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Coffee giant Starbucks is to take the unprecedented step of paying around GBP20m (USD32.2m) in extra tax to the UK after coming under fire for failing to pay any corporation tax in the past three years.
Starbucks is just one of several multinational companies to have experienced mounting hostility in past weeks over its UK tax affairs. In the vanguard has been parliament's Public Accounts Committee (PAC) which earlier this week issued a highly critical report on HM Revenue and Customs's (HMRC) ability to deal with large corporations which generate significant income in the UK but which appear to pay little or no tax there.
In Starbucks's case, it emerged that while the corporation has around 760 outlets in the UK, it had paid no corporation tax in the past three years, and a total of just GBP8.6m in 14 years of trading there. Committee Chairman Margaret Hodge slammed the use of "aggressive" tax planning as "immoral" and warned that HMRC appeared to be both lacking determination and demonstrating leniency in its approach. The department was urged to "get a grip" on the situation. There have been calls for boycotts of Starbucks coffee, with Hodge and Chief Secretary to the Treasury Danny Alexander taking part.
Now, in a surprising move, Starbucks has announced that it will make changes that will result in it paying higher corporation tax in the UK, above what is currently required by law. Kris Engskov, managing director of Starbucks in the UK told the London Chamber of Commerce that customers expect the company to do more when it comes to tax, and that, consequently, "we are going to take action and do something about it." Engskov explained that Starbucks is proposing "to pay a significant amount of corporation tax during 2013 and 2014 regardless of whether our company is profitable during these years."
It is Starbucks's alleged unprofitability in the UK that has resulted in its paying little or no corporation tax, with Engskov remarking that the "UK remains the most competitive espresso market in the world and we have not performed to our expectations over the many years we’ve been in business here." While Starbucks is "still working through some of the calculations," Engskov anticipates that the company "could pay or prepay somewhere in the range of GBP10m in each of the next two years in addition to the variety of taxes we already pay."
In addition, Starbucks will not claim tax deductions for royalties or payments related to intercompany charges to 2014. Further, even if Starbucks is unable to generate substantial profits in the years beyond 2014, it will consider extending this commitment until it is "paying corporation tax at a material rate."
Stressing the importance of the move, Engskov said: "This is an unprecedented commitment. It hasn’t been done before. So there is no procedural guideline for how to do it. As such, I want to clarify something that has been the subject of inaccurate reports this past week: despite the fact that we have a consistent and ongoing dialogue with the tax authorities over our business affairs here in the UK, we have not yet shared this particular proposal with HMRC."
Reacting to the news, Conor Delaney, tax lawyer at Milestone International Tax Partners, commented: “Strong arm tactics by Margaret Hodge the Public Accounts Committee appear to be paying off." He predicts that Google and Amazon will be under pressure to follow suit, but is concerned about the broader ramifications of the initiative. Delaney warned, "where does this end, and at what cost to the UK’s reputation as an investment destination for multi-nationals?"
Chancellor George Osborne announced earlier this week that HMRC will receive GBP77m in new funding from the Treasury to help it crack down on offshore evasion and avoidance by wealthy individuals and by multinationals. According to the Treasury, this should result in an additional GBP2bn per year in tax that it says would have otherwise gone unpaid. Additional staff and legal support will be given to HMRC to speed up its work in identifying and challenging multinationals’ transfer pricing arrangements, and to further strengthen HMRC's risk assessment capability across the large business sector. The aim is to ensure that multinationals do not shift profits out of the UK and therefore pay the tax due in accordance with UK tax law.
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