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Corporation tax

Recently three big American companies, namely Starbucks, Amazon and Google, have come under the spotlight for paying little or no tax in the UK.

Jun 27,2015
. Jackie: For this week's podcastsinenglish.com business podcast we're talking about corporation tax or rather not paying corporation tax.

Richard: Yes, recently three big American companies, namely Starbucks, Amazon and Google, have come under the spotlight for paying little or no tax in the UK.

Jackie: Okay, Richard, let's talk about Starbucks as they seem to be the most guilty. Now Starbucks hasn't paid any corporation or income tax in the UK over the past three years. But it's the world's biggest coffee chain, and it's big in Britain.

Richard: Yes, it started in the UK 14 years ago, has nearly 800 stores and over that time has had sales of £3bn and they've paid very little corporation tax.

Jackie: But they have paid some tax?

Richard: Yes, they've paid a total of £8.5m in corporation tax since 1998.

Jackie: So how come they're saying that they're not making any profit to pay the correct amount of tax?

Richard: Well, the crazy thing is to their shareholders they're saying the UK operation is very, very successful but to the UK taxman they're saying they're not making any money at all.

Jackie: How are they doing that?

Richard: Starbucks send a lot of money to Starbucks subsidiaries in other countries. For instance, they pay quite a large premium to the Dutch division of Starbucks and they say this is for rights images and in fact for the coffee recipes.

Jackie: Right

Richard: And also the coffee beans are roasted there and um... they pay them for the cost of the roasting. The beans come from the company's Swiss operation so the Swiss operation pay for the beans and then they charge the UK an extra 20% on top of that.

Jackie: Okay, because the Starbucks headquarters are in Switzerland, right, so you're saying that they charge them for the beans and they have to pay extra on top of that?

Richard: Yes

Jackie: So, why do the stores pay this premium, it's not a franchise?

Richard: Well, I think it's fairly obvious to a lot of people it's to minimise their tax bill. However, Starbucks say that it's 'intellectual property' and of course it's perfectly legal.

Jackie: So Starbucks UK have agreed to pay this amount to their parent company um... and therefore that... that's the loophole in the UK law.

Richard: Yes, it allows companies to have headquarters in a low-tax rate country and to charge their UK stores this premium which in fact gets rid of the profit and so no tax is paid. They pay no tax in the high-tax countries like the UK and they pay small tax in er... Switzerland or Ireland, for instance.

Jackie: Five percent, unlike 25 percent corporation tax in the UK.

Richard: Exactly

Jackie: Is there any other reason why Starbucks um... have such a low tax bill?

Richard: Yes. They spend an awful lot of money on certain tax-deductible areas. Um... they spend about £315m on these tax... tax-deductible areas.

Jackie: What kind of areas are you talking about?

Richard: Well, one of the main things is research and development.

Jackie: They spend millions on how to make coffee?

Richard: That's what they say.

Jackie: Mmm, it doesn't sound right though, does it?

Richard: And that's why um... it's kicking up a storm in the UK at the moment and a committee of *MPs have recently attacked, not just Starbucks but the other two companies that we've mentioned, and they do say they're not accusing these companies of being illegal but they are accusing them of being immoral.

Jackie: And many people in the UK are starting to boycott Starbucks, it's the only thing to do, perhaps.

Richard: Correct         

*MP: Member of Parliament, a politician