13th December 2010

Cadbury's tax avoidance

A recent Guardian article reports that Cadbury is to be restructured by its new American parent company, Kraft, to avoid paying millions of pounds in UK tax.

The restructuring plan apparently involves creating a parent holding company in Zurich, which would allow much of Cadbury's profit to be booked in Switzerland, thus benefiting from a much lower rate of corporation tax. In Zurich, rates begin at 15%, whereas corporation tax in the UK is currently 28%. Last year, Cadbury paid £197m in UK tax.

This is a form of “tax avoidance”, which can be defined as the minimisation of tax liability by lawful methods, as distinct from “tax evasion” which refers to illegal efforts not to pay tax.

The fact that tax avoidance is legal doesn’t stop national governments from trying to crack down on it, though often with limited success.

In 2004, HM Revenue & Customs tried to stop Cadbury Schweppes from using subsidiary companies in Dublin to benefit from the 10% corporate tax rate there. In a landmark case Cadbury Schweppes appealed to the European Court of Justice and won. Now, Cadbury’s move to Switzerland underlines the dwindling strength of national governments as they attempt to tax footloose multinationals.

A far cry then from the early days of the company.

In the late nineteenth century George Cadbury was determined to use his wealth to promote social reform and justice, implementing and campaigning for improved labour conditions, shorter working hours, old age pensions and sickness benefits in a way that anticipated the founding of the welfare state.

He would have understood instinctively the tax justice argument: that tax represents a social contract between citizen and state. Tax revenues not only support collective goods such as the NHS or the education system, the very act of taxation fosters better and more accountable government.

The high profile UK Uncut protests over the last couple of months reflect a growing concern about what the primary duty of a corporation is. Is it to their shareholders, to be as "tax efficient" as possible? Or is it to society at large in return for the privileges they enjoy?

A limited liability company gives its shareholders … the most phenomenal economic privilege: they cannot be sued for the debts the company incurs if all goes wrong even though they get all the benefit if things go right.

The privilege carries with it at least two implicit responsibilities. The first is to account for how the privilege is used – which means putting full and proper accounts on public record so we can know exactly what our companies are up to.

The second obligation is to pay for the privilege – and that means complying fully and willingly with the tax (and other) laws passed by the UK parliament that creates them using exactly the same authority that they use to grant the privilege of limited legal liability.

- Richard Murphy, UK Uncut blog

It seems that the world of big business has yet to learn one of the lessons of the nineteenth century Quaker industrialists like George Cadbury: that profit is legitimate only if it can be made without harming the greater good of society.

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