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Pre-takeover Cadbury’s aggressive tax avoidance exposed

48bcb9da-f264-4453-8c6f-21e44b68e663.imgBy Sally Gainsbury, Jonathan Ford and Vanessa Houlder From Financial Times

Cadbury, the British confectionery maker which became a cause célèbre for tax justice campaigners after it was acquired by US food group Kraft in 2010, engaged in aggressive tax avoidance schemes before the takeover that were designed to slash its UK tax bill by more than a third.

A Financial Times investigation into the tax affairs of the company – established in 1824 by Quakers and famous for its philanthropic ethos – has uncovered tax avoidance schemes former senior executives admit were “highly aggressive”.

The reality of Cadbury’s tax affairs contrasts with the claim of campaigners and politicians that Kraft’s takeover would cut its UK tax payments by £60m a year.

In fact, in the decade before the takeover, Cadbury paid an average of £6.4m a year in current tax on its ongoing UK operations, despite annual British profits of £100m and turnover of more than £1bn.

Like many multinationals, Cadbury reduced its corporation tax bill by loading operations in high tax countries, such as the UK and US, with debt, while using equity to fund its growth through low tax jurisdictions such as Ireland.

But it went even further by devising schemes to engineer interest charges that could be deducted from its gross profits and reduce UK tax.

Schemes uncovered by the FT included one based out of a previously dormant UK subsidiary named “Chaffinch”, which lent £728m to one of Cadbury’s main UK financing companies at the end of 2006.

Accounts show that the borrower booked the debt at just £671m, reporting the £57m difference as interest paid over the 18 months to mid-2008, which it deducted from its profits.

On the other side of the deal, Chaffinch structured the loan as a zero-coupon convertible note, which received no interest. The mismatch was designed to produce a tax saving of £17m for the borrower with no reciprocal taxable income for Chaffinch. Over the same three years, Cadbury paid just £1m in current tax on its UK operations.

A former Cadbury executive familiar with the scheme told the FT it was just one of “a lot of things” the group did “to create an interest deduction out of nothing”, adding that certain executives in the company “found that intellectually quite stimulating”.

Other schemes eschewed complicated debt and accountancy structures and instead relied on old fashioned tax havens.

In one such scheme, running from 1997 to 2002, the group injected £400m in equity from the UK into two Cayman Island subsidiaries that were established with the explicit purpose of lending the cash back to a Cadbury UK financing company at an annual interest rate of over 7 per cent for five years.

In less than 12 months, the UK financing company reported £30m in interest expense on the loan – reducing its tax bill by £9m at prevailing corporation tax rates.

The loan would normally have caught the attention of UK tax authorities, as the £30m interest was simply paid to Cadbury itself. But the group avoided attention by selling the Cayman companies to a third party just before the end of the first financial year, although not before the bulk of the £400m had been repaid.

Differences between UK and US tax regimes also gave the group opportunities to dodge American tax.

Under one scheme, two UK subsidiaries bought $576m worth of shares in a US group company in 2002. Within months, a sister US company began to buy the shares back at an average premium of more than 15 per cent. By 2006, it had spent $665m repurchasing just $576m worth of shares from the UK.

US tax authorities would have viewed the arrangement as a loan from the UK with a tax-deductible interest charge of $89m, entailing a tax saving of $31m. UK authorities, meanwhile, would have viewed it as an inter-group tax-free capital transaction.

Cadbury’s aim was to have it both ways: to repatriate $89m of profits tax-free by claiming an interest expense in the US without reporting any taxable interest in Britain.

The Cadbury executive told the FT such schemes – designed to get around the UK’s anti-avoidance rules – were commonplace, with a new scheme being devised to solve each fresh problem.

Between them, the US and “Chaffinch” schemes alone were designed to save the group £33m in UK tax between 2002 and 2008 – a period when its actual UK tax charge on ongoing operations was just £37m.

A spokeswoman for Mondelez International – the new name for Kraft – said it would be “wholly inappropriate” for it to comment on the tax affairs of Cadbury before its takeover. Three former board members of the group, including the last chairman, also declined to comment.

Throughout the 2000s, Cadbury was embroiled in a prolonged dispute with the UK’s Revenue & Customs, initially over offshore profits. In a 2009 settlement, the group wrote back £64m in UK tax credits, indicating its final bill was substantially less than it feared.

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