Tax avoidance is the deliberate act of individuals or corporations to take measures that would see them pay much less tax than they would normally pay as anticipated by the law. Tax avoidance involves the taxpayer exploiting the loopholes found in the tax laws that govern the given taxpayer.
McLaren explains that the exploitation is found in the interpretation of the law whereby, when the law was made, the loophole was not anticipated thus creating an ambiguity when the tax collector realises it (11). Tax avoiders usually operate on chances in that they interpret the law in their favour and that there is a possibility of them being caught. The paper defines a corporate tax besides using Starbucks as a case company to expound the subject of tax avoidance.
Corporate tax is the amount of tax that a corporation is required to pay based on factors like the profit of the company, the size of the company, and the location of the company. Most corporate organisations try to pay as little tax as possible as a way of boosting their profitability because taxes tend to eat in to their profits so much.
Therefore, as a way of maximising their profits, most corporations usually find a legal way of paying less tax through tax avoidance because it is largely legal. There has been no much debate on tax avoidance being illegal. The main debate is about its being ethical. The question of whether tax avoidance is ethical or not depends on an individual’s point of view with regard to whether it is unethical on one hand or it is simply an incisive interpretation of the law.
Alm and Togler state that, for one to understand an individual’s compliance decisions, he or she has to factor in some form of ethical dimensions because ethics issues differ significantly (635). Generally, tax avoidance is deemed unethical in society because it is a way exploiting the society of what it rightly deserves. Corporations make profits from it. Therefore, one way of them giving back to it is through taxes, which are guided by the law.
Because laws are subject to interpretation, it is unfair for others to use the existing loopholes to avoid paying taxes. This notion is a sign of irresponsibility. It is therefore deemed selfish and unethical. Most stakeholders believe that companies, which make much profit, should be at the forefront of paying taxes as a way of giving back to society.
Baker expounds this claim by explaining that corporations that avoid paying tax believe that they are within the legal parameters in doing so and that they are simply reading the laws to the later and thus an advantage to them (5). Corporations are businesses, which are there to make profits. Thus, they simply do what they are meant to do best.
Starbucks is the second largest café chain in the world after ‘McDonald’s’. Since the commencement of its operations in the United Kingdom, it has opened up to 735 stores besides raking an income of over 3billion pounds. Starbucks has paid taxes of only 8million pounds compared to its income. Starbucks has been cited for tax avoidance by giving two different reports to its shareholders and the taxman.
Whereas it indicates profitability when reporting to its shareholders, it reports losses to the taxman as a way of avoiding to pay tax on its income thus not paying any income taxes. Starbucks avoids paying taxes by not giving a breakdown of profits in its earnings statement.
In discussion with analysts and other investors, Starbucks paints a picture of a hugely successful entity in the United Kingdom that has seen it use the earnings from the United Kingdom to fund their expansions abroad. This act is against the backdrop of it filling a 26million pounds loss in the United Kingdom and hence a contradiction. In its bid to avoid paying taxes, Starbucks reports losses on its accounts.
Thus, it cannot attract corporate tax (Bergin Para. 5). Starbucks subjects its United Kingdom unit to royalty payments to the rate of six percent, which reduce the taxable amount on income that Starbucks is supposed to pay at the end of the day.
As McLaren states, Starbucks uses the intercompany loans system to show that its United Kingdom operations have been funded through loans and hence not legible for any income tax as it is deemed to be paying interests on the loans (11).
Political and Public Reaction
The revelation that Starbucks has been involved in tax avoidance has called for much condemnation from the public and politicians. This case has paved way for anti-tax avoidance campaigners to protest around Starbucks premises around the United Kingdom.
The anti-tax avoidance group called Uncut UK summoned the government to concentrate more efforts in putting in measures that would see tax cuts being avoided because they are the loopholes the corporations use to avoid paying their full taxes. These protests led some of Starbucks’ stores to close temporarily for the day.
The Commons Public Accounts Committee condemned Starbucks for its acts as well as its majesty revenue services for being too lenient to tax avoiders. This move forced Starbucks to pay 20 million pounds at the end of the year 2012 as a way of correcting its perceived mistake as a way of pacifying the public (Geogheghan Para. 4).
It also promised to pay 20 million pounds for taxes in the following two years. This move has been termed as insufficient because Starbucks has made billions of profits only paying a paltry 8 million pounds for the last fifteen years that it has been in operation.
Starbucks Response in Relation to that of Amazon and Google
Starbucks was able to explain questions on its tax issues by admitting that its six-percent deduction on products was a loophole that was used for abusing the tax system. It explained that half of the six-percent royalty that it charged in the United Kingdom was paid to the Netherlands government.
Amazon was not able to explain how royalties for products purely made in the United Kingdom were paid to banks in Luxemburg. On the other hand, Google explained that it repatriated profits from the United Kingdom to where technology originated: the United States of America.
It was found to be taking them to Bermuda instead and hence a strategy of avoiding tax. Murphy finds that, among the three companies, only Starbucks could justify its six percent royalty payments to the Dutch government though it also admitted that it was a way of avoiding paying taxes to the United Kingdom government, which is known to have high tax regimes.
Alm, James, and Benno Togler. “Do ethics matter? Tax compliance and morality.” Journal of Business ethics 101.4(2012): 635-651. Print.
Baker, Rosie. “Starbucks’ reputation grinds to a halt over tax decision.” Marketing Week 35.52(2012): 5. Print.
Bergin, Tom. Special Report: How Starbucks avoids UK taxes. 15 Oct. 2012. Web.
Geogheghan, Ben. UK uncut protests over Starbucks tax avoidance. 8 Dec. 2012. Web.
McLaren, Mathew. “How to pay less tax.” Canadian Business 85.21(2012): 11-12. Print.
Murphy, Richard. Amazon, Google, and Starbucks are struggling to defend their tax Avoidance. 13 Nov 2012. Web.