Is Starbucks` tax planning and practice setting a bad precedent? The following is a review on the Reuters’s report on ‘How Starbucks avoids UK taxes’: Reuters (2013). It looks at what tax avoidance and tax evasion are, and the issues affecting the ethics on Starbucks` tax planning and practice. Finally, to comment on whether Starbucks` tax planning is recommended for any other multinational company.
2. Tax Evasion or Tax Avoidance
2.1. A review about the tax planning
Tax avoidance, subject to what is said below, may be broadly described as the legitimate ordering of one’s affairs in such a way as to minimise the tax which is chargeable. The distinction between this and evasion must at the ...view middle of the document...
An example to show intention is, for a transfer price of $1 a trademark could be sold overseas. So instead royalties being paid to the home country, royalties are paid to offshore companies located in a lower taxing country.
2.4. International Profit Shifting Schemes
Here are some of the tax planning techniques used by large and complex enterprises
• Allocation of profits or income offshore; (e.g. profits shifted to lower tax rate countries)
• Expenses allocated onshore; (this increases deductions in the home country and lowers profits and lowers the tax payable)
• Countries offering Tax Holidays, incentives or low tax rates
• Re-invoicing arrangements (through tax havens and parking some of the profit offshore)
• Loans and funding arrangements; (Thin capitalisation i.e., high debt to equity issues) and funding issues and guarantee fees.
• Business restructures; (Chapter 9 OECD 2010)
• Intangibles (marketing or trade) such as royalties and patents.
• Foreign entities direct involvement and control over subsidiary. These are common where the company operates in a country but without any staff or were the company is charged higher prices for products, services and assets from other related parties overseas.
• Profit shifting through, undercharging for products, services and assets sold to other related parties overseas. Normally, selling at a lower price lowers the profit in the home country.
• Treaty shopping using Double Tax Agreements. An example is of shifting the payments of dividends to a country where taxes are lower instead of sending them back to the parent company.
• Currency Exchange, for example, timing issues on terms of payment.
• Non- compliance to contracts - contracts are ignored.
2.4. Tax Planning; is it legal and ethical?
One of the main issues has been as to what is legal or ethical. Need to consider the facts and circumstances. The following can involve tax planning as its aim.
Transfer Pricing - Usually there is not a lot that can be done with tax issues within the framework of the law. There may be a question of ethics but a legal approach to arrange international associated dealings to take advantage of the various countries tax laws and double tax agreements would normally pass the test. However the arm's length nature needs to be addressed to determine whether there is a transfer pricing issue, and if so, is an adjustment a possibility?
Tax Avoidance – This is a case of ethics and would be a borderline with the legal approach. It may be questionable if the law was intended otherwise. This can be done by arranging international dealings to acquire unintended advantages of the various countries tax laws and double tax agreements.
Tax Evasion – Usually an illegal and unethically approach by various means of concealment or misrepresentation.
In my opinion, it is unethical and immoral to evade the payment of tax, however planning to reduce or minimise tax is entirely something different. The tax authorities...