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Business

Taxing multinationals - Where should they pay?

Where should multinational companies pay their taxes? Starbucks Coffee has just announced it will pay 20 million pounds over two years to Britain, but is this correct? And can a more international agreement be found?

As austerity bites ever deeper in Europe, recouping lost taxes is a way for governments all over the continent to generate extra income and rebalance their budgets. So it would be fair to say that the British government was probably pleased to hear the news on Thursday that the Starbucks Coffee company is offering to pay 20 million pounds (about 25 million euros) to the UK tax authorities (HMRC) after protests from consumers about its tax affairs. The company's UK Managing Director, Kris Engskov, explained that the company had "listened to its customers" and added "we are [going] beyond what's required by the law, and we're going to do it, whether or not we make a profit in the next two years."

A first step

The offer has yet to become reality, and no statement, as yet, from HMRC was forthcoming about whether they would accept this amount, or want to look into the company's tax affairs more closely.

But, Margaret Hodge, Labour MP, and Chair of the Public Accounts Committee said to the BBC that this was a "welcome first step" and she hoped that other companies who have been "exploiting the rules" would take similar steps and do the same. Other companies, such as Google and Amazon have so far not announced anything similar, perhaps because, as the director of taxes at Berg Kaprow Lewis accountants (BKL) David Whiscombe explained to DW, "There has never been any suggestion that what any of these companies is doing is against the law."

Austerity bites

A tax declaration form in Germany (Photo: Jakob Studnar/dapd)

As tax returns are due, citizens ask how is it possible that rich multinationals can legitimately avoid paying taxes?

But in a climate of austerity, where services are being cut, small businesses and individuals are being checked up on and asked to pay ever increasing amounts of tax, the knotty question of multinational companies and corporate taxes has gained more and more traction. In November, the British treasury announced in the House of Commons that it was committing "over £900 million [to strengthen] HMRC's response to evasion and avoidance." This, they said, would "bring in around £7 billion in additional taxes each year by 2014-15."

The reality of multinational companies

Just this week though, the Chancellor of the Exchequer, George Osborne, announced in his Autumn Statement that he'd further cut the UK corporate tax rate from 22% to 21%, making the UK one of the most attractive places to do business in the world.  Whiscombe at BKL explained that "a feature of doing business internationally is that to some extent, you can choose where you recognize the profits, and you can choose what recharges you make from one territory to another. You can only make payments that are commercially justifiable, but what is commercially justifiable is itself a matter for debate and discussion."

Consumer power

Euro notes (Photo: Tatjana Balzer - Fotolia 44966116)

Now that Starbucks has offered to pay in the UK, will it be liable across the rest of Europe too?

Consumers across the continent have been expressing their dismay, that while they file their tax returns for the end of the year, big companies, creaming millions from them in profits, are not always paying their tax to the governments of countries in which they operate.

UK Uncut, is one such group which has been working to highlight what they call "tax avoidance" schemes, government policy, and cuts in public services for years. They organized a series of actions against Starbucks, including sit-ins, and transformed the coffee houses into services which have been cut in the UK such as crèches and playgroups. They say that Starbucks latest offer is a "hollow promise."

They confirmed on Friday that they plan more than 40 actions to keep the pressure up on companies so that the government is forced to review the laws which govern corporate taxes in Britain. The group wants the government to get them to make some universal agreements to make sure that the multinationals cannot operate from other bases across the world.

Tim Street, a spokesman for UK Uncut told DW that the Starbucks money offer had nothing to do with tax. "This has not been accepted by HMRC; this is money that they are putting forward to try and make the problem go away," he said, adding that he felt that it would only make things worse. "Instead of accepting the money, the government should change the law to deal with what he called abusive tax practices," he said. 

A marketing exercise?

The problem remains a legal one. Whiscombe thinks it's unlikely that Starbucks actions will have any effect on the other companies, or on UK tax law itself. Managing Director Engskov at Starbucks stated "we know that when we listen to [our customers], and act as a responsible business, that is good for the bottom line and we've shown that many times in our history.

And that is what it boils down to, says Whiscombe, a marketing decision essentially. He joked, in fact, that they could potentially claim the payment as a promotion or marketing expenditure and claim tax back on it later.

Double Tax Agreements

George Osborne, UK Chancellor chats with German Finance Minister Wolfgang Schaeuble prior to EU meeting of finance ministers for the European stability mechanism (Photo: EPA/CHRISTOPHE KARABA (c) dpa - Bildfunk)

Osborne and Schäuble pledged to spearhead new international tax reforms

As for double tax agreements, Germany's Finance Minister, Wolfgang Schäuble, and his British counterpart, George Osborne, made a joint statement in November pertaining to just this problem. They pledged at the G20 summit in Mexico to spearhead an international crackdown on tax avoidance by multinational companies, and "strengthen international tax standards that at the moment may mean international companies can pay less tax than they would otherwise owe."

This, Osborne stressed, was the only way not to be "priced out of the market" so that the UK could continue to offer low corporate rates, but make sure that taxes on corporate profits would not disappear abroad.  

Britain's Business Secretary, Vince Cable, was quoted as saying that Starbucks had paid "only 8.6 million [pounds] income tax since 1998 on 3.1 billion of sales because they report consistent losses in the UK.

But the talk of paying their "fair share" coming from politicians, like Labour's Margaret Hodge, Whiscombe thinks, is pointless, "One company deciding it will pay some tax, doesn't solve the problem. It is absurd to suppose that your tax yields from multinationals comes from whatever they feel like paying. If you want them to pay more, you have to change the law, you can't rely on public opprobrium and bullying to finance your exchequer; it's just bizarre."

Change the law

Companies have to, and are, complying with the law, so it is only when these laws are changed that a government can legitimately expect more tax. Tim Street from UK Uncut, thinks that a change in the law is the only way forward, but he feels that given that big accountancy firms often sit on committees and help craft these laws, it is "not surprising that they are in favor of  [them]. They know the loopholes and they know the ways around this."

He feels that the fact that Osborne has lowered corporate taxes still further is a sign that this government, with several millionaires in the cabinet are more interested in protecting the interests of business than the public. So changes to the law might be a long time coming, despite reassurances to the contrary. And offers, like Starbucks, could be an isolated windfall, rather than the "sustained effort" Hodge has been calling for to change the tax culture.

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