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Tuck Reunion 2014 - International Tax Reform in the U.S.: Why Are We Stuck in Neutral?

The document discusses corporate inversions, where U.S. companies relocate to countries with lower tax rates to reduce their tax liabilities. It reviews the historical rise of inversions from 1983 to 2014, emphasizing the need for U.S. tax reform to address the uncompetitive tax system that incentivizes these moves. Potential legislation is suggested to restrict inversions and maintain a fair tax structure.

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Leslie Robinson Associate Professor Tuck Reunion 2014 INTERNATIONAL TAX REFORM IN THE U.S.: WHY ARE WE STUCK IN NEUTRAL?
AGENDA  What is a corporate inversion?  A process by which an existing corporation changes its country of residenc  Why are inversions happening?  Symptom of an ‘uncompetitive’ tax system  What can / should the U.S. do about them?  General reform of the U.S. corporate tax code  Specific provisions to deal with tax-motivated inversions  Aside: Is tax avoidance immoral or unpatriotic?
CORPORATE INVERSIONS: 1983 - 2014 A Spike in Corporate Inversions 2014 2004 In last decade, 47 corporations have moved their address overseas to pay less U.S. taxes * * * * * * * AOE Corporat ion Alkermes DutchCo St ratasys TE Connect ivity Mallinckrodt Pharmaceut icals TIMELINE 1 9 8 3 • Helen of Troy •McDermott International Source : Congressional Research Service * Represents companies that inverted between 2009 and 2014. & • Santa Fe Int ’l •Everest Reinsurance •Appl i ed Power •Whit e Mountain Ins. •Tra nso ce an •PXRE Group • Trenwick • Xoma 1999 •R&B Falcon •Hungar ia n Telephone & Cabl e Corp. • Arcad e Acqu i sit ion Grp • Ene rgy I nfr astructure •Ascend Acqu i sit ion •Acqui sit i on Grp. • Foste r Whe el er •Patch I nt’l In c •Tyco El ectr i c •Star Maritime Acquisition Group •N ob l e Corp . • Co op er In dust ries • We ather f or d In t ’l • Ing ersoll-Ran d • PWC Co nsult i ng Ltd . 2001 •Global Santa Fe Corp. •Fost er Wheeler, •Accenture •Global Marine 2012 1 9 9 4 1 9 9 6 1 9 9 7 1998 2000 2005 2009 2013 2010 2008 2002 •Fluid Media Net work •Western Goldfields •Lincoln Gol d 2007 • 2020 ChinaCap Acquisit ion •InterAmerica Acquisit ion •Ideation Acquisi t ion Grp. •Vant age Energy Services • Alyst Acquisit ion Grp. • Alpha Secu rity • ENSCO I nt ’ l 2011 •Al ker m es, Inc •Pl astin um Pol ymer Te ch Corp. •Valient/ Biovail • Pentair • Rowan Compa nies • AON • Tro nox I nc • Argona ut • Jazz Pharmaceu t ical s / Azu r Phar m a • D.E. Maste r Bl ender s •Eaton/Coop er •Cade nce Pha rmaceu ticals • Act avis / Warner • Chi l cott •End o Hea lt h Solu t i ons •Liber ty Globa l PLC • Gold Reser ve •Playstar 29 In the last decade Legislation to tighten rules to limit inversions would save taxpayers nearly $20 billion over ten years . 47 In 20 years
SENATE FINANCE COMMITTEE, 07/22/2014
WHAT IS A CORPORATE INVERSION?
DEFINITION OF AN INVERSION  A corporate inversion is a process by which an existing corporation changes its country of residence by becoming a subsidiary of a parent corporation in another country, and if tax motivated…. With the objective of facing a lower tax rate in its new country of residence and paying no tax on its foreign-source income.
BEFORE INVERSION U.S. Company Non-U.S. Company 1 Non-U.S. Company 2 Non-U.S. Company 3 Paren t Subsidiary
U.S. Company Non-U.S. Company 1 Non-U.S. Company 2 Non-U.S. Company 3 AFTER INVERSION Paren t Subsidiary
ANATOMY OF INVERSIONS PARENT COUNTRY (AFTER INVERSION) IN RED  Naked inversion versus merger/acquisition  E.g. Coopers Industries (U.S.) to Bermuda (naked)  E.g., Argonaut (U.S.) acquire PXRE (Bermuda)  New parent as acquirer or target  E.g., Ensco (UK) acquire Pride (U.S.)  E.g., Eaton (U.S.) acquire Cooper (Ireland)
TAXONOMY OF CROSS-BORDER M&A  All cross-border mergers and acquisitions (M&A)  Headquarter relocations  Inversions  Tax-motivated inversions  One estimate puts tax motivated inversions at <1% of deal value for all cross-border M&A
WHY ARE INVERSIONS HAPPENING?
SOME DATA JOHANNES VOGET. RELOCATION OF HEADQUARTERS AND INTERNATIONAL TAXATION. JOURNAL OF PUBLIC ECONOMICS (2011).  About 6% of multinationals relocated their headquarters to another country  Sample period: 1997–2007  33 countries represented  Using Zephyr database by BvD
HEADQUARTER RELOCATIONS Table 1 Multinationals and headquarter relocations Country Firms Headquarter Multinationals Headquarter Percent firms relocations Australia 2374 1251 76 5 6.6% Austria 3305 593 52 2 3.8% Belgium 30433 4483 294 20 6.8% Canada 1630 866 100 7 7.0% Denmark 22729 6309 213 16 7.5% Finland 8283 933 99 9 9.1% France 90783 11427 367 23 6.3% Germany 25396 4773 322 30 9.3% Ireland 16505 3577 84 9 10.7% Italy 121006 9390 300 12 4.0% Japan 95379 3073 446 2 0.4% Luxembourg 1271 171 21 2 9.5% Netherlands 52007 1299 290 28 9.7% Norway 18778 5193 94 15 16.0% Spain 92611 17729 197 8 4.1% Sweden 21975 4834 413 19 4.6% Switzerland 1607 449 117 7 6.0% United Kingdom 139132 31974 508 37 7.3% United States 21023 5506 1158 27 2.3% Total 766227 113830 5151 278 5.4% Johannes Voget. Relocation of headquarters and international taxation. Journal of Public Economics (2011).
HEADQUARTER RELOCATIONS Table 2 Cross-country headquarter relocations Relocating from Code Relocating to AU AT BE CA DK FI FR DE IE IT JP LU NL NO ES SE CH GB US Total Australia AU 0 0 0 0 1 0 0 0 0 1 0 0 0 0 0 0 0 1 2 5 Austria AT 0 0 0 0 0 0 0 1 0 1 0 0 0 0 0 0 0 0 0 2 Belgium BE 1 0 0 0 0 0 3 3 1 0 0 0 4 0 0 0 1 2 5 20 Canada CA 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 7 7 Denmark DK 0 0 0 0 0 1 1 1 0 1 0 0 1 1 0 1 0 3 6 16 Finland FI 0 0 0 0 0 0 0 0 0 1 0 0 0 1 0 4 1 0 2 9 France FR 0 1 0 2 0 1 0 3 0 2 0 0 4 0 2 0 1 4 3 23 Germany DE 0 2 1 1 2 1 4 0 1 3 0 2 0 1 1 1 1 3 6 30 Ireland IE 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 4 4 9 Italy IT 0 0 1 0 0 0 2 3 0 0 0 0 0 0 0 0 1 4 1 12 Japan JP 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 1 0 0 2 Luxembour LU 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 g Netherlands NL 0 2 1 0 1 0 6 4 0 1 0 0 0 0 2 0 0 1 10 28 Norway NO 0 0 1 0 2 3 1 0 0 0 1 0 1 0 0 1 0 4 1 15 Spain ES 0 0 0 0 0 0 5 0 0 0 0 0 1 0 0 0 0 0 1 7 Sweden SE 0 0 0 1 2 0 0 1 1 0 0 0 2 2 0 0 1 4 5 19 Switzerland CH 0 0 0 0 0 1 2 1 0 0 0 0 0 0 0 1 0 0 2 7 UK GB 1 0 1 0 0 0 5 5 2 1 1 0 1 0 2 1 1 0 16 37 US US 1 0 0 4 1 1 5 4 0 0 0 0 3 0 0 0 2 6 0 27 Total 3 5 7 8 9 8 35 26 5 12 2 2 17 5 7 9 10 37 71 278
FINDINGS JOHANNES VOGET. RELOCATION OF HEADQUARTERS AND INTERNATIONAL TAXATION. JOURNAL OF PUBLIC ECONOMICS (2011).  The additional tax due in the home country upon repatriation of foreign profits has a positive effect on the numbers of relocations.  Headquarters in territorial countries more likely  The presence of controlled foreign corporation legislation has a positive effect on the number of relocations.  Headquarters in countries with no CFC rules more likely
TAX SYSTEMS Country Method of double tax relief Statutory tax rate CFC Legislation? Strength of CFC Legislation Australia Territorial 30.0 Y 3 Austria Territorial 25.0 N - Belgium Territorial 34.0 N - Canada Territorial 26.3 Y 4 Denmark Territorial 24.5 Y 4 Finland Territorial 20.0 Y 4 France Territorial 34.4 Y 4 Germany Territorial 30.2 Y 4 Ireland Worldwide 12.5 N - Italy Territorial 27.5 Y 3 Japan Territorial 37.0 Y 5 Luxembourg Territorial 29.2 N - Netherlands Territorial 25.0 N - Norway Territorial 27.0 Y 5 Spain Territorial 30.0 Y 4 Sweden Territorial 22.0 Y 5 Switzerland Territorial 21.1 N - UK Territorial 21.0 Y 7 U.S. Worldwide 39.1 Y 3 Leslie Robinson and Kevin Markle. Tax haven use across international tax regimes. Working paper.
CORPORATE TAX RATES 0.0 10.0 20.0 30.0 40.0 50.0 60.0 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 United States Average OECD
U.S. TAX SYSTEM  “With the developed world's highest corporate tax rate at over 39% including state levies, plus a rare demand that money earned overseas should be taxed as if it were earned domestically, the U.S. is almost in a class by itself.” (Wall Street Journal, Sept. 15, 2014)
2014 TAX COMPETITIVENESS INDEX The United States ranked last with respect to the international provisions of its tax code.
COSTS & BENEFITS OF AN INVERSION FIRM PERSPECTIVE  Costs  Shareholder-level tax liability  Potential change to real operations  Business synergies (if through merger)  Change in governance structure  Change in regulatory environment  Benefits  Reduction in income tax on future income  Improved access to internal capital  Business synergies (if through merger)  Change in governance structure  Change in regulatory environment
BEFORE INVERSION: TAX COSTS U.S. Company t=35% Non-U.S. Company 1 (t=20%) Non-U.S. Company 2 (t=20%) Non-U.S. Company 3 (t=20%) t=corporate tax rate • When foreign earnings are paid to the parent in the form of a dividend from 1, 2 or 3, the income is taxed at 15% (35%-20%). • Otherwise, earnings are ‘trapped’, generating implicit costs. • Loans from 1, 2, and 3 to the U.S. will be treated as a distribution.
AFTER INVERSION: TAX BENEFITS U.S. Company (t=35%) Non-U.S. Company 1 (t=20%) Non-U.S. Company 2 (t=20%) Non-U.S. Company 3 (t=20%) t=corporate tax rate • Previously ‘trapped’, earnings in 1 and 3 may be loaned to 2 for shareholder distributions or investment in the U.S. company. • Company 2 can loan to the U.S., generating significant interest deductions to lower U.S. tax liability.
COSTS (& BENEFITS?) OF AN INVERSION GOVERNMENT PERSPECTIVE  Costs  Erosion of the U.S. tax base  Cost advantage for foreign-controlled firms  Reduction in perceived fairness of tax system  Shift in real operations to another country  Change in governance structure  National pride from headquarter location  Benefits  None that come to mind…
WHAT CAN / SHOULD THE U.S. DO ABOUT THEM?
INVERSION LEGISLATION  What constitutes a ‘true’ expatriation? What is a ‘real’ foreign firm?  American Jobs Creation Act of 2004 targeted inversions  The owners of the new company are substantially different from the owners of the original company (based on value)  > 80 percent continuing ownership: inversion benefits disallowed  > 60 percent continuing ownership: inversion benefits restricted  Exception to the above : The firm has substantial business operations in the country where the new headquarters is to be located  2004: Substantial = Facts and circumstances  2006: Substantial = 10 percent  2010: Substantial = Facts and circumstances  2012: Substantial = 25 percent
CORPORATE INVERSIONS: 1983 - 2014 A Spike in Corporate Inversions 2014 2004 In last decade, 47 corporations have moved their address overseas to pay less U.S. taxes * * * * * * * AOE Corporat ion Alkermes DutchCo St ratasys TE Connect ivity Mallinckrodt Pharmaceut icals TIMELINE 1 9 8 3 • Helen of Troy •McDermott International Source : Congressional Research Service * Represents companies that inverted between 2009 and 2014. & • Santa Fe Int ’l •Everest Reinsurance •Appl i ed Power •Whit e Mountain Ins. •Tra nso ce an •PXRE Group • Trenwick • Xoma 1999 •R&B Falcon •Hungar ia n Telephone & Cabl e Corp. • Arcad e Acqu i sit ion Grp • Ene rgy I nfr astructure •Ascend Acqu i sit ion •Acqui sit i on Grp. • Foste r Whe el er •Patch I nt’l In c •Tyco El ectr i c •Star Maritime Acquisition Group •N ob l e Corp . • Co op er In dust ries • We ather f or d In t ’l • Ing ersoll-Ran d • PWC Co nsult i ng Ltd . 2001 •Global Santa Fe Corp. •Fost er Wheeler, •Accenture •Global Marine 2012 1 9 9 4 1 9 9 6 1 9 9 7 1998 2000 2005 2009 2013 2010 2008 2002 •Fluid Media Net work •Western Goldfields •Lincoln Gol d 2007 • 2020 ChinaCap Acquisit ion •InterAmerica Acquisit ion •Ideation Acquisi t ion Grp. •Vant age Energy Services • Alyst Acquisit ion Grp. • Alpha Secu rity • ENSCO I nt ’ l 2011 •Al ker m es, Inc •Pl astin um Pol ymer Te ch Corp. •Valient/ Biovail • Pentair • Rowan Compa nies • AON • Tro nox I nc • Argona ut • Jazz Pharmaceu t ical s / Azu r Phar m a • D.E. Maste r Bl ender s •Eaton/Coop er •Cade nce Pha rmaceu ticals • Act avis / Warner • Chi l cott •End o Hea lt h Solu t i ons •Liber ty Globa l PLC • Gold Reser ve •Playstar 29 In the last decade Legislation to tighten rules to limit inversions would save taxpayers nearly $20 billion over ten years . 47 In 20 years
FORTUNE, 07/07/2014
SENATE FINANCE COMMITTEE, 07/22/2014
MY TESTIMONY IN A NUTSHELL  There is no evidence that U.S. firms bear higher explicit tax costs on foreign income than their competitors  There is evidence that U.S. firms bear implicit tax costs from deferral, but no comparison has been made to their competitors  The issue is not territorial versus worldwide  Ending deferral and lowering the tax rate could be ‘better’ than adopting a territorial system  Stop gap measures to curb inversions will merely change the form of inversions and may result in unintended consequences for the U.S. economy
SENATE HEARING  C-Span
INTERNATIONAL NY TIMES, 09/22/2014
WALL STREET JOURNAL, 09/24/2014
FINANCIAL TIMES, 09/25/2014
INVERSION REGULATIONS  Treasury Notice 2014-52 (issued 09/22/2014)  Limits the ability to access the accumulated deferred earnings of foreign subsidiaries of U.S. firms  Restricts certain techniques used in inversion transactions that allowed firms to qualify with less than 80% ownership  Changes in regulation are a stop gap measure  Targeted legislation is needed to reduce incentives and ability of firms to invert  Estimated to take 2-3 years
LIMIT TAX BENEFITS POST-INVERSION U.S. Company (t=35%) Non-U.S. Company 1 (t=20%) Non-U.S. Company 2 (t=20%) Non-U.S. Company 3 (t=20%) t=corporate tax rate • Prevent previously ‘trapped’, earnings in 1 and 3 from being loaned to 2 for shareholder distributions or investment in the U.S. Company. • Limit situations where the shareholders of 2 are deemed to be substantially different than the original shareholders of the U.S.
KLAUSENPASS, SWISS ALPS (07/24/2014) (THAT’S ME ON SWITCHBACK # 426…) One of life’s many ironies: I spent a lot of money putting myself off the grid during the one week out of my life when my income potential was the greatest. BUT…we had so much fun…
Enjoy Reunion Weekend. THANK YOU!
Ethics in Action, Professor Rick Shreve & Professor Leslie Robinson (Guest) TAX AND REPUTATION
THE RISE OF TAX SHAMING Starbucks protester, December 2012. The tide of public opinion is visibly turning. Why?
ATTACK ON STARBUCKS IN THE UK  Foreign companies like Starbucks which have avoided paying large corporation tax bills in the UK “lack moral scruples", says British Prime Minister David Cameron.  “We are not accusing you of being illegal,” Public Accounts Committee chairman Margaret Hodge said, “we are accusing you of being immoral.”
TWO KEY DRIVING FORCES  Journalists are doing their own investigations and printing ‘sensational’ stories about how firms avoid taxes  E.g., In April 2012, the “But Nobody Pays That” NYT series was awarded a Pulitzer Prize for explanatory journalism. The Pulitzer jury said Mr. Kocieniewski’s work “penetrated a legal thicket to explain how the nation’s wealthiest citizens and corporations often exploited loopholes and avoided taxes.”  We are in an age of deep public spending cuts and real austerity  E.g., Stephen Timms, financial secretary to the Treasury, says that failing to pay the correct tax will "rob our public services of valuable resources" at a time when the public purse is under intense pressure because of the bank bailouts.
TAX AVOIDANCE IN THE UK  HMRC estimates that corporate tax avoidance is costing the UK economy something between 45 to 90 billion pounds a year.  Tax avoidance undoes austerity measures (i.e., policies used by governments to reduce budget deficits during adverse economic conditions) and widens the gap between the rich and the poor in British society.
DISCUSSION QUESTIONS 1. What is the situation facing Starbucks in the UK? 2. Do you agree with Starbucks' decision to make 'voluntary' tax payments? Why or why not? 3. What does it mean for Starbucks to pay its 'fair share' of UK corporate tax? 4. Do you think legal tax avoidance should ever be perceived as immoral? Why or why not? 5. There is a growing culture of tax shaming companies by both the media and politicians. The idea that Starbucks would voluntarily pay more tax than it legally owes demonstrates the effectiveness of tax shaming. However, is tax shaming justifiable? Why or why not?
CASE QUESTIONS (P. 4) 1. Looking at the common-size income statement data in Appendix A, what might have prompted Starbucks to re-locate its ‘roasting technology’ to the Netherlands and put the royalty arrangement in place in 2002? Is this type of ‘tax planning’ different than other kinds of strategic planning? Why or why not? 2. Are statements by Starbucks to its investors that the UK market is “successful” inconsistent with Starbucks UK realizing an operating loss in 14 out of 15 years? Why or why not? 3. What is the viewpoint of Starbucks? Of Starbucks’ customers? Of UK politicians? Of Economists? Which viewpoint is most consistent with yours? Why? 4. Does Starbucks’ community outreach influence the way you think about the morality of their tax planning arrangements? Why or why not?
INTERNATIONAL TAX PLANNING  ‘Stateless income tax planning’  A phrase coined by legal tax scholars  Traditional factors of production – land, labor, and capital – were the primary factors when many income tax systems were developed  Today, even a simple business model can be turned into intangibles assets for which ‘fees’ must be paid within a multinational group  Intangible “ownership” is divorced from the actual business or customers that the intangibles serve  Generally entails deductions in high tax countries; income in low tax countries
INTERCOMPANY ARRANGEMENTS Funds British operations with debt Starbucks Coffee Company (UK) Ltd.  British licensed stores Starbucks Corporation  Global headquarters Intercompany interest paid by Starbucks UK to the US (and other group companies) reduces UK profit and in some cases is taxed at low rates in jurisdictions where interest income is reported Starbucks Manufacturing EMEA BV  Roasting facility  Licensing agreement  Intellectual property Intercompany royalty paid by Starbucks UK reduces UK profit and is taxed at low rates in jurisdiction where royalty income is reported Use of the Starbucks brand, roasting technology etc. Case: Figure 1 (pg. 5)
ROYALTIES FROM UK TO NL Case: Figure 1 (pg. 6) Common-size income statement (all amounts are reported as a % of Sales): 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Sales 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Cost of sales -0.73 -0.55 -0.49 -0.50 -0.48 -0.47 -0.44 -0.44 -0.44 -0.42 -0.45 -0.47 -0.45 -0.48 -0.50 Labor -0.39 -0.43 -0.38 -0.34 -0.33 -0.32 -0.31 -0.30 -0.29 -0.31 -0.31 -0.31 -0.31 -0.32 -0.31 Buildings -0.47 -0.23 -0.23 -0.26 -0.30 -0.25 -0.24 -0.23 -0.21 -0.20 -0.23 -0.26 -0.24 -0.20 -0.19 Operating Income (Loss) before Royalties and fees - 59% - 21% -9% - 10% - 11% -4% 1% 4% 5% 7% 1% -4% 0% -1% 0% Royalties and fees 0.00 0.00 0.00 0.00 0.00 -0.06 -0.06 -0.06 -0.06 -0.06 -0.06 -0.06 -0.06 -0.06 -0.06 Operating Income (Loss) - 59% - 21% -9% - 10% - 11% - 11% -5% -3% -1% 0% -5% -11% -6% -7% -7%
COMMUNICATING WITH INVESTORS  Should Starbucks’ investors care about:  Consolidated operation or UK operation?  Intercompany payments? Cost allocation?  UK revenue growth, market share, or profit?  What is a ‘successful’ market? When should ‘regional’ executives be rewarded and promoted? (Case: Appendix A, pg. 6) Other Data: 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Director Benefits (000s) £ 91 £ 153 £ 219 £ 209 £ 270 £ 293 £ 439 £ 452 £ 534 £ 485 £ 519 £ 270 £ 312 £ 372 £ 708
VARIOUS VIEWPOINTS  Customers  Politicians  Executives  Academics Case: pgs. 3-4
NON-TAX CONTRIBUTIONS TO UK • Investment in people and stores (Case: Appendix A pg. 6) Other Data: 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Number of Employees 580 971 1746 3002 3946 4861 5299 6092 6645 7771 9225 9623 8647 8763 8739 Number of Owned Stores 66 95 161 252 322 373 420 467 514 580 664 666 601 607 593 • Investment in community (Case: pg. 3) E.g., Tenth place in the Financial Times 50 Best Workplaces in the UK and one of the 100 Best Workplaces in Europe; Partners with Prince’s Trust to give disadvantaged young people skills and work experience to get a job or secure training in the UK.
DISCUSSION QUESTIONS 1. What is the situation facing Starbucks in the UK? 2. Do you agree with Starbucks' decision to make 'voluntary' tax payments? Why or why not? 3. What does it mean for Starbucks to pay its 'fair share' of UK corporate tax? 4. Do you think legal tax avoidance should ever be perceived as immoral? Why or why not? 5. There is a growing culture of tax shaming companies by both the media and politicians. The idea that Starbucks would voluntarily pay more tax than it legally owes demonstrates the effectiveness of tax shaming. However, is tax shaming justifiable? Why or why not?
THE ACADEMIC LITERATURE AND THE “UNDER-SHELTERING PUZZLE”  Survey evidence  69 percent of executives surveyed cite “potential harm to firm reputation” as a reason for not adopting a tax planning strategy  Empirical evidence  Investors respond negatively to news a firm is accused of engaging in a tax shelter; the reaction is greater for retail firms (but, reverses quickly)
SOCIAL MEDIA Source: www.YouGov.com • On June 23, 2013, Starbucks announced that it made its first £5 million payment to HMRC, confirming that it was following through with the plan laid out last December. • According to YouGov’s social media analysis nearly a third heard about the brand that day, up from 16 per cent the day before. Leaving no ambiguity as to what was driving the increased activity, top words mentioned alongside Starbucks were “tax”, “corporation”, “UK”, “pays” and “first”.
BRAND DATA Source: www.YouGov.com • Buzz score measures the net balance of positive and negative things people have heard about a brand. • Before Reuters story: +2.7; after PAC investigation: -44.4; after first payment: - 10.0.
CONSUMER LOYALTY YouGov asked: If there were a Costa Coffee, a Starbucks and a Cafe Nero next door to each other, which one would be your first choice to visit? Now Before the tax row Costa 39.4% 31.8% Starbucks 15.4% 22.7% Caffe Nero 12.1% 12.3% Source: www.YouGov.com • Costa said (same-store) sales rose 7.1 per cent in the 3 months to November 29, 2012 (versus 6.8% in the previous 3months). Andy Harrison, CEO said of the backlash: “It’s clearly not bad for our business.” Still, the cause and effect is not clear. • Hodge encouraged taxpayers to boycott the U.S. chain. "I'm not going to buy Starbucks tomorrow, I think everybody should go and buy Costa," she told BBC2's Newsnight in October 2012.
COSTA VERSUS STARBUCKS Source: www.YouGov.com • Index score takes into account how customers rate the brand in terms of impression, quality, value, reputation, satisfaction and whether they would recommend it.
RECENT ACADEMIC STUDIES  Branding experts note:  On the one hand - Customers have very long memories and their emotional tie to a brand is a very important part of the loyalty. If a company with a strong brand damages that, it also damages its financial value.  One the other hand - It is hard to measure the direct impact of tax shaming on sales and profit. Reputational damage is difficult to ascertain and can quickly dissipate. Though one impact of tax shaming is that individuals can boycott brands, the number of people who take direct action is relatively low.  No empirical evidence that firms or executives bear reputational costs from engaging in tax avoidance  Examine CEO/CFO turnover, auditor turnover, lost sales, increased advertising costs, decreased media reputation  Also, no change in tax avoidance behavior post public scrutiny
DISCUSSION QUESTIONS 1. What is the situation facing Starbucks in the UK? 2. Do you agree with Starbucks' decision to make 'voluntary' tax payments? Why or why not? 3. What does it mean for Starbucks to pay its 'fair share' of UK corporate tax? 4. Do you think legal tax avoidance should ever be perceived as immoral? Why or why not? 5. There is a growing culture of tax shaming companies by both the media and politicians. The idea that Starbucks would voluntarily pay more tax than it legally owes demonstrates the effectiveness of tax shaming. However, is tax shaming justifiable? Why or why not?
SOME THOUGHTS  Who bears the burden of taxation?  E.g., Starbucks announced price increases as of June 25, 2013 on many of its coffee drinks  What about taxes other than income taxes?  E.g., Total tax contribution framework of PwC and World Bank  The notion of ‘fair share’ is loosely based on revenues or market share, but corporate tax is based on profits.  Do governments need to fundamentally rethink their tax systems?
DISCUSSION QUESTIONS 1. What is the situation facing Starbucks in the UK? 2. Do you agree with Starbucks' decision to make 'voluntary' tax payments? Why or why not? 3. What does it mean for Starbucks to pay its 'fair share' of UK corporate tax? 4. Do you think legal tax avoidance should ever be perceived as immoral? Why or why not? 5. There is a growing culture of tax shaming companies by both the media and politicians. The idea that Starbucks would voluntarily pay more tax than it legally owes demonstrates the effectiveness of tax shaming. However, is tax shaming justifiable? Why or why not?
SOME THOUGHTS  Spirit of the law versus the letter of the law  Can the spirit of the law be enforced?  Some countries instituting general anti-avoidance rules (GAARs)  Does the transaction have a valid business purpose? Would more transparency solve things?  Currently, no tax authority sees the full picture of a multinational firm’s group structure. Should they?
DISCUSSION QUESTIONS 1. What is the situation facing Starbucks in the UK? 2. Do you agree with Starbucks' decision to make 'voluntary' tax payments? Why or why not? 3. What does it mean for Starbucks to pay its 'fair share' of UK corporate tax? 4. Do you think legal tax avoidance should ever be perceived as immoral? Why or why not? 5. There is a growing culture of tax shaming companies by both the media and politicians. The idea that Starbucks would voluntarily pay more tax than it legally owes demonstrates the effectiveness of tax shaming. However, is tax shaming justifiable? Why or why not?
SOME THOUGHTS  Tax naming and shaming is increasing  E.g., Amazon, Google, GE, Apple, Microsoft, HP  When do we breach taxpayer confidentiality?  Could it be considered immoral for a politician to single out a particular company to ‘assure’ the public that the government is proactively combatting tax avoidance?
Thank you for a great discussion!

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Tuck Reunion 2014 - International Tax Reform in the U.S.: Why Are We Stuck in Neutral?

  • 1.
    Leslie Robinson AssociateProfessor Tuck Reunion 2014 INTERNATIONAL TAX REFORM IN THE U.S.: WHY ARE WE STUCK IN NEUTRAL?
  • 3.
    AGENDA  Whatis a corporate inversion?  A process by which an existing corporation changes its country of residenc  Why are inversions happening?  Symptom of an ‘uncompetitive’ tax system  What can / should the U.S. do about them?  General reform of the U.S. corporate tax code  Specific provisions to deal with tax-motivated inversions  Aside: Is tax avoidance immoral or unpatriotic?
  • 4.
    CORPORATE INVERSIONS: 1983- 2014 A Spike in Corporate Inversions 2014 2004 In last decade, 47 corporations have moved their address overseas to pay less U.S. taxes * * * * * * * AOE Corporat ion Alkermes DutchCo St ratasys TE Connect ivity Mallinckrodt Pharmaceut icals TIMELINE 1 9 8 3 • Helen of Troy •McDermott International Source : Congressional Research Service * Represents companies that inverted between 2009 and 2014. & • Santa Fe Int ’l •Everest Reinsurance •Appl i ed Power •Whit e Mountain Ins. •Tra nso ce an •PXRE Group • Trenwick • Xoma 1999 •R&B Falcon •Hungar ia n Telephone & Cabl e Corp. • Arcad e Acqu i sit ion Grp • Ene rgy I nfr astructure •Ascend Acqu i sit ion •Acqui sit i on Grp. • Foste r Whe el er •Patch I nt’l In c •Tyco El ectr i c •Star Maritime Acquisition Group •N ob l e Corp . • Co op er In dust ries • We ather f or d In t ’l • Ing ersoll-Ran d • PWC Co nsult i ng Ltd . 2001 •Global Santa Fe Corp. •Fost er Wheeler, •Accenture •Global Marine 2012 1 9 9 4 1 9 9 6 1 9 9 7 1998 2000 2005 2009 2013 2010 2008 2002 •Fluid Media Net work •Western Goldfields •Lincoln Gol d 2007 • 2020 ChinaCap Acquisit ion •InterAmerica Acquisit ion •Ideation Acquisi t ion Grp. •Vant age Energy Services • Alyst Acquisit ion Grp. • Alpha Secu rity • ENSCO I nt ’ l 2011 •Al ker m es, Inc •Pl astin um Pol ymer Te ch Corp. •Valient/ Biovail • Pentair • Rowan Compa nies • AON • Tro nox I nc • Argona ut • Jazz Pharmaceu t ical s / Azu r Phar m a • D.E. Maste r Bl ender s •Eaton/Coop er •Cade nce Pha rmaceu ticals • Act avis / Warner • Chi l cott •End o Hea lt h Solu t i ons •Liber ty Globa l PLC • Gold Reser ve •Playstar 29 In the last decade Legislation to tighten rules to limit inversions would save taxpayers nearly $20 billion over ten years . 47 In 20 years
  • 5.
  • 6.
    WHAT IS ACORPORATE INVERSION?
  • 7.
    DEFINITION OF ANINVERSION  A corporate inversion is a process by which an existing corporation changes its country of residence by becoming a subsidiary of a parent corporation in another country, and if tax motivated…. With the objective of facing a lower tax rate in its new country of residence and paying no tax on its foreign-source income.
  • 8.
    BEFORE INVERSION U.S. Company Non-U.S. Company 1 Non-U.S. Company 2 Non-U.S. Company 3 Paren t Subsidiary
  • 9.
    U.S. Company Non-U.S. Company 1 Non-U.S. Company 2 Non-U.S. Company 3 AFTER INVERSION Paren t Subsidiary
  • 10.
    ANATOMY OF INVERSIONS PARENT COUNTRY (AFTER INVERSION) IN RED  Naked inversion versus merger/acquisition  E.g. Coopers Industries (U.S.) to Bermuda (naked)  E.g., Argonaut (U.S.) acquire PXRE (Bermuda)  New parent as acquirer or target  E.g., Ensco (UK) acquire Pride (U.S.)  E.g., Eaton (U.S.) acquire Cooper (Ireland)
  • 11.
    TAXONOMY OF CROSS-BORDERM&A  All cross-border mergers and acquisitions (M&A)  Headquarter relocations  Inversions  Tax-motivated inversions  One estimate puts tax motivated inversions at <1% of deal value for all cross-border M&A
  • 12.
  • 13.
    SOME DATA JOHANNESVOGET. RELOCATION OF HEADQUARTERS AND INTERNATIONAL TAXATION. JOURNAL OF PUBLIC ECONOMICS (2011).  About 6% of multinationals relocated their headquarters to another country  Sample period: 1997–2007  33 countries represented  Using Zephyr database by BvD
  • 14.
    HEADQUARTER RELOCATIONS Table1 Multinationals and headquarter relocations Country Firms Headquarter Multinationals Headquarter Percent firms relocations Australia 2374 1251 76 5 6.6% Austria 3305 593 52 2 3.8% Belgium 30433 4483 294 20 6.8% Canada 1630 866 100 7 7.0% Denmark 22729 6309 213 16 7.5% Finland 8283 933 99 9 9.1% France 90783 11427 367 23 6.3% Germany 25396 4773 322 30 9.3% Ireland 16505 3577 84 9 10.7% Italy 121006 9390 300 12 4.0% Japan 95379 3073 446 2 0.4% Luxembourg 1271 171 21 2 9.5% Netherlands 52007 1299 290 28 9.7% Norway 18778 5193 94 15 16.0% Spain 92611 17729 197 8 4.1% Sweden 21975 4834 413 19 4.6% Switzerland 1607 449 117 7 6.0% United Kingdom 139132 31974 508 37 7.3% United States 21023 5506 1158 27 2.3% Total 766227 113830 5151 278 5.4% Johannes Voget. Relocation of headquarters and international taxation. Journal of Public Economics (2011).
  • 15.
    HEADQUARTER RELOCATIONS Table2 Cross-country headquarter relocations Relocating from Code Relocating to AU AT BE CA DK FI FR DE IE IT JP LU NL NO ES SE CH GB US Total Australia AU 0 0 0 0 1 0 0 0 0 1 0 0 0 0 0 0 0 1 2 5 Austria AT 0 0 0 0 0 0 0 1 0 1 0 0 0 0 0 0 0 0 0 2 Belgium BE 1 0 0 0 0 0 3 3 1 0 0 0 4 0 0 0 1 2 5 20 Canada CA 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 7 7 Denmark DK 0 0 0 0 0 1 1 1 0 1 0 0 1 1 0 1 0 3 6 16 Finland FI 0 0 0 0 0 0 0 0 0 1 0 0 0 1 0 4 1 0 2 9 France FR 0 1 0 2 0 1 0 3 0 2 0 0 4 0 2 0 1 4 3 23 Germany DE 0 2 1 1 2 1 4 0 1 3 0 2 0 1 1 1 1 3 6 30 Ireland IE 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 4 4 9 Italy IT 0 0 1 0 0 0 2 3 0 0 0 0 0 0 0 0 1 4 1 12 Japan JP 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 1 0 0 2 Luxembour LU 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 g Netherlands NL 0 2 1 0 1 0 6 4 0 1 0 0 0 0 2 0 0 1 10 28 Norway NO 0 0 1 0 2 3 1 0 0 0 1 0 1 0 0 1 0 4 1 15 Spain ES 0 0 0 0 0 0 5 0 0 0 0 0 1 0 0 0 0 0 1 7 Sweden SE 0 0 0 1 2 0 0 1 1 0 0 0 2 2 0 0 1 4 5 19 Switzerland CH 0 0 0 0 0 1 2 1 0 0 0 0 0 0 0 1 0 0 2 7 UK GB 1 0 1 0 0 0 5 5 2 1 1 0 1 0 2 1 1 0 16 37 US US 1 0 0 4 1 1 5 4 0 0 0 0 3 0 0 0 2 6 0 27 Total 3 5 7 8 9 8 35 26 5 12 2 2 17 5 7 9 10 37 71 278
  • 16.
    FINDINGS JOHANNES VOGET.RELOCATION OF HEADQUARTERS AND INTERNATIONAL TAXATION. JOURNAL OF PUBLIC ECONOMICS (2011).  The additional tax due in the home country upon repatriation of foreign profits has a positive effect on the numbers of relocations.  Headquarters in territorial countries more likely  The presence of controlled foreign corporation legislation has a positive effect on the number of relocations.  Headquarters in countries with no CFC rules more likely
  • 17.
    TAX SYSTEMS Country Method of double tax relief Statutory tax rate CFC Legislation? Strength of CFC Legislation Australia Territorial 30.0 Y 3 Austria Territorial 25.0 N - Belgium Territorial 34.0 N - Canada Territorial 26.3 Y 4 Denmark Territorial 24.5 Y 4 Finland Territorial 20.0 Y 4 France Territorial 34.4 Y 4 Germany Territorial 30.2 Y 4 Ireland Worldwide 12.5 N - Italy Territorial 27.5 Y 3 Japan Territorial 37.0 Y 5 Luxembourg Territorial 29.2 N - Netherlands Territorial 25.0 N - Norway Territorial 27.0 Y 5 Spain Territorial 30.0 Y 4 Sweden Territorial 22.0 Y 5 Switzerland Territorial 21.1 N - UK Territorial 21.0 Y 7 U.S. Worldwide 39.1 Y 3 Leslie Robinson and Kevin Markle. Tax haven use across international tax regimes. Working paper.
  • 18.
    CORPORATE TAX RATES 0.0 10.0 20.0 30.0 40.0 50.0 60.0 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 United States Average OECD
  • 19.
    U.S. TAX SYSTEM  “With the developed world's highest corporate tax rate at over 39% including state levies, plus a rare demand that money earned overseas should be taxed as if it were earned domestically, the U.S. is almost in a class by itself.” (Wall Street Journal, Sept. 15, 2014)
  • 20.
    2014 TAX COMPETITIVENESSINDEX The United States ranked last with respect to the international provisions of its tax code.
  • 21.
    COSTS & BENEFITSOF AN INVERSION FIRM PERSPECTIVE  Costs  Shareholder-level tax liability  Potential change to real operations  Business synergies (if through merger)  Change in governance structure  Change in regulatory environment  Benefits  Reduction in income tax on future income  Improved access to internal capital  Business synergies (if through merger)  Change in governance structure  Change in regulatory environment
  • 22.
    BEFORE INVERSION: TAXCOSTS U.S. Company t=35% Non-U.S. Company 1 (t=20%) Non-U.S. Company 2 (t=20%) Non-U.S. Company 3 (t=20%) t=corporate tax rate • When foreign earnings are paid to the parent in the form of a dividend from 1, 2 or 3, the income is taxed at 15% (35%-20%). • Otherwise, earnings are ‘trapped’, generating implicit costs. • Loans from 1, 2, and 3 to the U.S. will be treated as a distribution.
  • 23.
    AFTER INVERSION: TAXBENEFITS U.S. Company (t=35%) Non-U.S. Company 1 (t=20%) Non-U.S. Company 2 (t=20%) Non-U.S. Company 3 (t=20%) t=corporate tax rate • Previously ‘trapped’, earnings in 1 and 3 may be loaned to 2 for shareholder distributions or investment in the U.S. company. • Company 2 can loan to the U.S., generating significant interest deductions to lower U.S. tax liability.
  • 24.
    COSTS (& BENEFITS?)OF AN INVERSION GOVERNMENT PERSPECTIVE  Costs  Erosion of the U.S. tax base  Cost advantage for foreign-controlled firms  Reduction in perceived fairness of tax system  Shift in real operations to another country  Change in governance structure  National pride from headquarter location  Benefits  None that come to mind…
  • 25.
    WHAT CAN /SHOULD THE U.S. DO ABOUT THEM?
  • 26.
    INVERSION LEGISLATION What constitutes a ‘true’ expatriation? What is a ‘real’ foreign firm?  American Jobs Creation Act of 2004 targeted inversions  The owners of the new company are substantially different from the owners of the original company (based on value)  > 80 percent continuing ownership: inversion benefits disallowed  > 60 percent continuing ownership: inversion benefits restricted  Exception to the above : The firm has substantial business operations in the country where the new headquarters is to be located  2004: Substantial = Facts and circumstances  2006: Substantial = 10 percent  2010: Substantial = Facts and circumstances  2012: Substantial = 25 percent
  • 27.
    CORPORATE INVERSIONS: 1983- 2014 A Spike in Corporate Inversions 2014 2004 In last decade, 47 corporations have moved their address overseas to pay less U.S. taxes * * * * * * * AOE Corporat ion Alkermes DutchCo St ratasys TE Connect ivity Mallinckrodt Pharmaceut icals TIMELINE 1 9 8 3 • Helen of Troy •McDermott International Source : Congressional Research Service * Represents companies that inverted between 2009 and 2014. & • Santa Fe Int ’l •Everest Reinsurance •Appl i ed Power •Whit e Mountain Ins. •Tra nso ce an •PXRE Group • Trenwick • Xoma 1999 •R&B Falcon •Hungar ia n Telephone & Cabl e Corp. • Arcad e Acqu i sit ion Grp • Ene rgy I nfr astructure •Ascend Acqu i sit ion •Acqui sit i on Grp. • Foste r Whe el er •Patch I nt’l In c •Tyco El ectr i c •Star Maritime Acquisition Group •N ob l e Corp . • Co op er In dust ries • We ather f or d In t ’l • Ing ersoll-Ran d • PWC Co nsult i ng Ltd . 2001 •Global Santa Fe Corp. •Fost er Wheeler, •Accenture •Global Marine 2012 1 9 9 4 1 9 9 6 1 9 9 7 1998 2000 2005 2009 2013 2010 2008 2002 •Fluid Media Net work •Western Goldfields •Lincoln Gol d 2007 • 2020 ChinaCap Acquisit ion •InterAmerica Acquisit ion •Ideation Acquisi t ion Grp. •Vant age Energy Services • Alyst Acquisit ion Grp. • Alpha Secu rity • ENSCO I nt ’ l 2011 •Al ker m es, Inc •Pl astin um Pol ymer Te ch Corp. •Valient/ Biovail • Pentair • Rowan Compa nies • AON • Tro nox I nc • Argona ut • Jazz Pharmaceu t ical s / Azu r Phar m a • D.E. Maste r Bl ender s •Eaton/Coop er •Cade nce Pha rmaceu ticals • Act avis / Warner • Chi l cott •End o Hea lt h Solu t i ons •Liber ty Globa l PLC • Gold Reser ve •Playstar 29 In the last decade Legislation to tighten rules to limit inversions would save taxpayers nearly $20 billion over ten years . 47 In 20 years
  • 28.
  • 29.
  • 30.
    MY TESTIMONY INA NUTSHELL  There is no evidence that U.S. firms bear higher explicit tax costs on foreign income than their competitors  There is evidence that U.S. firms bear implicit tax costs from deferral, but no comparison has been made to their competitors  The issue is not territorial versus worldwide  Ending deferral and lowering the tax rate could be ‘better’ than adopting a territorial system  Stop gap measures to curb inversions will merely change the form of inversions and may result in unintended consequences for the U.S. economy
  • 31.
  • 32.
  • 33.
  • 34.
  • 35.
    INVERSION REGULATIONS Treasury Notice 2014-52 (issued 09/22/2014)  Limits the ability to access the accumulated deferred earnings of foreign subsidiaries of U.S. firms  Restricts certain techniques used in inversion transactions that allowed firms to qualify with less than 80% ownership  Changes in regulation are a stop gap measure  Targeted legislation is needed to reduce incentives and ability of firms to invert  Estimated to take 2-3 years
  • 36.
    LIMIT TAX BENEFITSPOST-INVERSION U.S. Company (t=35%) Non-U.S. Company 1 (t=20%) Non-U.S. Company 2 (t=20%) Non-U.S. Company 3 (t=20%) t=corporate tax rate • Prevent previously ‘trapped’, earnings in 1 and 3 from being loaned to 2 for shareholder distributions or investment in the U.S. Company. • Limit situations where the shareholders of 2 are deemed to be substantially different than the original shareholders of the U.S.
  • 37.
    KLAUSENPASS, SWISS ALPS(07/24/2014) (THAT’S ME ON SWITCHBACK # 426…) One of life’s many ironies: I spent a lot of money putting myself off the grid during the one week out of my life when my income potential was the greatest. BUT…we had so much fun…
  • 38.
  • 39.
    Ethics in Action, Professor Rick Shreve & Professor Leslie Robinson (Guest) TAX AND REPUTATION
  • 40.
    THE RISE OFTAX SHAMING Starbucks protester, December 2012. The tide of public opinion is visibly turning. Why?
  • 41.
    ATTACK ON STARBUCKSIN THE UK  Foreign companies like Starbucks which have avoided paying large corporation tax bills in the UK “lack moral scruples", says British Prime Minister David Cameron.  “We are not accusing you of being illegal,” Public Accounts Committee chairman Margaret Hodge said, “we are accusing you of being immoral.”
  • 42.
    TWO KEY DRIVINGFORCES  Journalists are doing their own investigations and printing ‘sensational’ stories about how firms avoid taxes  E.g., In April 2012, the “But Nobody Pays That” NYT series was awarded a Pulitzer Prize for explanatory journalism. The Pulitzer jury said Mr. Kocieniewski’s work “penetrated a legal thicket to explain how the nation’s wealthiest citizens and corporations often exploited loopholes and avoided taxes.”  We are in an age of deep public spending cuts and real austerity  E.g., Stephen Timms, financial secretary to the Treasury, says that failing to pay the correct tax will "rob our public services of valuable resources" at a time when the public purse is under intense pressure because of the bank bailouts.
  • 44.
    TAX AVOIDANCE INTHE UK  HMRC estimates that corporate tax avoidance is costing the UK economy something between 45 to 90 billion pounds a year.  Tax avoidance undoes austerity measures (i.e., policies used by governments to reduce budget deficits during adverse economic conditions) and widens the gap between the rich and the poor in British society.
  • 45.
    DISCUSSION QUESTIONS 1.What is the situation facing Starbucks in the UK? 2. Do you agree with Starbucks' decision to make 'voluntary' tax payments? Why or why not? 3. What does it mean for Starbucks to pay its 'fair share' of UK corporate tax? 4. Do you think legal tax avoidance should ever be perceived as immoral? Why or why not? 5. There is a growing culture of tax shaming companies by both the media and politicians. The idea that Starbucks would voluntarily pay more tax than it legally owes demonstrates the effectiveness of tax shaming. However, is tax shaming justifiable? Why or why not?
  • 46.
    CASE QUESTIONS (P.4) 1. Looking at the common-size income statement data in Appendix A, what might have prompted Starbucks to re-locate its ‘roasting technology’ to the Netherlands and put the royalty arrangement in place in 2002? Is this type of ‘tax planning’ different than other kinds of strategic planning? Why or why not? 2. Are statements by Starbucks to its investors that the UK market is “successful” inconsistent with Starbucks UK realizing an operating loss in 14 out of 15 years? Why or why not? 3. What is the viewpoint of Starbucks? Of Starbucks’ customers? Of UK politicians? Of Economists? Which viewpoint is most consistent with yours? Why? 4. Does Starbucks’ community outreach influence the way you think about the morality of their tax planning arrangements? Why or why not?
  • 47.
    INTERNATIONAL TAX PLANNING  ‘Stateless income tax planning’  A phrase coined by legal tax scholars  Traditional factors of production – land, labor, and capital – were the primary factors when many income tax systems were developed  Today, even a simple business model can be turned into intangibles assets for which ‘fees’ must be paid within a multinational group  Intangible “ownership” is divorced from the actual business or customers that the intangibles serve  Generally entails deductions in high tax countries; income in low tax countries
  • 48.
    INTERCOMPANY ARRANGEMENTS FundsBritish operations with debt Starbucks Coffee Company (UK) Ltd.  British licensed stores Starbucks Corporation  Global headquarters Intercompany interest paid by Starbucks UK to the US (and other group companies) reduces UK profit and in some cases is taxed at low rates in jurisdictions where interest income is reported Starbucks Manufacturing EMEA BV  Roasting facility  Licensing agreement  Intellectual property Intercompany royalty paid by Starbucks UK reduces UK profit and is taxed at low rates in jurisdiction where royalty income is reported Use of the Starbucks brand, roasting technology etc. Case: Figure 1 (pg. 5)
  • 49.
    ROYALTIES FROM UKTO NL Case: Figure 1 (pg. 6) Common-size income statement (all amounts are reported as a % of Sales): 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Sales 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Cost of sales -0.73 -0.55 -0.49 -0.50 -0.48 -0.47 -0.44 -0.44 -0.44 -0.42 -0.45 -0.47 -0.45 -0.48 -0.50 Labor -0.39 -0.43 -0.38 -0.34 -0.33 -0.32 -0.31 -0.30 -0.29 -0.31 -0.31 -0.31 -0.31 -0.32 -0.31 Buildings -0.47 -0.23 -0.23 -0.26 -0.30 -0.25 -0.24 -0.23 -0.21 -0.20 -0.23 -0.26 -0.24 -0.20 -0.19 Operating Income (Loss) before Royalties and fees - 59% - 21% -9% - 10% - 11% -4% 1% 4% 5% 7% 1% -4% 0% -1% 0% Royalties and fees 0.00 0.00 0.00 0.00 0.00 -0.06 -0.06 -0.06 -0.06 -0.06 -0.06 -0.06 -0.06 -0.06 -0.06 Operating Income (Loss) - 59% - 21% -9% - 10% - 11% - 11% -5% -3% -1% 0% -5% -11% -6% -7% -7%
  • 50.
    COMMUNICATING WITH INVESTORS  Should Starbucks’ investors care about:  Consolidated operation or UK operation?  Intercompany payments? Cost allocation?  UK revenue growth, market share, or profit?  What is a ‘successful’ market? When should ‘regional’ executives be rewarded and promoted? (Case: Appendix A, pg. 6) Other Data: 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Director Benefits (000s) £ 91 £ 153 £ 219 £ 209 £ 270 £ 293 £ 439 £ 452 £ 534 £ 485 £ 519 £ 270 £ 312 £ 372 £ 708
  • 51.
    VARIOUS VIEWPOINTS Customers  Politicians  Executives  Academics Case: pgs. 3-4
  • 52.
    NON-TAX CONTRIBUTIONS TOUK • Investment in people and stores (Case: Appendix A pg. 6) Other Data: 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Number of Employees 580 971 1746 3002 3946 4861 5299 6092 6645 7771 9225 9623 8647 8763 8739 Number of Owned Stores 66 95 161 252 322 373 420 467 514 580 664 666 601 607 593 • Investment in community (Case: pg. 3) E.g., Tenth place in the Financial Times 50 Best Workplaces in the UK and one of the 100 Best Workplaces in Europe; Partners with Prince’s Trust to give disadvantaged young people skills and work experience to get a job or secure training in the UK.
  • 53.
    DISCUSSION QUESTIONS 1.What is the situation facing Starbucks in the UK? 2. Do you agree with Starbucks' decision to make 'voluntary' tax payments? Why or why not? 3. What does it mean for Starbucks to pay its 'fair share' of UK corporate tax? 4. Do you think legal tax avoidance should ever be perceived as immoral? Why or why not? 5. There is a growing culture of tax shaming companies by both the media and politicians. The idea that Starbucks would voluntarily pay more tax than it legally owes demonstrates the effectiveness of tax shaming. However, is tax shaming justifiable? Why or why not?
  • 54.
    THE ACADEMIC LITERATUREAND THE “UNDER-SHELTERING PUZZLE”  Survey evidence  69 percent of executives surveyed cite “potential harm to firm reputation” as a reason for not adopting a tax planning strategy  Empirical evidence  Investors respond negatively to news a firm is accused of engaging in a tax shelter; the reaction is greater for retail firms (but, reverses quickly)
  • 55.
    SOCIAL MEDIA Source:www.YouGov.com • On June 23, 2013, Starbucks announced that it made its first £5 million payment to HMRC, confirming that it was following through with the plan laid out last December. • According to YouGov’s social media analysis nearly a third heard about the brand that day, up from 16 per cent the day before. Leaving no ambiguity as to what was driving the increased activity, top words mentioned alongside Starbucks were “tax”, “corporation”, “UK”, “pays” and “first”.
  • 56.
    BRAND DATA Source:www.YouGov.com • Buzz score measures the net balance of positive and negative things people have heard about a brand. • Before Reuters story: +2.7; after PAC investigation: -44.4; after first payment: - 10.0.
  • 57.
    CONSUMER LOYALTY YouGovasked: If there were a Costa Coffee, a Starbucks and a Cafe Nero next door to each other, which one would be your first choice to visit? Now Before the tax row Costa 39.4% 31.8% Starbucks 15.4% 22.7% Caffe Nero 12.1% 12.3% Source: www.YouGov.com • Costa said (same-store) sales rose 7.1 per cent in the 3 months to November 29, 2012 (versus 6.8% in the previous 3months). Andy Harrison, CEO said of the backlash: “It’s clearly not bad for our business.” Still, the cause and effect is not clear. • Hodge encouraged taxpayers to boycott the U.S. chain. "I'm not going to buy Starbucks tomorrow, I think everybody should go and buy Costa," she told BBC2's Newsnight in October 2012.
  • 58.
    COSTA VERSUS STARBUCKS Source: www.YouGov.com • Index score takes into account how customers rate the brand in terms of impression, quality, value, reputation, satisfaction and whether they would recommend it.
  • 59.
    RECENT ACADEMIC STUDIES  Branding experts note:  On the one hand - Customers have very long memories and their emotional tie to a brand is a very important part of the loyalty. If a company with a strong brand damages that, it also damages its financial value.  One the other hand - It is hard to measure the direct impact of tax shaming on sales and profit. Reputational damage is difficult to ascertain and can quickly dissipate. Though one impact of tax shaming is that individuals can boycott brands, the number of people who take direct action is relatively low.  No empirical evidence that firms or executives bear reputational costs from engaging in tax avoidance  Examine CEO/CFO turnover, auditor turnover, lost sales, increased advertising costs, decreased media reputation  Also, no change in tax avoidance behavior post public scrutiny
  • 60.
    DISCUSSION QUESTIONS 1.What is the situation facing Starbucks in the UK? 2. Do you agree with Starbucks' decision to make 'voluntary' tax payments? Why or why not? 3. What does it mean for Starbucks to pay its 'fair share' of UK corporate tax? 4. Do you think legal tax avoidance should ever be perceived as immoral? Why or why not? 5. There is a growing culture of tax shaming companies by both the media and politicians. The idea that Starbucks would voluntarily pay more tax than it legally owes demonstrates the effectiveness of tax shaming. However, is tax shaming justifiable? Why or why not?
  • 61.
    SOME THOUGHTS Who bears the burden of taxation?  E.g., Starbucks announced price increases as of June 25, 2013 on many of its coffee drinks  What about taxes other than income taxes?  E.g., Total tax contribution framework of PwC and World Bank  The notion of ‘fair share’ is loosely based on revenues or market share, but corporate tax is based on profits.  Do governments need to fundamentally rethink their tax systems?
  • 62.
    DISCUSSION QUESTIONS 1.What is the situation facing Starbucks in the UK? 2. Do you agree with Starbucks' decision to make 'voluntary' tax payments? Why or why not? 3. What does it mean for Starbucks to pay its 'fair share' of UK corporate tax? 4. Do you think legal tax avoidance should ever be perceived as immoral? Why or why not? 5. There is a growing culture of tax shaming companies by both the media and politicians. The idea that Starbucks would voluntarily pay more tax than it legally owes demonstrates the effectiveness of tax shaming. However, is tax shaming justifiable? Why or why not?
  • 63.
    SOME THOUGHTS Spirit of the law versus the letter of the law  Can the spirit of the law be enforced?  Some countries instituting general anti-avoidance rules (GAARs)  Does the transaction have a valid business purpose? Would more transparency solve things?  Currently, no tax authority sees the full picture of a multinational firm’s group structure. Should they?
  • 64.
    DISCUSSION QUESTIONS 1.What is the situation facing Starbucks in the UK? 2. Do you agree with Starbucks' decision to make 'voluntary' tax payments? Why or why not? 3. What does it mean for Starbucks to pay its 'fair share' of UK corporate tax? 4. Do you think legal tax avoidance should ever be perceived as immoral? Why or why not? 5. There is a growing culture of tax shaming companies by both the media and politicians. The idea that Starbucks would voluntarily pay more tax than it legally owes demonstrates the effectiveness of tax shaming. However, is tax shaming justifiable? Why or why not?
  • 65.
    SOME THOUGHTS Tax naming and shaming is increasing  E.g., Amazon, Google, GE, Apple, Microsoft, HP  When do we breach taxpayer confidentiality?  Could it be considered immoral for a politician to single out a particular company to ‘assure’ the public that the government is proactively combatting tax avoidance?
  • 66.
    Thank you fora great discussion!

Editor's Notes

  • #43 Journalists are calling me to ask me for sources of information and to check their work or even ask for my opinion. Iceland and Century Aluminum.
  • #45 Tax competition.
  • #48  The last thing I did was save my bank $1m by entering into a real estate swap with a company that we intended to enter into a merger with – early enough that we were not legally considered related parties, but late enough that the ‘related party rule’ was operating in spirit. Accelerate losses on future sales of real estate and defer gains. Sometimes income can be put in high tax countries such as U.S. to use excess foreign tax credits.
  • #49 3 intragroup charges: royalties, coffee markup, interest
  • #50 Cost of sales includes 20 percent markup on coffee purchased from Swiss subsidiary. The income earned by the Swiss subsidiary would normally be taxed in the U.S. at a 35 percent rate as earned, however, there is an exception for dealing in agricultural commodities (which Starbucks qualifies for). The Swiss subsidiary never actually takes possession of any of the coffee beans, but it does perform the required business functions of ‘preparation of contracts and invoices, arranging freight, insurance and credit, arranging shipping documents, storage and warehousing, and dealing with quality claims.’ Coffee roasting is performed in the Netherlands.
  • #51 When viewed from the perspective of the group as a whole, Starbucks believes its UK operation to be profitable. UK GAAP ignore intercompany payments in consolidation, while tax rules in each individual country include intercompany payments. A lot of accusations that UK is mis-managed if it can’t generate a profit.
  • #52 39 percent of total tax revenue comes from income tax in the UK (9 percent from corporations). The rest comes from property, sales, social security, payroll, etc.
  • #55 Second most prevalent answer
  • #57 YouGov is the authoritative measure of public opinion and consumer behaviour in the United Kingdom.
  • #60 Optional reading