Starbucks Coughs Up More U.K. Tax

It’s doing so voluntarily, but sales have taken a hit since news came out that the coffee chain has been paying virtually no tax in Britain.
Andrew SawersDecember 12, 2012

With U.K. and European Union lawmakers planning tough new tax measures, Starbucks says it will voluntarily pay an extra $32 million (£20 million, €25 million) to the U.K. government during the next two years.

The coffee company, Google, and Amazon all were recently called to testify before a parliamentary committee on why they pay virtually no tax in Britain.

In a letter published on Starbucks’s U.K. website, Kris Engskov, managing director of Starbucks Coffee Company UK, insisted that “Starbucks has complied with all UK tax laws.” But he said the company “will not claim tax deductions for royalties and standard intercompany charges.” Starbucks had been paying royalties worth between 4.7% and 6% of U.K. revenue to its European headquarters in Amsterdam.

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“Furthermore, Starbucks will commit to paying a significant amount of tax during 2013 and 2014 regardless of whether the company is profitable during these years,” Engskov said.

He added, “We’ve learned it is vital to listen closely to our customers — and that acting responsibly makes good business sense.” Sky News recently said that the public backlash against the negligible tax paid by Starbucks had resulted in a significant increase in sales at U.K.-based rival Costa Coffee.

The European Commission is encouraging EU member countries to take action against tax avoidance and abusive tax planning. “Tax planning structures have become ever-more sophisticated [such] that they reduce tax liability through strictly legal arrangements [that] contradict the intent of the law,” the commission said recently.

While EU member states have made “important efforts” to protect their national tax base being eroded by aggressive tax planning, they “are often not fully effective, especially due to the cross-border dimension of many tax planning structures and the increased mobility of capital and persons,” the commission said.

The commission has recommended that member countries adopt a common approach with regard to double-taxation treaties, applicable to companies based in one country and doing business in another. The idea is that if a particular type of income is not taxed in one country, it should be taxed in the other to prevent what the commission calls “double non-taxation” (and what some corporate tax directors refer to as “nowhere income”).

Another, perhaps more significant, recommendation from the commission is that member countries introduce a “general anti-abuse rule,” or GAAR. Under such a rule, national governments would ignore any “artificial arrangement or an artificial series of arrangements which has been put into place for the essential purpose of avoiding taxation and leads to a tax benefit,” the commission recommended.

The U.K. government, which has been debating the idea of a GAAR for more than a year, has just published draft legislation it expects to take effect next summer. The proposed law includes provisions for creating an advisory panel designed to prevent the GAAR itself from being abused by U.K. tax authorities.

Andrew Sawers is editor of CFO European Briefing, a CFO online publication.