Taxing issues – US firms use supply chain structures to avoid UK tax

The issue of tax paid by large firms has been back in the news again. If you like blood sports, watch the Public Accounts Committee from last week tear the man from Amazon in particular limb from limb here (not great quality but you get the general impression).

What did come out of the PAC was more around how Starbucks use procurement and supply chain activities to move profit around. Their coffee sourcing team in Switzerland charges a 20% mark-up on purchase price to all their companies around Europe. Even though their executive claimed that this was for more than “just” buying the coffee, (work on sustainability for instance was mentioned), there was still a margin of something like 7% made on that substantial spend, ensuring a good slug of profit is made in Switzerland rather than in the UK or other end user countries.

There is also a 6% “licensing fee” for use of the brand name etc. That is paid into the Netherlands by other countries, which moves more profit into that country, where Starbucks have done a deal with the tax authorities – we didn’t find out what that deal is.

But it’s not just Starbucks, Amazon and Google. As Private Eye has pointed out for years, some of the government’s largest suppliers aren’t exactly paragons of virtue when it comes to paying tax in the UK. Read Private Eye for more:

Accenture, uses offshore arrangements to convert £2bn of income into a tax bill of less than £3m. But it is not alone. ..An even larger supplier, IBM, receives around £400m a year from UK taxpayers and, alongside Accenture, is a lead provider on the universal credits programme. In four years up to 2011 it paid just £30m corporation tax on more than £15bn income and more than £1bn of pre-tax profit.

Computer Weekly also disclosed that CSC paid just 0.5% tax on £1.5bn income earned from a 10-year outsourcing deal with Royal Mail signed in 2003.

Now there’s news that the government is looking at making potential suppliers declare how much UK tax they pay when they bid for contracts. But why not take matters one stage further? When we wrote about this some time ago, we got a comment from Ian Heptinstall who said that the Japanese government use tax paid as a measure of financial strength in pre-qualification. “Those who pay little tax can only bid for little contracts”!

So why not do that? Take a lack of tax being paid as an indicator of poor financial capacity, which would be a legitimate reason for eliminating a bidder from a tender, or at least restricting the size of the contract they can be awarded.

Perhaps it’s getting to the point that something will actually be done. I can only speak personally, but through my working life I’ve never felt too unhappy about paying my taxes. Social cohesion and all that. We dabbled briefly with running Spend Matters UK/Europe out of Ireland, but decided not to, and I’ve never done anything particularly “creative”. But when you hear what Amazon and friends are up to, you start thinking, “why should I do the decent thing when these firms – whose top managers are many times wealthier than me - don’t bother”?

It’s a corrosive effect, and whilst I appreciate it is not easy, some effective action is surely needed.

Voices (3)

  1. bitter and twisted:

    A light touch on the truly mobile international businesses is one thing, but Starbucks can’t relocate their UK branches to the Netherlands, can they?

  2. eSourcingSensei:

    I think the issue over payment/non payment of tax in the UK from certain companies becomes a sensitive issue because at a personal level we get no choice – we have to pay income tax or break the law…………..

    And I am one who is very uneasy about big business’s payng less tax than is apparantly due.

    BUT there is a distinction here that is rarely mentioned in articles in the media when slating huge companies for not paying more tax in the UK. They are NOT breaking any laws, they are not doing anything illegal no matter how unsavoury we, the men and women on the street, may find this.

    The issue here is legislative and that means if the Government want to ensure they receive increased tax payments from big corporations they need to change the law/rules to ensure that is done.

    Why is it that certain European countries are happy, nay even VERY keen, to offer taxation breaks if companies will oporate out of their country? You site Netherlands as one who has made some sort of deal with Starbucks. Well they have also done so with other big names too. They are seeking to attract more and more business into their country which as a result will boost the overall economy if not necessarily the coffers of the tax man.

    I have some reservations about “ensuring” these business increase their taxation payments here in the UK. If that does happen I am convinced that, where they are able to, they will relocate, and take their business elsewhere, after all they need to maximise their profits in a difficult economic climate. And this course of action may well have a much wider “fall-out”.

    If business’s move out of the UK becuase of the pressure of changes in the taxation rules then I think we could see further job losses or if the companies take their people with them, a reduction in the economy because less money will be turned over and available for spending within the UK.

  3. Charlie:

    By taking their profit centrally, these US companies pay more tax in US. Let’s say we change our tax rules and get them to pay more tax in UK, this will reduce their profit back to US and so reduce their US tax bill. I can’t image these foreign countries, especially the US, are not going to make UK companies pay more local tax in all the countries they operate in – so UK will loose out big time. Think of the impact on the big international companies who pay their corporate tax in UK…the language is very political and not very rational

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