Costa Coffee v Starbucks - a totally misleading comparison

From the BBC:

Starbucks' announcement [that it will 'voluntarily' pay £10 million corporation tax in the UK each year] comes after much public anger over the revelation of how little corporation tax it pays in the UK, with some people saying they would boycott its outlets.

The company has paid just £8.6m in corporation tax in its 14 years of trading in the UK, and nothing in the last three years, despite UK sales of nearly £400m in 2011. Starbucks has reported a taxable profit only once in its 15 years of operating in the UK, often reporting losses...

UK Uncut, a group that protests against corporate tax avoidance in the UK, said that Starbucks' announcement was not enough... "The £10m that Starbucks has estimated it may end up paying is £5m less than that paid by their nearest competitor Costa coffee."

Starbucks has 760 outlets across the UK and says it contributes "£300m to the UK economy" each year. Rival Costa has 1,479 coffee shops.
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(They are completely ignoring the fact that catering services are fully VAT-able, so Starbucks must be paying about £80 million in VAT. VAT-able businesses pay 1/6 as much in Business Rates as they do in VAT = £13 million (about £17,000 for each of 760 shops, looks about right). They then pay twice as much in rent, a privately collected tax of £26 million. Let's assume that wages and salaries make up half their turnover and that's taxable at average rate 40%, that's another £80 million. Tot that up and Starbucks is handing over about £200 million a year in tax. Not nothing. I got a good kicking for pointing this out at a Leftie meeting yesterday. But I digress as usual.)
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If you know anything about international tax, you will know that that is a totally stupid and misleading comparison. Here is a bare bones crash course, if you do not know and understand this (like those idiots UK Uncut) then you might as well keep your mouth shut:

1. Most countries have a rule which says that dividends from overseas subsidiaries are exempt.

2. Different countries have different corporation tax rates. As a generalisation, the larger the country, the higher the rate.

3. Most countries allow companies in a group to pay each other 'management charges' or 'royalties' which are sometimes subject to withholding tax of between 10% to 20%, and sometimes exempt, all depending on double tax treaties and prevailing rates. The UK has tax treaties with most civilised countries; if you want to pay/receive cross-charges to/from other subsidiaries in those countries, the withholding tax rate is low or zero. If you want to pay royalties to a subsidiary in a tax haven, the withholding tax rate is 20%.

4. Companies try to minimise the total corporation tax they pay, but if there is a 'choice' as to which country they pay in, then as a tie-breaker, they prefer to pay more tax in their 'home' countries than abroad (shareholders are more likely to get credit for this when they receive dividends).
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So applying these rules:

- if a UK based group has a subsidiary with a profit of £100 in a high corporation tax country (say 30%) where the withholding tax rate is 20%, it will prefer to get those profits out as a cross-charge of £100. It suffers 20% (£20) withholding tax, which it claims as a credit against UK corporation tax of 24%, so it pays another £4 in the UK. Total tax bill £24.

- if the same UK based group has a subsidiary with a profit of £100 in a low corporation tax country (say 15%) with a withholding tax rate of 5%, it will prefer to pay the £15 tax in the other country and take an £85 dividend which is not taxed in the UK.

- if the same UK based group has a subsidiary with a profit of £100 in a medium tax country (say 24%) it is pretty indifferent whether it pays itself the profits as a dividend or cross-charge. But it will be incurring UK head office costs which are tax-allowable, so there is no point having tax-free income because they can't offset the costs. So on balance, they will go for cross-charge rather than dividend, especially if the withholding tax rate is lower than the corporation tax rate in the other country (which is nearly always the case).

So we can safely assume that:

- Costa Coffee (part of Whitbread), a UK-based international group, will be underpaying corporation tax in other countries and paying roughly the "right" amount in the UK.

- Starbucks, a US-based international group, will be underpaying corporation tax in other countries (including the UK) and paying roughly the "right" amount in the USA.

Summary: you cannot compare the two companies' UK corporation tax payments, it is a diagonal comparison. Before we slag off Starbucks (who pay for too much tax in the UK) and hold out Costa Coffee as a shining example, we should be asking how much corporation tax Costa Coffee pays or avoids in other countries. Obviously, Costa Coffee is made to pay far too much tax in the UK (VAT and PAYE), separate topic.