Starbucks, the well-known multinational coffee purveyor, is not a large taxpayer, despite its success as a business. This fact has caused some displeasure among the British public. So much so, that Starbucks voluntarily paid an amount of £10 million (R150 million)over and above what it was required by law to pay to the British tax authority for the current tax year.
Apparently, prior to this, Starbucks had paid only £8,6 million in tax since opening its doors in the UK 15 years ago. So how does it manage to post great profits worldwide, but file tax losses in the high tax jurisdictions where it has outlets? Well, from the gross amount of turnover that Starbucks earns in the UK, it makes large payments to one of its subsidiaries in Switzerland for coffee.
This ranks as a deduction for tax. And, Switzerland is, of course, a jurisdiction where tax rates are negotiated canton by canton. Then the company makes another large royalty payment for the intellectual property that it uses to its subsidiary in Amsterdam. Starbucks has denied using tax havens, although it has admitted to the negotiation of a preferential rate of tax in respect of its Amsterdam subsidiary. Although summoned before a British parliamentary committee to explain the tax situation, Starbucks is not accused of breaking any law.
The activist group Actionaid has reported that, from its own research, 98 of the 100 top companies on the FTSE 100 index have at least one offshore subsidiary company in a tax haven. This underscores the fact that large capital is easily moved and will always follow the line of least taxation, no matter the measures that governments come up with. In my view, then, the only way for a government to attract and retain a tax base of large multinationals is to offer competitive tax rates.
Another fact that can be gleaned from the Starbucks tax issue is that the most effective tax planning techniques worldwide involve cross-border tax planning. In other words, a SA business might attempt to split its business income among many different entities and people, and might well save some tax, but in a high tax jurisdiction, when turnover increases, sooner or later the income that accrues to each entity will be taxed at a high rate.
However, if a group of businesses bands together to register a brand in a low tax jurisdiction, or employs a marketing arm in a lower tax jurisdiction, the effect of splitting income cross border will then result in real savings. If such planning is undertaken in an intelligent fashion, the tax avoidance provisions in the income tax act can be sidestepped quite legally.
Lower taxes equate to more capital. In turn, this results in a stronger, healthier company, less reliant upon high finance costs, which are the unintended consequences of high tax.
Peter O’Halloran is head of tax at BDO, Gaborone. Contact him on 00267 390 2779 or at [email protected]. Please state ‘Tax’ in the subject line of your email.