Time to kill the loophole
Starbucks has poured a great deal of coffee in Great Britain over the last 14 years but not much tax revenue into the treasury. But this week, after the British government pressed the company, Starbucks announced that it would commit to substantial tax payments in 2013 and 2014.
A government analyst told the BBC that the agreement could produce about 20 million pounds in tax revenue, after Starbucks paid no taxes in 2011 on 400 million pounds worth of business and only 8 million pounds in 14 years.
Two other big American companies targeted by the British government, Amazon and Google, held fast but the government vowed to pursue them.
The cases should be instructive to Pennsylvania. The underlying structure that the companies use for tax avoidance in the United Kingdom is very similar to the "Delaware loophole" by which thousands of companies avoid paying hundreds of millions of taxes to the commonwealth.
Starbucks' European headquarters is in Amsterdam, the Netherlands. It's European outlets, including 760 locations in the UK, technically are subsidiaries of the Amsterdam office. They all pay major royalties to the main office for copyright usage and other aspects of the business. One result is that the outlets then show no profit.
Many companies doing business in Pennsylvania do the same thing. Corporate parents have small offices, sometimes nothing more than post office boxes, in no-tax or low-tax states like Delaware. Companies operating in Pennsylvania pay those offices large amounts to the home offices for copyright use and so on, diminishing in-state profits and eliminating their tax bills.
Just like London, Harrisburg has the ability to eliminate the loophole. The next state budget is due in February and the Corbett administration already is saying that it will be the most difficult of the three the administration has faced thus far. It and lawmakers can't legitimately make that claim while allowing so many corporations to avoid paying Pennsylvania taxes. Lawmakers should kill the loophole and reduce the corporate tax rate to increase state revenue while fairly distributing the tax burden.