After UK Lawmakers accused it of immorally avoiding tax Dec. 3, Starbucks (SBUX) announced Dec. 6 it would voluntarily pay 20-million pounds in UK corporation tax over the next two years.
“Having listened to customers and to the British public, Starbucks in the UK will be making changes which will result in the company paying higher corporation tax in the UK—above what is currently required by law,” Starbucks said in a statement.
Public outcry ensued after British Parliament’s public accounts committee stated the government needed to “get a grip” on multinational companies that exploited tax laws and moved profits generated in the UK offshore.
“Global companies with huge operations in the UK, generating significant amounts of income, are getting away with paying little or no tax here,” Labour Party legislator Margaret Hodge, committee chair,” said. “This is outrageous and an insult to British businesses and individuals who pay their fair share.”
Starbucks was one of the companies singled out by British lawmakers, along with Google and Amazon. Because companies operating in Europe can choose any of the 27 European Union nations to base themselves, they often choose to take advantage of a particular nation with lower tax rates. Starbucks bases its European business in The Netherlands and only pays British tax after first transferring large sums of profit to its Dutch headquarters. According to the BBC, Starbucks has only paid 8.6-million pounds in corporate tax during its 14 years of trading in the UK—and no tax in the past three years—but posted UK sales of nearly 400-million pounds in 2011 alone.
UK chief secretary to the treasury Danny Alexander told the BBC paying tax is an obligation, not “a voluntary choice,” and the government will continue its efforts to tacks tax avoidance.
“Taxation for big companies, or for anyone in society, can’t be, and mustn’t be, a voluntary arrangement,” Alexander said. “Thinking of the tax system as if it is like the church plate going around on a Sunday morning is completely the wrong way to think about it.
“Paying tax is not a voluntary choice,” he added. “It is not something you can just choose to do willy nilly because you think it will please your customers, it is an obligation.”
Alexander’s remarks mirror much of the debate occurring in the US right now as Democrat and Republican lawmakers battle over who should pay what in taxes as the government skirts the edge of the fiscal cliff. One item they tend to agree on, ironically, is the need to reduce corporate taxes.
The US corporate tax rate, at 35 percent, is currently among the highest in the developed world. Many politicians believe the tax rate is responsible for declining American business. Former Clinton administrator and Harvard Kennedy School lecturer Elaine Kamarck agrees.
“The fact that we now have the highest corporate tax rate means that we are now uncompetitive with our trading partners,” Kamarck told the Daily Caller News Foundation. “We’re looking at a situation where the tax status of our big corporations is actually hurting their prospects for increasing job growth in the United States.”
Kamarck said when companies move their headquarters to Europe or Canada to benefit from more favorable taxes, they take many high-paying jobs with them.
“That is not a labor price issue, that is a tax issue,” she said.
Democrat and Republican platforms have included lower corporate tax rates. During the presidential election, President Obama even expressed support for lowering the corporate tax rate.
“Governor Romney and I both agree that our corporate tax rate is too high, so I want to lower it, particularly for manufacturing, taking it down to 25 percent,” Obama said.
But will a lower tax rate help when it’s really legal tax loopholes that companies seek, allowing them to pay little to no tax at all. Amazon, for example, split its European business into several subsidiaries, funneling sales through countries such as Switzerland and Luxembourg. According to Reuters, the company has been able to avoid more than $1 billion in US taxes on revenue of almost $40 billion during the first three quarters of 2012.
Likewise, Google has been able to cut its tax bill by more than $3 billion by moving profits between headquarters in Ireland and the Netherlands to Bermuda. Bloomberg reports Google’s “income shifting—involving strategies know to lawyers as the Double Irish; and the Dutch Sandwich—helped reduce its overseas tax rate to 2.5 percent, the lowest of the top five US technology companies by market capitalization, according to regulatory filings in six countries.”
And tax-avoidance loopholes don’t just exist internationally. Bank of American actually got a $1.9 billion tax refund—yes, that’s money from the government—in 2010, in spite of reporting $4.4 billion in profits. The refund was awarded the same year Bank of American was given a $1 trillion bailout form the Federal Reserve and Treasury Department.
Apple, the most profitable tech company in the world, set up an office in Reno, Nev. to collect its profits rather than its Cupertino, Calif. headquarters. Why? California’s corporate tax rate is nearly 9 percent, while Nevada’s is 0.
And then there’s Starbucks. The $40-billion company told tax officials in the UK, German and France it’s been losing money in the countries, and, therefore, paid no tax. Meanwhile, Starbucks officials told UK investors its UK operation is doing quite well. Starbucks chief financial officer Troy Alstead told Reuters the company “simply used a different measure of profit when reporting its performance to investors and when filing its tax returns.”
But is it really the companies at fault, or the lawmakers who allow such loopholes to exist?
London mayor Boris Johnson, however, defended the companies in an interview with Sky News.
“Imagine that you are the corporate finance director of one of these companies,” he said. “Your job is to look at the law as it stands. Your fiduciary duty to your shareholders is to minimize your tax exposure.”
Kamarck agrees. In fact, she says any comprehensive tax reform package that includes corporate tax cuts will pay for itself by eliminating tax loopholes.
“The White House has said that a lowering of the corporate tax rates should be paid for by closing some tax loopholes or tax expenditures,” she told the Daily Caller. “There are very few tools in the tool kit that government leaders have to produce jobs… and this is one clear way that you could establish greater economic growth and therefore jobs.”