Financial advice for multinationals: How to pay as little tax as possible on your UK revenue

October 23, 2012
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Euro Crunch
October 23, 2012

Some of the biggest multinationals have figured out how to avoid paying most taxes on their UK sales.

EBay legally avoids paying nearly £50 million ($80 million) in UK taxes by funneling payments through Luxembourg and Switzerland. Ikea pays a so-called “franchise fee” on worldwide sales to tax authorities in the Netherlands, thereby halving its UK tax bill. Starbucks paid no corporate income tax in the UK for the past three years, despite having more than £1 billion in sales from hundreds of UK cafes.

How do these global giants do it? The short answer is that they pay lots of money to clever accountants and lawyers to advise them. We spoke to some of the experts for their advice on how to legally skirt having to pay UK taxes. No one wanted to go on the record, but here are their anonymous tips:

Set up your tax structure before you begin trading. If you start moving assets outside of the UK after you’ve started, you could trigger tax charges, including those related to goodwill.

Find yourself a tax-friendly home like Ireland. This is what Apple and Google did. Then they route profits through that country and benefit from a lower corporate tax of 12.5%.

Pay a franchise fee. This is what Ikea does in the Netherlands. For a nominal fee, it has a Dutch, tax-exempt, non-profit that holds the assets of Ingka Holding, also Dutch and the parent company of Ikea companies. Ikea pays a 3% franchise fee on Ikea sales worldwide through this Dutch holding company. Net profits of Ikea Group are not taxed globally because they’re owned by a non-profit foundation. In order to qualify, you need a small number of resident directors, or non-executive directors, on board. These people get paid. But as long as you’re saving millions in taxes, what does it matter?

Eat the profits. The strategy here is to earn as little as possible by incurring charges from a parent company or other entity. Sales and profits may be in the UK, but you pay interest, service charges, or other expenses to a company in a better jurisdiction to lower profits. Starbucks UK, for example, buys coffee beans from Switzerland and pays a Dutch company to roast them. To do this, Starbucks allocates some profits from UK sales to these units. Known as “transfer prices,” they help multinationals lower their tax bill.

Some companies form property holding companies and employment companies, which charge the operating company for the use of premises and employees—perhaps at cost, perhaps not. What’s left by way of net profit is taxed. The after-tax profit is then “dividended up” to a group company, i.e. the UK subsidiary pays profits to the parent company via a dividend.

Take an impairment charge. This is what Starbucks has done in the UK, at least in 2010, according to company filings with the UK companies’ registrar. This involves writing off goodwill by treating it as an expense. Goodwill impairment can be used with acquisitions when the value of an asset acquired drops below the value assigned at the time of purchase. Companies are allowed a fair amount of discretion when determining the value of the goodwill—and over what period of time they can write it off—and so figures can be manipulated.

Roll over losses. Companies are allowed to carry forward losses from one year to the next, so that even after a very good year for sales, all of the profits may be eaten up by prior year losses. Voilà! No profits, no corporate income taxes!

For the record: Quartz is not endorsing any of these strategies. And be warned that you risk being scorned in the UK press if you pursue them. There’s also a parliamentary hearing investigating how multinationals are pulling this off.

But, for the bold corporate chieftain, there’s money to be saved by adopting the right mindset. As Starbucks CEO Howard Schultz said:

We don’t pay income tax because we are not making money there.

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