group companies for use of intellectual property (brands) and commodities in its supply chain (coffee beans). Tax systems globally say that when one company supplies a group company with goods or services cross-border, the commercial arrangements for those supplies must be at arms’ length (and tax computations will be made as if they were at arms’ length even if the reality is different). This stops companies from making supplies to each other at unrealistic rates – without it, company A in a low tax country could say sell coffee beans to a sister company B in a high tax country at an artificially high price – profit goes up in low tax country A and goes down in high tax country B, so the group as a whole pays less tax.
So by stopping this kind of practice, tax treatment of so called “transfer pricing” is a good thing. You’d therefore expect Starbucks UK to pay a fair market price for its coffee beans and have no different tax treatment just because its supplier is in common ownership. Of course an inter-group supply contract lacks a measure of bargaining tension compared with a true arms’ length arrangement (although anyone who says it lacks any tension clearly hasn’t worked in a global company; inter-necine doesn’t cover it). But that isn’t evidence that the system is broken, it’s evidence that the individual arrangements need scrutiny, which is part of the normal routine of tax inspection.
The idea behind a brand levy is that if the parent company has incurred lots of expenditure acquiring a brand, registering trade marks and building up goodwill in the brand through advertising, the subsidiary company should pay its fair contribution towards these costs, as it has benefitted from them through higher sales locally. (Why else go to Starbucks if it isn’t for the brand experience? Other coffees are available.) So if the subsidiary company doesn’t pay a brand fee at all it will have received all of these benefits without paying, which is not what you would get between two unrelated companies operating at arms’ length – and so its parent company could be taxed as if it had received whatever level of fee its tax authorities think is appropriate. The concept of a brand fee seems difficult to argue with – every franchise business is predicated on it – if Starbucks UK were wholly independent of the rest of Starbucks it would expect to pay a licence fee to Starbucks for the use of the brand.
So again the issue here isn’t one of principle but of application. How high should the brand fee be? The added element here is that, while the coffee beans can only be supplied from the country where they are physically warehoused / roasted / processed, the bundle of intellectual property rights behind a brand can be moved around more easily. So controversy arises where the intellectual property ownership is placed offshore in a low tax country in order that the brand payments all land up somewhere convenient. I’m not sure whether that is a case of the corporations’ being villainous or simply taking advantage of some countries’ willingness to offer low tax regimes (red carpets for wealthy French businessmen, anyone?). And it doesn’t make any difference to the UK tax take in any event.
So it is certainly true that differences in international tax rates provide opportunities for international groups to use standard transfer pricing approaches to influence where they pay tax and as a result how much. But I am not convinced that the PAC has picked on the right target in the corporations rather than examining either the global system or at least the UK legislative approach.
Just as companies compete with each other, so of course do countries by offering different tax treatment – sometimes offering favourable treatment to companies and sometimes treating them as a captive target. If anything I’ve found individual countries’ particular approaches to tax caused more difficulties than opportunities. Designing corporate restructures in such a way as not to trigger a payment for some long-lost tax event is a bit like one of those fairground games where you have to guide a steel loop around a wavy wire without touching it, only the real life version came with more headaches and to the detriment of running a business as a commercial enterprise creating jobs and returns for investors. Given the prevalence of snakes in the tax world it is hardly surprising that corporates should look out for ladders.
But perhaps my biggest issue with the PAC and the like is that they assume that companies are free to throw away money which would otherwise be available to plough back into the business or return to investors, by declining to use appropriate and available tax structures. In fact any directors who did so might be in breach of their fiduciary duties and of their statutory duties (under s170 Companies Act, the so-called “six pack”). That section lists the factors which the directors must consider when making decisions about the company – employees, suppliers, shareholders – environment and the community even – but nothing about the taxman. So if it is now so important to parliament that the taxman gets a fair crack of the whip, why Didn’t parliament write this into s170? It would have been easy to write in a seventh factor (even if a “seven pack” isn’t quite as ripped a concept as a “six pack”) obliging the directors to take into account an obligation to pay taxes fairly; it wouldn’t have placed paying tax first but it would have put it on an equal footing with all other considerations.
We might expect the UK in due course to follow a number of other leading economies in adopting a general law prohibiting certain types of avoidance. The advisory panel on the General Anti-Abuse Rule appointed following the Aaronson enquiry is looking at just this issue. And if there is a legal requirement to adopt or avoid a course of action, the directors will be free from criticism by following it (although I still think there is a role for an amended s170 if only to provide balance in those cases which are not prohibited by any new Anti-Abuse Rule but are still marginal). But I doubt this new Rule can represent a silver bullet; the devil in group tax lies in the detail, and the question of whether Starbucks UK pays too much for its coffee beans, or should be allowed to deduct brand royalties paid to a Dutch company, will always be one of fact. Facts and politicians make occasional peace with one another and the PAC does seem to have been somewhat selective with its facts on this issue.
So much for taxes. I really don’t want to think about the PAC engaging with death…