Starbucks Corp. is moving its European headquarters from Amsterdam to London and the firm's EMEA boss insists that the reason has nothing to do with tax. "The U.K. is a great place to do business," said Kris Engskov who commented that Starbucks would end up paying more tax in the U.K. after the move. That sounds like a strange tax logic for a corporate relocation but the coffee shop chain was accused of immorality by a committee of U.K. parliamentarians in 2012 after a Reuters investigation revealed that Starbucks had paid only £8-million ($14.8-million) to the U.K. exchequer since 1998, thanks to the shifting of royalty profits to its Netherlands holding company.
However, if you think that Starbucks is arriving in London like a beaten cur to be slapped about by the tax man, think again. Nothwithstanding the televised dressing-down of Starbucks, Amazon and Google by the House of Commons Public Accounts Committee, Britain has itself become something of a tax haven for footloose multinationals. While the MPs were berating American corporations for being fiscally flirtatious, the Chancellor of the Exchequer, George Osborne, was planning a series of tax law reforms designed to make the U.K. a more attractive home for multinationals. Reductions in personal taxation, corporate taxation, changes to patent law and to tax rules on controlled foreign companies have made the U.K. more attractive to corporate treasurers.
Prompted by the changes, a clutch of big companies have announced relocations to the U.K., including Aon Corp., the world's largest insurance broker, which became the first S&P 500 company to move its domicile to the U.K., abandoning its Chicago home. The shift to a softer fiscal regime landed one big prize, WPP Group PLC. The world's biggest advertising group quit the U.K. in 2008 in protest against what were then tough anti-avoidance rules, but the company has now moved its tax base back to the U.K., a signal that will have delighted the Chancellor. Indeed, his delight would no doubt have increased further last September, when Margaret Hodge, the chairman of the Commons committee that sought to make an example of Starbucks, accused the government of creating "absurd" loopholes that would allow companies to mimize their U.K. tax liablity.
The U.K. reforms include a commitment to reduce the U.K. corporation tax rate to 20 per cent but the key element is a change to the regime for Controlled Foreign Companies, rules that govern the tax liability of a U.K. holding company for income generated by foreign subsidiaries. Tax exempt dividend transfers are a common concession used by governments that want to attract corporate HQs, but interest and financing is also key. Under the new U.K. rules, income generated by financing a foreign subsidiary will be taxed at a quarter of the normal rate, only 5.5 per cent, a major change that makes the City of London with its capital markets, hugely attractive as a location for the treasuries of big international companies.
Still, big companies don't relocate just to profit from tax rules. These change with the political wind and if London is attracting big companies, it is not for a quick tax fix – or for London's housing market, which has the dubious distinction of being among the world's more costly. If London does attract companies, such as Aon or perhaps a Walgreen, the drug store currently under shareholder pressure to reduce its corporate tax bill by moving to Europe, it is because London is the world's biggest crossroads, more cosmopolitan and culturally diverse than New York and with a financial marketplace in a time zone that captures Asia and North America in a working day. Tax is the icing on the cake.