The Edge

Richard Northedge takes on corporate finance

Britain acts to attract the tax avoiders: WPP plc and Starbucks Corporation show us why

No-one boycotted WPP plc (LON:WPP) when it avoided UK tax by moving its headquarters to Dublin. It’s harder to shun a worldwide advertising group than a high-street coffee shop. But WPP’s now coming home because Britain is playing the tax game.

Companies like WPP and Starbucks Corporation (NASDAQ:SBUX) were not so much avoiding tax but choosing where they paid it. Chancellor George Osborne, oddly enough, would prefer they paid tax in Britain so he is bending our rules to make the UK more attractive than other tax havens.

Starbucks chose to pay its tax in the Netherlands by making its UK shops pay a royalty to a Dutch company for using its brand. But Holland is not some offshore tax haven: it is a mainstream EU member that taxes its companies heavily – if not quite as heavily as some other countries.

The basic corporation tax rate in the Netherlands was 25 per cent when it was 28 per cent in the UK. A company saved money by diverting profits there – but not a lot. It makes very little difference to the company where it pays its tax but it makes a lot of difference to the country: taxing Starbuck’s profits was a big bonus for the Dutch and a big loss for Britain.

Offering to pay UK corporation tax instead thus costs Starbucks little more – especially when the UK is cutting its tax rates to outdo the Dutch.

Britain had already cut its corporation tax rate to 26 per cent in 2011 and knocked off another two per cent the following year. The rate was due to fall to 22 per cent in 2014 but the chancellor has now cut that to 21 per cent. His hope is not only that companies like WPP will return to Britain but also that other international groups will divert their profits to the UK instead of to Holland or wherever.

WPP is coming home because having tweaked our tax rules as well as the rates, it will pay no more as a British company that it does as a nominally Irish firm. A decision that is neutral to the advertising group is Dublin’s loss and Britain’s gain.

So Britain does not mind being a low-tax area that attracts business, it simply objects when other countries offer even lower tax rates. The hope is that taxing companies at a low rate yields more money than having a high rate they avoid. This has nothing to do with ethics, just tax competition.

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