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Why is it so taxing?

Starbucks was recently accused of paying almost no tax in the UK. In fact it claims it won’t be doing so for several more years. The fact that this has gone on for about 16 years is surely not a testament to the incompetence of its management but to the commitment Starbucks has to the UK, where it can make a lot of money without paying much tax.

At any rate it is no doubt currently entirely legal. But the Chancellor’s statement promises a tax on such ‘diverted profits’ (the ‘Google tax’), so that it could be less worthwhile. At the moment the details of the proposals are not at all clear. But it will have to rest on far more transparency over where profits are made and tax is actually paid. At the moment this information is very hard to come by.

Yet that does not mean it is hard to produce. Vodafone has done this. So whether the tax on diverted profits flies or fails, it will be down to the relative strength of two forces: political will versus commercial won’t.

 

 

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It's not a very taxing world

Cameron’s initiative to open up tax havens is a good start – despite the fact that the recent agreement is only one for the UK dependencies to develop an action plan to look at transparency, rather than actually to take any action. But there will still be a long way to go after the UK dependencies have opened their doors to scrutiny.

Firstly, there are all the other tax havens in the world that are not under British control. These need to take similar action.

Secondly, transparency is needed not only for the many trusts that are held in tax havens, but also for those held everywhere else. These legal structures are just as important as companies in channeling funds away from tax authorities.

Thirdly, companies should report on the revenues of their various subsidiaries throughout the world. This would show up exactly how Starbucks, Amazon and other multinationals are dealing with their taxes.

And then, if all these things were done, there would still be the network of international treaties that permits tax dodging in the first place. We need to remember that however much we may dislike how companies operate in order to lose tax liabilities, the great majority of it is entirely legal and the structures were put there largely by democratic governments – such as Cameron’s.

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Tax turnover not profit: VAT's nice

The debate about the tax paid – or not paid – by companies doesn’t seem to have questioned whether the right thing is being taxed. Corporation tax is levied on profit which is the typically the difference between two much larger quantities: income and expenses. Companies have got very expert at adjusting the difference between the two, so that the tax due can be manipulated at will. What makes that possible is a very complex network of treaties between most countries. That network would be laborious to unravel.

But the moral outrage seems to stem from the fact that while for example Starbucks’ profit in the UK may be minimal, its turnover is substantial. So why not tax the turnover directly?

And we already have a system in place that could perhaps be adjusted to ensure that all businesses pay according to their turnover. It’s called VAT.

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Google, Starbucks and Amazon – which is the odd one out?

Google, Starbucks and Amazon were all made to look foolish by the UK Parliamentary Committee inquiring into tax avoidance on Tuesday. But Amazon came off much worse than the rest. Why?

Starbucks put up its CFO and Google its VP for Northern Europe. Both knew their business well, even if they did not really have any defence against their tax practices. But Amazon fielded its Public Policy Director. What showed was that not only did he not have any defence against its tax practices, but he didn’t appear to know the business. As a result, another meeting of the Committee with Amazon will probably be scheduled.

What this shows is that issues of corporate responsibility cannot be left to those merely trying to defend the company’s image. It is not simply a matter for the dark art of better messaging, but a matter of actually doing business differently.

For my other posts on tax – search this site for ‘tax’.

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Tax: how to tarnish your image

Both Starbucks and Amazon have been exposed as under-paying tax. How does this square with their nice CSR images? It doesn’t.

Starbucks have been doing good work in their supply chain and Amazon has been addressing packaging issues. But tax is not seen as a traditional ‘CSR’ issue. And it clearly hadn’t occurred to them that there was anything wrong in using the law to their own advantage. So there’s good and bad and there’s legal and illegal. The two categories just don’t map neatly onto each other. CSR doesn’t really know which fence to sit on.

The real problem, though is not the formulation of CSR, but the lack of fixed formulae for apportioning tax based on where value is created and consumed. At the moment the law leaves multinationals to do the transfer pricing trick, after which the quantity of tax paid is entirely discretionary. Sorting tax out is entirely possible and mainly requires the UK government to act in the national interest.

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Searching for a better haven for tax

Google is up to its usual tricks: paying as little tax as it can. But it is no different from most other large and international companies. Are there any realistic challenges to the routine use of tax havens and the pursuit of the minimum tax bill?

Two things make Google an interesting case study: its popularity as a search engine and its motto: ‘do no evil’. A useful article on how Google does it can be found here.

But does ‘doing no evil’ just mean ‘maximising your tax bill’ for the sake of society? Or minimising it for the sake of shareholders? The answer must lie in optimising it, so that the tax paid in a given country is proportional to the work done in that country. Which is quite possible to calculate.

 

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Taxing codes

The Code of Practice that banks have signed up to – which is meant to stop tax avoidance – has a glaring loophole. The main provision says that banks “should not engage in tax planning other than that which supports genuine commercial activity”. But financial engineering (including tax planning) is a commercial activity. So there should be no problem in banks undertaking tax planning for schemes specifically designed to avoid tax.

It would appear that the activities of banks, and the complexities of the codes designed to govern them, are too byzantine to be understood and managed by anyone. Hence the appeal to the ‘spirit’ of the law. I fear that the only spirits to co-operate will be those at the bar.

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Nothing is certain but death and taxes…

Unless you are a company, when it is all up for grabs…

The House of Commons Public Accounts Committee has challenged HM Revenue and Customs to come clean in its dealings with them. In the view of the Chair of the Committee, confidentiality should not be used as a cloak for companies. Whether this is evasion or avoidance by the Revenue, it challenges the supremacy of parliament and seriously threatens democracy.

Meanwhile UK Uncut is trying to take HMRC to court for getting into bed with the very companies from which it is trying to extract tax.

In part it is the complexity of the tax regime that is to blame. One solution, proposed by conservatives, is for a flat rate tax. For individuals this becomes regressive, so that the poor are more badly affected than those with money. But for companies, the same system would be far more progressive than the current arrangement, in which the large pay far less than the small.

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Taxing Corporate Citizens

If companies would like to be seen as ‘corporate citizens’, then they should expect other citizens (the public) to judge their actions from a moral perspective. They must expect the same horror of corporate tax avoidance as is shown towards MPs fiddling expenses. At the moment the public is largely unaware of the issue – but when informed, they are in no doubt as to the injustice of corporate tax policies.

As I pointed out some time ago in Corporate Truth, many of the solutions are well known – and some have even been espoused by the G20. But what is really lacking is the political will to follow through.