Last updated: October 2015
Starbucks, Amazon and Google in the dock
The recent parliamentary committee hearing was a historic first in democratic scrutiny of corporate tax affairs, says Richard Murphy. Perhaps that’s why the companies grilled made such a mess of it.
The Public Accounts Committee hearing on 12th November 2012 into the tax affairs of Starbucks, Amazon and Google has to be unique. Never before have such corporations been held accountable to our parliament for the taxes they pay – or don’t pay - here in the UK.
The first thing we learned from this hearing was that while tax avoidance is fundamental to the business model of all three companies, not one of them had the faintest idea how to defend their behaviour.
They were utterly unprepared to answer simple questions about why they are avoiding corporation tax due in the UK. And that’s despite it being almost four years now since I started exposing Google’s tax affairs. At a stroke these companies, and I suspect the whole corporate world, have lost any moral high ground they might have hoped to claim on this issue.
Starbucks admitted – for the first time – that whilst it claims (quite incredibly) that its 700 UK stores are not profitable, its 30 coffee traders in Switzerland make an enormous 20% profit margin despite never seeing a coffee bean; a fact possibly related to the 12% tax it pays there, compared to the main UK rate of 24%.
It got worse. Starbucks claims it has made a taxable profit only once in its 15 years in the UK. Yet those profits are calculated minus a ‘royalty’ that it pays to other parts of the company group. According to Starbucks the royalty reflects the costs of things like product development.
Chief financial officer Troy Alstead admitted to the committee that half the royalty on sales in the UK is paid to its own Netherlands regional headquarters, but that little product development takes place there. Starbucks just happen to have a tax deal so favourable with the Dutch government they’re not allowed to talk about it, at a stroke confirming that this is tax avoidance. The Netherlands too has serious questions to answer.
Worst for Amazon
For Amazon things were much worse. Their rep could not justify how an order made in the UK for a product in a UK warehouse, shipped by UK staff through the UK post and with a bill enclosed printed in this country could somehow have anything to do with Luxembourg. Amazon then lost all credibility with the committee by declining to disclose on a country by country basis where their profits arise. MPs were furious and rightly so: the case for the country-by-country reporting accounting system I have created for multinational companies could not have been better made.
Google tried harder but they had created one insurmountable obstacle for themselves. Their argument was profits should be taxed where they are earned and they said US technology drove their European profits. But by their own admission payments made from Europe for that technology never reach the USA. Instead they get parked in tax-free Bermuda.
So what did we learn?
First, if this committee could tear these companies to shreds so easily why have HMRC been letting them get away with these fables? I’d be calling Lin Homer, HMRC chief executive, back to the committee for another grilling.
Second, so long as companies can hide behind rules that do not demand they account on a country-by-country basis for what profit they make and what tax they pay this abuse will continue. Transparency became the very obvious key to solving this problem as the afternoon progressed.
Third, these companies need to think about changing their behaviour very soon or they’ll be keeping UK Uncut, as representatives of an increasingly angry British public, in business for decades.
Fourth, we need simple and effective rules to combat this cheating. I’ve suggested a mechanism for this I call the Fair International Tax (see Take action below).
And last of all, and most importantly, this all happens with the active connivance of governments – in the Netherlands, Switzerland, Luxembourg, Ireland and Bermuda, at least. There is an international conspiracy amongst some governments (including, maybe, ours) to align the interests of states with the interests of corporations to make sure that tax is not paid by companies. That means it is paid by ordinary people instead. This has to change – for the benefit of us all.
Richard Murphy is founder of The Tax Justice Network and blogs at www.taxresearch.org.uk. His new book ‘The Courageous State: Rethinking Economics, Society and the Role of Government’ is available from www.searchingfinance.com