Multinational companies use variety of methods to divert funds to lower tax locations.
A multinational company may use a variety of different business structures and arrangements to conduct their worldwide affairs.
In Monday's column I used the example of a typical cafe scene to examine how multinational companies may operate in New Zealand.
I do not know whether these companies operate in the same way in New Zealand as they do in the United Kingdom.
Starbucks in New Zealand is operated by New Zealand publicly listed company Restaurant Brands under licence to Starbucks Coffee International so clearly there will be differences.
The techniques used by the multinational companies are the real point of this discussion.
Just last month the Public Accounts Committee of the House of Commons in the United Kingdom conducted a Select Committee inquiry into the conduct of three multinational companies operating in the United Kingdom - Starbucks, Amazon and Google.
The Public Accounts Committee was trying to understand how these three American companies manage their financial affairs in the UK with particular focus on the corporate tax payments made in the UK.
The UK coffee shop market grew by 7.5 per cent in 2012 alone. One in five consumers visited a coffee shop every day, compared to one in nine in 2009.
Three leading chains account for 54 per cent of this massive £5.8 billion ($11.1 billion) market. Costa coffee have 1522 outlets, Starbucks 752 and Cafe Nero 530.
Against this backdrop of a burgeoning business environment for coffee, Starbucks has been losing money for all but one of the last 15 years.
The Public Accounts Committee found it difficult to reconcile comments made to investors in the US about the success of the UK operations with the actual results filed in Companies House.
The committee chair said: "Mr Alstead, we are sceptical of your story. I think the allegation is that the way in which you set charges against the UK business means that you manipulate the profits out of the UK into tax havens."
Another MP, Austin Mitchell, compared Starbucks UK results (£1.6 million in corporation tax over the last 14 years) to the Costa coffee results which paid £15.5 million in corporation tax in 2011 alone.
Costa coffee is owned by the UK-listed company Whitbread.
It emerged that a 6 per cent royalty goes to Starbucks regional headquarters in Amsterdam. These royalties were claimed as a deductible expense against UK profits.
While these royalties did not go to a tax haven, they were not highly taxed by the Netherlands.
A very low tax regime under a special confidential tax ruling with the Dutch Government applies to this royalty income.
Starbucks Switzerland purchases all Starbucks coffee, then on-sells it with a 20 per cent mark-up to the UK operations.
While the coffee never physically goes to Switzerland profits are effectively transferred from the UK to Switzerland. The coffee meanwhile is shipped directly to roasting facilities around the world.
The Swiss tax rate on these profits has been around 12 per cent.
The committee then went on to examine how Amazon operated in the UK.
When someone in the UK buys from amazon.co.uk they are actually buying from a Luxembourg company.
However, their book is delivered from one of eight warehouses based in the UK.
The income earned from the sale of the book is revenue for the Luxembourg company alone. The UK company receives its income by charging the Luxembourg company for services provided by the UK company in the United Kingdom.
The UK company had revenue of £207 million and they recorded a tax expense of £1.8 million. The Luxembourg company had European-wide revenues of €9.1 billion ($14.5 billion) and could not (more accurately, would not) disclose the UK share of this European revenue.
The Luxembourg company employs 500 people and Amazon UK 15,000.
As Austin Mitchell MP said: "I do not get ... why Luxembourg is so lucky - the books are here, the warehouses are here, the billing is here, the business [is] here and the customers are here."
Everything but the tax was in the UK.
Advertisers who use Google pay Google Ireland every time a consumer clicks on the relevant website.
Google Ireland pays tax at the rate of 12.5 per cent.
Google UK employs people to provide services that are charged to Google Ireland.
The UK operations promote Google products and make sure they work in the UK for UK consumers. The UK company had revenue of £396 million and paid £6 million of corporation tax.
Google Ireland pays a royalty for intellectual property to a company situated in Bermuda. Bermuda has little or no corporate tax.
In Google's US SEC filings US$248 million ($295 million) tax was paid on foreign income of US$7.633 billion, equivalent to a tax rate of 3.25 per cent.
Based on the inquiry in the UK Parliament multinationals are using a variety of techniques to limit corporate profitability in the United Kingdom.
Some companies use internet trading to ensure that the profit is taken out of the customer's country and placed in a low tax jurisdiction such as Ireland or Luxembourg.
In other situations payments are made for the use of intellectual property and deductions claimed for royalties paid to low tax jurisdictions (like Bermuda) or countries that are prepared to enter into low tax rulings such as the Netherlands.
Sometimes commodities are traded using a company that purchases and on-sells goods or services effectively transferring profits from high-tax jurisdictions (the United Kingdom) to lower-tax jurisdictions (Switzerland has a special rate for commodity trading).
In all cases these are genuine legal transactions which support the basis for the arrangements.
If the tax system is to operate effectively it needs to respect binding legal and genuine commercial transactions.
The next column examines what our Government and the OECD can do about corporate taxation and multinational enterprise.
Craig Elliffe is professor of taxation law and policy at the University of Auckland Business School.By Craig Elliffe