The party’s over for tax dodgers

Earlier this month, global coffee chain giant Starbucks took what it described as an “unprecedented step” of pledging to pay up to £20 million (Rs 176.5 crore) in corporation taxes in the UK over the next couple of years, whether or not the company made a profit, by not claiming tax deductions for royalties or payments related to inter-company charges.

The company insisted while it had paid the level of taxes required by the law it had “listened” to its customers. “It has become clear that you expect more from us than just to follow the letter of the law.”

The announcement came in the wake of huge public and political pressure on Starbucks, alongside Google and Amazon, over the structuring of their businesses, which meant that they paid minimal amounts of corporation tax in the UK, despite having sizeable operations in the country.

Starbucks in spotlight

Starbucks, which has 760 branches across Britain, has paid just £8.6 million (Rs 76 crore) in corporation tax over the past 14 years.

The company’s explanation — that high rents had meant that it had struggled to be profitable in the country and that it had to make royalty payments to its European headquarters in the Netherlands — has failed to wash with a country in the midst of a major austerity drive, involving tax increases and substantial public spending cuts.

All the more so because on several occasions — according to documents cited by a British parliamentary committee — senior executives of Starbucks had boasted of the huge success of the company’s UK operations, and spoke of taking the lessons learnt to the US, not to mention that it had continued to open up new stores.

In November and December, Starbucks branches across the country were targeted by protestors from the UK Uncut campaign group, which pointed to the consequences of the ability of companies to siphon their profits abroad.

“If the government took strong action to stop tax dodging by companies like Starbucks we could easily afford to prevent the £5.6 million being cut from violence against women services, 25 per cent cuts for Sure Start [children] centres and the further £10 billion benefit cuts,’ the group said.

“We are not accusing you of being illegal: we are accusing you of being immoral,” said Margaret Hodge, chair of the House of Commons influential Public Accounts Committee to executives of the three US firms, who were called in to Parliament to testify in mid November. “You pay no taxes here and that really riles us.”

In a recent blog posting, one anonymous tax advisor noted that the established principle of tax planning in Britain, dating back to as long ago as 1929, namely that companies and individuals had the right to structure their financial affairs as tax efficiently was no longer accepted. “We have reached a stage where doing this is classed as immoral and unethical.”

In Britain, it’s not just companies facing public wrath over tax arrangements, even when they abide by the law.

Earlier this year, Jimmy Carr, a popular comedian, was forced to make a public apology and pledge to alter his tax arrangements, routed through the island of Jersey.

Even Prime Minister David Cameron intervened, describing the use of schemes such as Carr’s as “morally wrong.” Meanwhile, the Chancellor of the Exchequer has pledged to put more funds into combating both tax avoidance and tax evasion.

Internet cos in the net

Elsewhere in Europe, governments are also fighting to claw in much needed tax revenues, particularly with Internet companies who have gained a reputation for structuring their assets in a way to take advantage of the differential tax rates across Europe.

Google is currently enmeshed in a battle with French authorities over its tax arrangements (Google reports much of its European revenues through low tax Ireland), while Amazon has received a request for $252 million from the government. Italy too has been pursuing large international firms, including Google, Facebook, Amazon and Apple.

However, it’s not just the companies that are the target of criticism, with campaigners rightly pointing out that had governments done their job in setting up and enforcing suitably rigorous tax systems, they wouldn’t end up in this situation in the first place.

The ability of companies to minimise their tax payments was highlighted in a recent Reuters report. It revealed that corporation tax paid in Britain had fallen by 21 per cent since 2001, despite the fact that companies’ gross operating surplus had risen to 65 per cent over that period.

The European Commission estimates that around €1 trillion a year is lost to the European Union as a result of tax evasion and tax avoidance.

The trouble for Europe has been that, despite government pledges to toughen up the system, governments have been torn between satisfying public demands for a fairer system, and fears that a more rigorous system could put off international investors. (The British Prime Minister’s comments at the G20 meeting in Mexico welcoming French businesses to Britain following the French government’s decision to raise income taxes is just one example).

Aware of the risks of inaction, the European Commission laid out plans earlier this month to encourage European governments to step up their anti-tax avoidance measures — including action against tax havens by creating a black list, and removing domestic technicalities that companies were able to use to avoid tax — suggesting that the process be monitored by the Commission itself.

“An EU-wide response is needed to close loopholes and ensure that no country loses out financially addressing the problem,” it said.

How far countries, preoccupied more with cutting public spending than corporate tax revenues, will take the Commission’s proposals remains to be seen.

In the meantime, a company’s tax obligation beyond the letter of the law is likely to be at the forefront of the public debate in Europe through 2013.

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