DOES STARBUCKS PAY ENOUGH TAX? View the RES Annual Public Lecture here.


Rather than trying to tax corporate profits at the location where value is created, we should tax this income just like VAT: at the destination of sales.

That is one of the conclusions of Professor Rachel Griffith of the University of Manchester, who delivered the Royal Economic Society''s annual public lecture (##RESlecture) at the Royal Institution on Tuesday 24 November (and will do so again at the Whitworth in Manchester on Thursday 3 December).

Professor Griffith notes that current policy reforms for taxing multinational firms are seeking to reinforce a system established under international agreements in the 1980s. But implementation of this system is increasingly difficult when corporate assets are internationally mobile and ''intangible'' – they are ideas and investments (patents, trademarks, brands, etc.) that do not have a physical presence.

The UK and US media have widely reported the small amounts of corporate income tax paid by several large and high profile multinational firms. Widespread protests against Starbucks in 2012 led Prime Minister David Cameron to state that ''companies need to wake up and smell the coffee'' at the World Economic Forum in 2013.

More recent attention has turned to Facebook. At the Labour Party''s 2015 conference, shadow chancellor John McDonnell said: ''We will force people like Starbucks, Vodafone, Amazon and Google and all the others to pay their fair share of taxes.''

But what is a fair share of corporate income taxes for a multinational firm to pay to the UK Exchequer? It does not make sense to consider the amount that a firm pays of a single tax in isolation: we need to think about the fairness of the tax system as a whole, considering all taxes and benefits together.

When considering corporate income taxes, this is complicated by three factors:

• First, when we talk about who pays a tax, we don''t mean who writes the cheque. What we mean is who is made worse off by the imposition of the tax.

This is called ''tax incidence''. A firm cannot be made worse off (it cannot bear the incidence of a tax); only individuals can. Which individuals bear the burden of corporate incomes taxes? Estimates suggest that the burden is probably shared between the shareholders, the workers of the firm and the consumers of the products that the firm makes – with the amount that each bears depending on factors such as what options each has in terms of alternative investments, jobs or products to consume.

• Second, with multinational firms, there is an additional complexity over where the firm pays taxes.

Multinational firms operate and move more easily across national borders – and thus tax jurisdictions. In which countries should a firm pay taxes? One option is the firm''s home country: where its corporate headquarters are located, and where many of its shareholders are probably located. Another is the country where the firm''s assets, such as its buildings and machinery, are located and where its workers are employed. And another is the countries in which the firm sells its products.

• Third, firms now rely more on ''intangible assets'' to produce value. These are ideas and investments that do not have a physical presence.

Intangible assets by their nature are not tied to a physical location – and unlike a piece of machinery, an idea can be used in many locations at the same time. In addition, the most valuable ideas are often those that can be combined with other ideas to create even greater value. Tying the value created in this way to a physical location – and thus to a tax jurisdiction – can be very difficult.

Professor Rachel Griffith concludes:

''We currently try to tax corporate profits at the location where value is created, under international agreements formed in the 1980s. Implementation of this system is increasingly difficult in the presence of intangible and internationally mobile assets.''

''An alternative, and preferable, way to tax corporate income would be to tax profits (value added) at the destination of sales (similar to VAT). Such a measure has been suggested by many prominent economists.''

''But this is politically unpopular, and current policy reforms seek to reinforce the current system. They do nothing to address the fundamental issues of what is a fair and efficient way to tax corporate income.''

To view the lecture that took place on 24 November at the Royal Institution, please register and view the live feed here (filmed on behalf of the RES by Wavecast)