There’s so damn much going on in politics and economics right now–national security, immigration reform, jobs–that it’s easy to lose track of matters that remain critical even if they’re no longer in the spotlight, like tax avoidance by multi-national corporations.
My colleague Chye-Ching Huang has a recent post up on three hyper-caffeinated “accounting techniques” that Starbucks uses to shelter profits. You will recall that Ms. Huang is the terror of the territorialists, and she uses Starbucks as yet another example of why this “solution” to tax avoidance by MNCs is the ultimate non-solution (riffing off of some work of the international tax expert Ed Kleinbard).
Royalties. Starbucks UK paid Starbucks companies in other countries (such as the Netherlands) huge royalties for the right to use the Starbucks brand, store design, and other intellectual property. As Kleinbard points out, Starbucks is generally viewed as a traditional retail business that sells tangible goods and services; if it can shift large profits offshore through royalty payments for intellectual property, then any company can do it.
“Transfer pricing.” Starbucks UK paid what appear to be inflated prices on coffee beans to Starbucks-owned bean companies in low-tax countries. [which they can then deduct as a business expense.]
Interest payments. Starbucks UK took a big loan from its U.S. parent company and paid large amounts of interest on it. (As Kleinbard details in the paper, however, this doesn’t mean that Starbucks paid significant U.S. tax on that interest.) [Since interest payments are deductable from taxable income.]
The United Kingdom has a territorial system, so it generally only taxes profits that a corporation earns in the UK. UK policymakers and citizens have been outraged to learn that Starbucks UK, despite capturing nearly a third of the UK coffee market in 2011, paid no corporate tax in 2011 (or in 12 of the 13 years before that).
If the United States adopted a territorial tax system, multinationals would have a similar incentive to move U.S.-earned profits to tax havens and low-tax countries rather than report them – and pay tax on them – in the United States. The Starbucks example shows just how easy that is.
Here’s something about all this that’s worth considering. Note her point about outraged policymakers and citizens. In fact, in the face of that outrage, the company coughed up 20 million pounds (about $30 million) in an effort to assuage the public. Sure, that doesn’t amount to a lot of lattes, but it’s the outrage part that gets me. Why isn’t the bloody dog barking on this side of the pond?!? Yes, we love our iPads and doubleshot espressos, but we also kinda like schools, parks, air, roads, retirement security, and the like. My countrymen and women–are we to let the Brits out-outrage us!?