I know, I know: bloggers should resist the urge to speculate about a company’s tax affairs unless they’ve really spent a good long time scouring company registries, reading court cases, talking to people in and outside the company, corresponding with tax directors. Doing their best to review everything that’s in the public domain, and as much of what isn’t as they can get their hands on.I haven’t, it’s fair to say, done all this with Starbucks.** But Starbucks sits so interestingly in the tax arena – as ‘bricks-and-mortar’ a retail operation as it’s possible to get, yet accused of all the same shenanigans with royalties and intangibles and offshoring of intra-group services as the ‘digital economy’ guys – that I just couldn’t resist the company’s announcement last month about moving its European HQ to the UK, a move Starbucks claims “will mean we pay more tax in the UK”. Why does it matter?
If, as George Osborne and the OECD insist, the basic problem with international tax is that globalization and digitalization has run ahead of the international tax architecture founded in the 1920s, then the British government’s ostensible dissatisfaction with Starbucks’ tax affairs is an important test for their own diagnosis of the problem. After all, there’s nothing digital about a skinny latte. And there have been multinational retail chains since at least the 1950s. If Starbucks’ European tax arrangements are nonetheless, British politicians tell us, symptomatic of something gone wrong with international tax, then it’s worth interrogating how they work. Equally, it’s worth interrogating whether they’re really going to look any better from the UK exchequer’s perspective if the company moves out of naughty tax-haven Netherlands and into wholesome Blighty where everyone has to play tax cricket fair and square…I’m also not sure that any one piece of recent media coverage has really put the whole thing together very satisfactorily, so I think it’s worth laying out my (partly speculative) cards on the table.
Which are these: while we obviously can’t tell for sure, like others I can’t see a compelling reason why moving Starbucks’ European HQ from the Netherlands to the UK should generate significantly greater personal or corporate tax liabilities for the company or its payroll, either in the UK or in Europe as a whole. More importantly, this potential outcome has nothing to do with an ageing, unfit international tax system. It’s primarily thanks to quite deliberate tax policies pursued by successive UK governments, including the last two, to turn the UK into a Dutch-style corporate tax haven. If MPs have needed the Pfizer-Astrazeneca deal to twig this, then they must have been asleep every time corporate tax policy has been debated in Parliament for the last ten years.
My starting point is this piece from the FT [registration required]:
“[By moving its European HQ from Netherlands to UK] Starbucks will put an end to the controversy over its Dutch tax structure….Starbucks confirmed on Wednesday that royalties from other countries will in future be paid to the UK. This change is set to increase the UK operation’s profitability, which until last year was reduced by royalties flowing to the Netherlands.”
1) As others have pointed out, this doesn’t deal with the fact that a large proportion of the royalties don’t stay in the HQ company, Starbucks Coffee EMEA BV, to be taxed there. Starbucks Coffee EMEA BV persistently pays very little Dutch tax, and it’s perfectly possible that this is not simply thanks to a clement Dutch tax ruling, but due to very small taxable profits. (In the absence of a tax note in the Dutch accounts it’s hard to verify precisely the Dutch company’s taxable profit or loss – in recent years it has booked accounting losses and a small tax charge – perhaps from accounting expenses that aren’t tax-deductible; perhaps unwinding past deferred tax liabilities; or perhaps accounting some of the tax due from the Dutch roaster operations, with which it’s in fiscal unity?)
2) So why isn’t the HQ company very profitable? Substantially because over half of the royalties income that Starbucks Coffee EMEA BV receives from around Europe is paid out again; to the UK, as it happens. It’s received by a UK limited partnership, Alki LP (incidentally, mis-described in the company’s Dutch accounts as an LLP). Since most UK LPs don’t have to file accounts with Companies House, it’s a little difficult to see what’s going on from here on in, but it seems that Alki LP is the bottom rung of a stack of mellifluously-named UK and Dutch partnerships: Alki LP’s major partner is Dutch partnership (Commanditaire Vennootschap) called Emerald City CV, whose major partner is another Dutch partnership, Rain City CV, whose major partner is the US holding company Starbucks Coffee International Inc. Being UK-tax-transparent, Alki LP’s income is presumably passed up this partnership stack without a significant tax charge until it gets to the top.
3) I confess I’m not entirely sure what this partnership stack is for. But it’s worth noting that Dutch CV/BV chains can be used to avoid US CFC rules: Dutch CVs can be reverse-hybrids, being tax-transparent in the Netherlands, so not liable for tax there; but in some circumstances viewed as taxable corporations under the US ‘check-the-box’ system, and so not subject to current US tax. This may mean that the European Starbucks affiliates – including in the UK – can continue to deduct their royalties payments against tax in the countries where they operate, while deferring US tax on that royalties income (and not incurring tax in the Netherlands either, if the royalties income can be got out of the BV by paying it as royalties into the US-owned partnership stack). Hard to tell for sure, and I still can’t work out why there’s a stack of three partnerships in a row.
So let’s sketch out a scenario in which Starbucks does the minimum to which it publicly committed last month: its European HQ, the holding company of many of the European affiliates and the initial recipient of royalty payments from the UK and other affiliates, becomes a UK-registered and UK-tax-resident company. Starbucks have already said that the roaster company (Starbucks Manufacturing EMEA BV) will stay in the Netherlands. The ownership of significant IP could presumably stay with the UK limited partnership Alki LP. In this scenario I can’t see any reason why the royalties income received by the European HQ can still be shunted through the UK/Dutch partnership stack – indeed this is the specific question that journalists should be putting to Starbucks. The US tax treatment of this royalties income remains uncertain, and I’m not making any hard and fast claims about these entities’ tax election for the IRS – again, it’s a question that journalists should be putting to Starbucks. (I did, but they presumably didn’t feel the need to answer).
4) For what it’s worth, I don’t agree with various commentators that the prospective tax-free ride out of the UK for Starbucks’ European royalties has much to do with UK corporate tax territorialisation, or it’s new ‘IP-friendly’ tax measures. Unlike foreign dividends,*** foreign-source royalties are still generally subject to UK corporation tax. And from a quick scoot through the relevant patent registration offices, it doesn’t appear that the royalties payments to Starbucks Coffee EMEA BV or Alki LP are for patented intellectual property (Starbucks’ patents seem to be owned mainly by US or Hong Kong subsidiaries), so they shouldn’t benefit from the reduced 10% tax rate introduced under the much-criticised UK Patent Box, introduced in 2012.
5) There are instead far more prosaic reasons: not least that royalties income can safely bat back and forth between companies and partnerships across European borders without, in all likelihood, any UK or Dutch withholding tax impediments thanks to successive UK-Dutch double tax treaties since the 1980s (it’s not just other countries’ exchequers that suffer when the UK government blithely barters down its own source taxing rights for the benefit of UK Plc); or else thanks to the EU Interest-Royalties Directive (amidst all the original Starbucks furore in December 2012 the EC proposed recasting this Directive to prevent abuse – a recast that the EU Member States have since then conveniently allowed to quietly slide. The European Council has discussed and rejected the idea of a review three times since 2010).
6) It’s also perhaps significant that a fortnight before Starbucks’ announcement, Companies House records show that the UK limited partnership Alki LP – the initial recipient of the royalties paid out from the European HQ – had a major injection of capital, to the tune of nearly 100 million euros. I don’t know why this should be, but I wonder if it might be to ensure that the partnership can be deemed to be providing enough capital to merit its economic ownership of the Starbucks IP for which it receives royalties. Presumably if the European HQ moves to the UK, this would bring its payments to Alki LP within the purview (and scrutiny) of HMRC rather than the Dutch tax authorities, which previously provided the HQ with the safety of an advance ruling. Of course, more activist revenue authorities might seek to argue that the real economic ownership of the intangibles sits at least partly with the operating affiliates that contribute some value to Starbucks’ brands, products and processes; or with the US companies that develop the IP in the first place – and that this is where some of the royalties income should be taxed. This was the line originally taken by the OECD’s little-publicised 2012 proposals on the transfer pricing of returns to intangibles [pdf]. Multinationals like Starbucks, though, have little to fear: late last year OECD member states, buoyed by a barrage of negative comment from big business [pdf], decided to back down somewhat from going even this far in tweaking the current tax rules. While European politicians were taking rhetorical shots in public at multinationals manipulating intangible assets for tax purposes, they were in the privacy of the OECD’s closed-door working parties quietly backing a partial reversion to a ‘form over substance’ position in the international rules under which the contractual owner of IP, and those companies that provide capital, are those entitled to the returns to intangible assets – even if they are in practice empty partnerships or tax haven shell companies. As the main corporate lobby group at the OECD noted with qualified satisfaction:
“the [revised] Draft addresses some significant concerns previously expressed by the business community….[we are] pleased that improvements have been made to acknowledge legal ownership and funding, and that the revised draft examines whether there can be functions performed, assets used, and risks assumed by parties other than the investor and legal owner which would in comparable arm’s length situations, give rise to a return with respect to the intangibles.”
7) One final potential hitch has been smoothed out by recent UK governments as part of their pursuit of a territorial, HQ-friendly tax regime. Starbucks’ European HQ company owns not only EU operating companies but also the Swiss company, Starbucks Coffee Trading Sarl, that – on paper – buys the beans and sells them to the UK and other European affiliates. Previously Starbucks might have been anxious that setting up their European HQ in the UK could put some of the income of this low-tax Swiss procurement hub within the net of the UK’s CFC rules. The UK’s new slimmed down CFC rules – initiated by Labour, passed by the Conservatives in 2012 –are likely to have removed that anxiety. Income into the Swiss affiliate from other European operating companies won’t be subject to CFC tax top-up in the UK, and I suspect (though can’t be certain) that even payments to Switzerland from the UK operating company are likely to be sufficiently active, or a sufficiently small part of the Swiss affiliate’s income, to fall outside the new CFC ‘gateways’ too.
8) And finally – won’t there be a whole bevy of Starbucks jobs moving from the Netherlands to the UK (with attendant income tax and NI contributions)? Er, no. At last count the European HQ company in the Netherlands had 133 employees. Yet Starbucks has said that just a “modest number of senior executives” will move to the UK. (Again, journalists should be asking exactly how many, and also how many of these will be non-UK-domiciled and thus not even subject to UK tax on their overseas earnings.) As with other high-profile corporate ‘moves’ to the UK lauded by the Treasury as proof of the economic benefits being reaped by its territorialised, HQ-friendly tax regime, this one doesn’t seem to be bringing significant new jobs, business activities – or, perhaps, tax revenues.
And if this happens, for all the politicians’ complaining, it won’t simply be because of the tax slipperiness of global, virtual businesses. It will be thanks to those same politicians’ quite deliberate tax policies, which have been explicitly designed to engineer this situation: from the UK’s recent neutering of its anti-tax-haven rules; to its give-aways of taxing rights in multinational-friendly European tax treaties; to the US ‘check-the-box’ system – first introducing a system taxing U.S. multinationals’ offshore passive income, then under lobbying pressure in the 1990s introducing a loophole that effectively neutralises that offshore taxation; to the liberalisation of EU cross-border tax rules. That’s what the UK’s corporate tax roadmap is for: to make it possible for multinationals like Starbucks to headquarter here more or less tax-free. (This brochure from UKTI explains it openly).
If Starbucks ends up paying little or no more tax, and gets a slapdown from the politicians for its trouble, it will simply be for doing what Cameron’s government – and its Labour predecessor – expressly intended.
Image by MyLifeStory/Flickr (Creative Commons)
**Though I have looked at a selection of accounts; and put a series of questions and the outline of this post to Starbucks UK’s press office, to which at the time of writing they had declined to respond. And for an alternative blog view, see Ben Saunders’ fascinating series on the original Starbucks tax flap.
***It is worth bearing in mind, though, that dividend income to the new UK HQ from other European affiliates and the Dutch roaster will presumably also be tax-exempt thanks to a participation exemption introduced by the Labour government in 2009 almost as generous as the one Starbucks’ European HQ will previously have enjoyed in the Netherlands. Not that Starbucks would have been particularly worried anyway – with a UK corporation tax rate headed to 20%, I imagine that tax credits for underlying tax paid on any profits in other European countries could have wiped out UK tax liabilities on the profit distribution.
Title Image: Creative Commons (MyLifeStory/Flickr)