How HMRC is tackling tax arrangements similar to Starbucks’
The Public Accounts Committee (PAC) met last month to ask HM Revenue & Customs (HMRC) about its efforts to curb tax avoidance, including how HMRC has developed its transfer pricing approach to counteract tax arrangements such as those by Google, Amazon and Starbucks.
Present at the hearing on February 11, on behalf of HMRC, were Lin Homer, chief executive of HMRC, and Jim Harra, director general for business tax, who were asked by the PAC’s Stewart Jackson about the “sweetheart deal” between the Dutch government and a well-known high street coffee chain.
“…the sweetheart deal that the Dutch tax authorities had with—I am not asking you to discuss Starbucks’ tax affairs—let us say a well-known high street coffee chain. Apparently, having purchased the coffee in Switzerland, it had a sweetheart deal to roast and store it in Holland. Miraculously, after 15 years of trading it had made no profits in its retail outlets in the UK. Just imagine that that organisation existed. What specific efforts have you made on that kind of scenario?” said Jackson.
Harra said that in such cases, HMRC has been “active operationally”.
“We do not have to accept the agreements that taxpayers make with other tax authorities when it comes to transfer pricing, so we have actively pursued a number of those large cases, both by ourselves and with international partners.”
HMRC has a joint intelligence group, which works with a number of other tax authorities to ensure it is jointly gathering and sharing information about transfer pricing.
A question of royalty
HMRC was then asked about the intellectual property (IP) royalty flow of Starbucks and whether that issue had been addressed and, if so, whether it has or will be addressed by unilateral or multilateral tax agreements between countries or by legislation.
“If you are talking about royalties that flow,” said Harra, “one of the arrangements that multinationals put in place to try to divert profits to low-tax jurisdictions is that they will place the intellectual property there. They are able to do that because the substance involved in managing intellectual property can be fairly light. That is one area that the international BEPS project is looking at.”
Jackson referred back to the PAC discussion with HMRC in 2012 and the idea that it costs hundreds of millions of pounds to develop the concept of a cup of coffee and to improve and enhance that as IP.
“We were quite incredulous at that concept and challenged that company at the time,” said Jackson. “It raised an important issue: the fact that the tax authorities were accepting that at face value, across a wide range of business activities.”
Harra said HMRC certainly does not accept that concept at face value.
“We do challenge, and have got yield from challenging, the royalty payments made in relation to intellectual property. It is very difficult, because often there is no market comparator, so it is very resource-intensive and involves hiring economists and everything to do it, but we do do it.”
Harra is referring to a lack of comparables in the European market.
In addition Harra referred to the UK’s controversial diverted profits tax, which it is working on in relation to the OECD’s BEPS project and which will be included in the next Finance Bill.
“That is about tackling some of the transfer pricing arrangements, with which the Committee is very familiar because it has taken evidence on them before, where companies purport not to have a permanent establishment in the UK and sign and seal their contracts in another, lower-tax jurisdiction. That kind of commissionaire arrangement will be tackled by the new diverted profits tax, and they will be deterred from doing that.”
