LONDON (Reuters) - British lawmakers have criticized a deal the tax man made with Starbucks (SBUX.O) that allowed the coffee chain to almost eliminate its UK tax bill by deducting royalties the group paid itself for the use of its own brand.
Starbucks Chief Financial Officer Troy Alstead told Reuters the UK tax authority had questioned its practice of paying 6 percent of turnover as royalties to a Dutch subsidiary and that the two parties had agreed to lower it to 4.7 percent.
Royalty payments - in this case paying a related company for the use of the Starbucks brand - are deductible against UK tax.
"This illustrates why we need much greater transparency. We have no way of knowing whether this was a fair settlement or whether it represents another 'sweetheart deal' for big business," said Margaret Hodge who chairs the parliamentary Public Affairs Committee, which is looking at tax avoidance.
The committee has previously criticized deals the tax office HMRC (Her Majesty's Revenue and Customs), made with investment bank Goldman Sachs GS.L and phone group Vodafone (VOD.L).
The latest criticism comes as U.S.-based Starbucks faces media and political pressure in Britain following a Reuters report that showed the company had paid just 8.6 million pounds of income tax since 1998 despite racking up 3 billion pounds in sales.
Starbucks, the second-largest restaurant or cafe chain globally after McDonald's (MCD.N), cut its tax bill by reporting losses to the authorities while telling investors the UK was profitable.
On Wednesday, Prime Minister David Cameron faced questions in parliament about the tax practices of a number of multinationals including Starbucks.
He said he was unhappy with the level of tax avoidance by big corporations working in Britain and urged HMRC to make sure all companies paid their fair share.
In a telephone interview, Starbucks CFO Alstead told Reuters HMRC had questioned the UK unit's practice of paying 6 percent of its turnover to an associated company in the Netherlands.
Starbucks first disclosed the HMRC probe into royalties in its 2009 accounts but did not disclose the cut until this week.
Alstead said paying brand royalties was common practice in the restaurant chain industry.
Tax experts say a company would be expected to show the benefit from royalties for licenses or trademark use was critical to its profitability to enjoy the tax deduction.
HMRC quizzed Starbucks after it reported a decade of losses. Alstead said that after discussion, the two agreed that the level of royalty fee that could be deducted for tax purposes would be cut to 4.7 percent of turnover.
That is still higher than the 4.3 percent the UK unit of hamburger chain McDonald's paid in the last three years for the use of its brand. Unlike Starbucks, McDonald's UK made an average 149 million pound pretax annual profit over that period.
Starbucks' royalty payments reduced its UK earnings by 150 million pounds, cutting tax payments and building up taxable losses which can be used to offset future taxes. At current tax rates, the deduction could end up saving Starbucks around 36 million pounds in taxes.
John Hemming, a member of parliament with the Liberal Democrat party, the junior member of the coalition government, said the Starbucks fee approved by HMRC appeared high.
"There needs to be a detailed review of such payments," he said. He proposed the government look at introducing withholding taxes on inter-company royalty payments or limit the amount that can be deducted from tax.
Reporting by Tom Bergin; Editing by Erica Billingham