Tax ranting #6 - Royalties

[king_pellinor]

Starbucks is being slated for paying royalties from the UK to reduce taxable profits.  Apparently no-one pays royalties for any other reason.

Couple of things here:  first, er, yes they do.  It's what the whole franchising business is based on, for one thing.  I don't think there's a Starbucks on the Island, but I'm pretty sure that if I set up Starbucks IW Ltd and opened a coffee shop called Starbucks, the existing Starbucks group would want a cut of the action.  It's not a tax trick, it's not even an accounting thing, it's a perfectly ordinary business arrangement.

Second, if we start saying royalties shouldn't be taken into account for tax purposes, what happens to all the royalties received by UK companies?  ARM, for example?  Or indeed any company working in the new Intellectual Property sector that people are saying is the future for UK business?  Do they get all their income tax-free?

Or is it just that royalties are a bad thing when they go in one direction?  No-one's mentioning that they're taxed where received.  OK, they're not taxed very much in the Netherlands, but that's for the UK to complain about to the government of the Netherlands.  It's the sort of thing wars have been fought over, if I remember my history properly.

Third, Starbucks apparently has a global agreement to pay royalties at 6% of turnover, which is in the sort of ballpark I'd expect.  HMRC argued it down to 4.7% for UK tax purposes, probably because HMRC will always assume that anything you're paying will be too high (which can be a reason why you go for the highest reasonable number).  So it's both a standard thing across the board, and HMRC have agreed that it's being deducted at the right level. So Starbucks UK is acting like a perfectly commercial company whose tax affairs have been approved by the authorities.  The swine!

It all comes down to profit, and the fact that they don't make any.  Royalties only come into it because people look at the profit/loss line, and then say:
     - If you didn't have this number here that I don't understand you'd make a profit. 
     - Therefore the only reason you don't make profits is because of this number here. 
     - Therefore the only reason to have this number is to avoid profits.

Of course there are any number of things that would have a bigger effect on Starbucks's profitability than the royalties: turnover and wages, for two.  I've seen it suggested that if everyone went out and bought an extra cup of Starbucks coffee, we could pretty much force them to pay UK tax as that income would go straight to the bottom line.  Equally, if they'd just cut wages they'd get the same effect. 

So when it comes down to it, Starbucks avoid tax by a) not selling coffee and b) paying their staff.  Immoral swine!

Comments

[bunn.livejournal.com]

I've seen it suggested that if everyone went out and bought an extra cup of Starbucks coffee, we could pretty much force them to pay UK tax as that income would go straight to the bottom line.

??? I really hope the person suggesting that has Starbucks shares!

Would it not make more sense to buy an additional cup of coffee from another coffee retailer that doesn't pay tax or franchise fees outside of the UK, if you want UK tax to be paid...? 'We hate Starbucks, let's all... buy their coffee so they'll make a profit!' seems a *particularly* odd call to action. :-D

[king-pellinor.livejournal.com]

That was the point, I think :-) If they're not paying tax because they're loss-making, then help them make a profit and see what happens.

Buying one from an already-profitable shop would probably mean more UK tax is paid, but if the point is to get *Starbucks* to pay tax you need Starbucks to have the profits.

[skordh.livejournal.com]

Yes, but if we increased their income and it turned out they did just pay more royalties, we would have settled the question of their ethics, but at the cost of giving them more money!

they're not taxed very much in the Netherlands, but that's for the UK to complain about to the government of the Netherlands. It's the sort of thing wars have been fought over, if I remember my history properly.

So your solution is a 4th Dutch War? Somewhat controversial, but at least it's a definite course of action, and it would certainly stimulate the economy...

[king-pellinor.livejournal.com]

OK, they'd pay 4.7% of the price of the coffee out in royalties, a few pence in materials, and the rest would be pure profit. No marginal costs of staff, rent, admin, or anything.

I suspect that the suggestion might have been slightly tongue in cheek, mind ;-)

Although at the end of the day, people are complaining that Starbucks aren't paying tax because they got a bit ambitious in their business plan and weren't able to generate the sales they needed to get to justify the masses of cash they threw at getting nice sites. The argument could be boiled down to "you get taxed on the profits we think you should have made, had you not cocked up".

[wellinghall.livejournal.com]

And it's one of the few countries whose armed forces are smaller than ours ...