Starbucks, Google and Amazon: the tax crash of Monday afternoon
taxresearch.org.uk
taxresearch.org.uk
Ayrshire Pullman Motor Services v Inland Revenue [1929] 141 Tax Case 754.
"Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands."
Gregory v. Helvering 69 F.2d 809, 810 (2d Cir. 1934), aff'd, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596 (1935)
I doubt much 1930's money was being filtered through Bermudan or Lichtensteinien shell companies.
Countries who want to make money via a territorial nexus usually use VAT or GST ... which the UK already does.
Exactly, they have run into fundamental problems with income tax which is simply a bad tax scheme. From being counterproductive to easy to game (at a certain scale).
On the other hand, I receive no ability to offset my own GST collections against GST expenditures.
Every tax has problems. That's why every major economy has a bunch of different taxes that collect money in different ways for different kinds of economic events -- purchases, income, sale of capital/equity and so on.
http://en.wikipedia.org/wiki/William_Vestey,_1st_Baron_Veste...
Second, everyone knows that this "sorry, we have to pay royalties" thing is most likely legal, but a very grey area. It certainly is against the spirit of the law. A company whose main product is "we make you feel good" should not use such tactics in their own interest.
No judge will ever make a ruling on the basis of "the spirit of the law". They may try to divine the intent of Parliament or Congress according to agreed interpretive rules.
But it's still about rules. Predictable, and precise.
Even the law of Equity, which is the closest to being the law that is about the "spirit" of the law ... relies on rules.
Otherwise you no longer have a government of law, you have a government of men. Those don't work very well.
The closest we can come to having a true government of law is for the process that generates law to be rooted entirely in natural law theory, where the law is "discovered" instead of created. Common law and equity are at least traditionally an attempt at this, but any system that makes room for positive law, or contains any sort of legislative institution, can't even be described as an attempt at a government of law.
Your latter quote is actually from Helvering v. Gregory, which was the 2nd Circuit case.
Here's a quote from the case actually named Gregory v. Helvering, which was the SCOTUS case[1]:
"In these circumstances, the facts speak for themselves, and are susceptible of but one interpretation. The whole undertaking, though conducted according to the terms of subdivision (B), was in fact an elaborate and devious form of conveyance masquerading as a corporate reorganization, and nothing else. The rule which excludes from consideration the motive of tax avoidance is not pertinent to the situation, because the transaction, upon its face, lies outside the plain intent of the statute. To hold otherwise would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose.
Judgment affirmed."
In short, business transactions must have a business purpose, and the substance of the transaction is much more important than the form.
[1] http://supreme.justia.com/cases/federal/us/293/465/case.html
And that's how law quotes work. Sometimes the facts of the case bear on obiter dicta. Sometimes they don't. That doesn't change their degree of persuasiveness.
Every single day judgements are written where a principle is outlined and then, when the principle has been breached, the judge says so.
Does that change the principle? No. Because it is the principle.
Certain obiter dicta are taken as "persuasive" by other courts because they form such a concise statement of a legal principle that they can't really be improved on.
The two quotes I gave above are widely used in tax law in multiple countries because they elegantly state the general principle that a taxpayer has no legal obligation to help the tax man raise more money.
> because the transaction, upon its face, lies outside the plain intent of the statute. To hold otherwise would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose.
...to the weird accounting used by Starbucks where their profitability (or otherwise) is chosen to please the people they talk to.
And, again, the courts will not help the tax man. That is, they will not read the laws in a way that places the onus of maximising the tax revenue on the tax payer.
Judge Learned Hand is, in this case, concisely explained that principle before going on to explain that it doesn't apply because the respondent didn't obey the law.
Legal reasoning is actually very simple. The first step is to be consider separate things separately.
But the question is not:
Should taxes be levied?
Is it immoral to pay only what the law requires?That depends on how hard you're trying to work around it.
If you're shifting profits around the globe deliberately to avoid taxes in the places you generated those profits - yes. Other people will draw the line in different places, as demonstrated by the comments here!
Is that categorically different?
I consider it very different to using accounting tricks to make profits disappear out of the country entirely, based on bogus internal charging.
The point is that you have to define "where" the profit was made. In an international environment that's pretty close to insensible (especially since the naive interpretation of profit to the lay person is gross profit).
And I still think that morally there isn't a categorical difference between minimising tax by spending money and minimising tax by ... spending money.
Not in the case of a bricks n' mortar business like Starbucks it ain't!
"And I still think that morally there isn't a categorical difference between minimising tax by spending money and minimising tax by ... spending money."
And I don't see what 'by spending money' has to do with anything.
Well, two things. First: VAT is designed to capture tax from this exact scenario.
Secondly:
1. The beans are bought from Switzerland.
2. The sale is made in High Street.
Now, to calculate gross profit, deduct Cost of Goods Sold from the Sales.
But: COGS was established in Switzerland.
Sales in Britain.
If you calculate profit as if COGS was established in Britain, you beggar Switzerland.
If you calculate it the other way around, you beggar Britain.
Switzerland has more favourable tax rates. So Starbucks, completely legally, arrange their affairs so that the COGS is done in Switzerland. Otherwise they'd buy from British bean middlemen.
Why is it Switzerland's problem that Britain has the higher tax rates?
It comes down to this - Starbucks operate a chain of coffee shops in the UK. They report to their shareholders that their UK division is a profitable enterprise, they report to the HMRC that it's a loss-maker. Somewhere in between there is probably the truth, and it's that truth the UK should be taxing on.
Why should Starbuck, simply because it is a multinational, enjoy tax breaks that a local/national business does not get?
--edit-- I realise that that isn't a moral question for starbucks, but one for the res of us. The question for Starbucks is 'What is the limit of reasonable behaviour?' and many people consider they've gone far beyond that.
I know you think the limit of reasonable behaviour for a corporation is the same as the limit of the law, so I'll pose the same question to you I posed to someone else downthread -
If it's not (yet) illegal to dump industrial byproducts into the water supply in the country you're operating in, is it moral to do so?
You have to attempt to justify it. Other people will see if they agree with your justifications.
Most justifications are reasonable and the person is correct to make them.
Sometimes justifications shift from being acceptable to being unacceptable. (Free parking spaces for employees is now a taxable benefit in England.) There's a bit of a kerfuffle while people transition.
Sometimes foolish people will make justifications that strain credulity.
Sometimes unscrupulous people will invent justifications.
It feels that Amazon and Starbucks (and probably Google) are straining credulity with their weird systems.
They wouldn't do it if those were actually illegal systems of tax minimisation.
That you or I would like massively profitable companies to pay more tax in our respective countries is one matter. Whether they are obliged to do so by law is a different.
The question I'm raising is: if I am obliged by law to pay X, is it moral that I pay only and exactly X?
Starbucks needing to pay Starbucks so that they can use the Starbucks brand (and thus - co-incidentally we're told) syphoning off profit from Starbucks UK to Starbucks cupboard in tax haven is an example of something that might be legally correct but is morally wrong.
I think it's pretty clear that we disagree, so feel free to have the last word.
The intent of tax law is everywhere the same: maximise revenue. Full stop.
In the USA, the UK and Australia we live in a society of laws, not a society of personal judicial discretion. Judges give regard to the intent of the lawmakers insofar as it illuminates how to apply a piece of legislation. It is not their job to simply decide that something is "right" or "wrong" according to their personal views of what is a sensible policy setting for taxation.
The point is that if you take the view that minimising tax is wrong, you need to explain why. The logical contrapositive (or is it converse? I always get them mixed up) is that maximising the tax you pay is morally correct, which opens up an embarrassing slippery slope argument that even I, as a recovering libertard, am not keen to go a-whooshing down.
It is always important in discussion moral questions to distinguish between what is moral conduct and what are desirable outcomes. What humans do and what humans intend to come about are frequently very different, but we all have a habit of smooshing them together in discussions such as these.
I realise that I have tremendously muddied the waters by insisting on reverting to first principles, but well ... principles matter.
If I may create a false dichotomy: given the choice between a government of laws and a government with maximised revenue, I would prefer to live under a government of laws.
I don't care what the courts think. I agree with you - the law exists; judges interpret that law; these companies don't appear to be breaking any laws. My accusations of them not being moral isn't based in law, nor in them trying to reduce their tax bill.
I think it's fine for people to reduce their tax burden. I even think it's fine for people to employ lawyers to scour the laws and find vigorous ways to reduce their tax burdens.
But then there are tricks that are legal now, but which appear to flaunt the intent of the law, and which will get fixed at a later point.
And, in my opinion, sometimes these tricks go so far as to be dishonest. And that's the bit where morality comes in. Companies that reduce their tax bills are not immoral, unless they are telling borderline lies in order to do so.
When a UK company sells goods in the UK to UK citizens, making over £3bn per year in sales, and then say that their company is actually in Luxembourg and the UK business is just a delivery business to reduce their tax bill - well, that feels slimy. It might be legal.
Some behaviour is not illegal, but that doesn't mean it's acceptable.
The other thing about laws is that they are not fixed. They get refined over the years. And there are some grey areas until the law is tested by whoever enforces it.
A remarkably naive view of corporations.
My point being that from the perspective of pure greed, breaking tax laws is dumb. The IRS, HMRC, the ATO and their ilk all have amazing powers to obtain compliance from taxpayers.
But only up to the boundaries of the law. Which is why the smart thing to do is to ... work up to the boundaries of the law.
WEIRD HUH?
Corporations and governments are fundamentally the same thing - groups of people - and aiming to shrink the power of one by giving even greater power to the other is no solution at all.
The more effort people spend avoiding taxes, the more complicated the tax system will get as it attempts to close those loopholes. The more complicated it gets, the harder it is to form a social contract that represents the best interest of the nation.
Which is orthogonal to whether it is moral to arrange your affairs to pay only what is legally owed.
> The more effort people spend avoiding taxes, the more complicated the tax system will get as it attempts to close those loopholes.
Which is also orthogonal to whether it is moral to arrange your affairs to pay only what is legally owed.
This is the framework under which I consider tax avoidance to be unethical -- obviously if you do not support the society in the first place, you might disagree.
Then change the rules. We have a mechanism for that purpose.
It is not the courts.
>The more effort people spend avoiding taxes, the more complicated the tax system will get as it attempts to close those loopholes. The more complicated it gets, the harder it is to form a social contract that represents the best interest of the nation.
Also, I hadn't mentioned the courts once, and in fact stressed multiple times that I'm not talking about the legality of the situation.
This is an absurdity; what binds a society together is people forming actual relationships of mutual benefit with one another. Complex, formal institutions are an afterthought, and even more of an afterthought is paying some precise percentage of your income to the specific people who operate one of those institutions, so they can can pay others to construct roads (as though no other means could be found to facilitate the pouring of asphalt), or build prisons for the incarceration of people who ingest particular chemicals that some think are per se bad.
If anything, empowering excessively centralized institutions creates intense factional polarization which undermines societies, inhibiting the formation of substantive relationships and communities instead of sustaining them. Our present "culture war" is a clear example of this.
The sole substantive basis for functional societies is the willingness of people to participate in them. Theoretical doctrines of "social contracts" and "nations" are just post-hoc rationalizations.
I want Amazon and Starbucks here. However I feel both are taking the piss when it comes to taxes. Amazon say they run a distribution network or something and so only have to pay minimal taxes. I feel the fact that these companies failed to justify why they pay the tax they do prove that they are doing something wrong - even if its not illegal.
As for Google I feel it is less of a problem. They mainly deal in digital goods. They don't have a big presence in the UK. They just offer their online service's here. As most of the tech work is done in the US or Ireland I don't think they have much to justify with their tax situation. I work for a website-as-a-service company and we have thousands of clients scattered around the world. Around 500 are based in the UK. I don't really see how we could accurately be charged tax based on geographical location of Sales.
Almost zero for one tax, but they certainly pay lots of other taxes. Mom and pop coffee shops aren't known to be large tax payers either, they probably weren't paying much more than Starbucks is now.
It's not avoiding a reasonable amount of tax that is annoying to most people. It is the transparent exploitation of loopholes to evade tax that is annoying.
Eg: Starbucks has to pay starbucks to use the brand starbucks, which means starbucks pays less corporation tax here, but more in the country where they've registered the company that owns the starbucks brand. (Which just happens to be an office in a building in a country with a low corporation tax rate.)
I guess I just don't understand that viewpoint. I would be shocked if a company wasn't using legal means to reduce its expenses. The problem isn't companies using loopholes, it's that there are loopholes in the first place.
Big companies like loopholes like this because they have the advantage in using them (lots of accountants) and in the US many voters like them because closing them is "raising taxes". At the end of the day it's a gift to large corporations at the expense of small businesses and startups.
Bob should be paying 40% tax. Bob uses normal legal means and reduces his tax burden to 25%. Some people think he's a but cheeky; most people don't really care (or are jealous that he has an accountant); some people say "good on you!"
Ann should be paying 40% tax. Ann uses a bunch of weird interpretations of tax law to squeeze through loopholes. Ann has to keep changing her finances because the loopholes keep changing. Ann pays about 0.5%. Ann then claims that she can hire a cleaner, and so we should be grateful that the cleaner pays PAYE and can buy goods which will have VAT.
At the same time as Ann and Bob are avoiding tax everyone is going through tough times; their jobs are at risk, their services are being cut.
Everyone knows that rich people and companies avoid some tax. Most people really don't care, so long as some kind of tax is being paid.
Contentious - damage, or consumer choice and therefore progress?
> However I feel both are taking the piss when it comes to taxes
While I have zero doubt these companies and others will be taking 101% advantage of the situation, don't forget that the situation has been created by our own governments and an unwillingness to modernise in the face of a globalised world.
For example, it surprises most people to learn that this 'brand value' Starbucks charges itself for (or the fact that these companies charge themselves between entities in the first place) is in many ways a requirement of the corporation to abide by transfer pricing rules.
It's a matter of whether there is a level playing field. I was shocked to hear the representative from Amazon admit yesterday that they only pay 3% tax on ebook sales through an agreement with Luxembourg.
That's absurd.
Ultimately it is the fault of the voters, and as another poster pointed out, this is about a level playing field, not "punishing" big multi nationals.
What we have seen since the 80's is a corporate oligarchy being created, if you can get into it you are set for life.
These people are Nixonian in their attitude, "it's not morally wrong when I avoid taxes". This also stems from the amorality of Ayn Rand's writings, in Randian thinking it is acceptable to expect others to follow a moral code which you yourself break and it's acceptable to admonish others for breaking it.
Big companies don't actually create a lot of jobs, most companies over their lifespan shed workers as they become more efficient. For a healthy free market to operate, it is vitally important that the percentage tax burden is the same for small companies and large companies, governments should not be giving tax advantages to anyone. This economic cherry picking causes "too big to fail" syndrome.
As a UK voter, if a political party said they would simplify the tax code and make all companies who operate in the UK pay taxes on their business here I would probably vote for them.
> As for Google I feel it is less of a problem... They don't have a big presence in the UK.
So let me get this straight, you are OK with Google not paying taxes because... they don't provide jobs to the UK? My apologies if I honestly misunderstood your post, but it seems really strange that you let Google "off the hook" since they ONLY remove money from your economy and don't even create jobs there. The way your post is worded its as if you are offended that Amazon and Starbucks provide thousands of jobs.
If Amazon and Starbucks figured out a way to provide the exact same services they do today, minus all those pesky UK employees, would you feel less angry with them?
Google services don't really benefit much from UK infrastructure (except digital infrastructure, which is privately owned for the most part at this point in time).
Amazon and Starbucks simply would not be in business without UK roads, UK police and other UK services; so Amazon and Starbucks are benefitting from taxpayer-funded services while not contributing their fair share to their maintenance.
EDIT: sorry, I wasn't clear -- I'm not arguing that Google should be treated differently, I was just suggesting a justification for the difference in perception.
But that's beside the point, if you want to take a different view on it, a healthy population is a resource on which these companies draw. In the US model, companies also pay for this, direct to their employees private health insurers. But pay it they (mostly) do.
Well it's obvious why: once you make welfare (almost) free, people abuse of it because they do not see the cost and they have nothing to report to no one.
Citation needed. All the evidence I've seen is that the French are much healthier than Americans.
"Based on detailed interviews with over 89,000 people, the results showed that 15% of the population from high-income countries (compared to 11% for low/middle-income countries) were likely to get depression over their lifetime with 5.5% having had depression in the last year. MDE were elevated in high-income countries (28% compared to 20%) and were especially high (over 30%) in France, the Netherlands, and America. "
On the other hand in 2008 Forbes compiled a list of the 15 healthiest countries based on a range of factors. France were number 15, the US were number 11.
Broadly I think they're probably about the same - essentially healthy Western nations who could do better.
For me the most interesting statistic about nationalised healthcare vs. the US model of private healthcare (other models are available) is the cost:
The US pays more per person on healthcare admin than the UK pays into the NHS in total.
The standard UK pension is £107.45 per week for a single person, £171.85 for a couple. If you think that's allowing people to live the high life then you and I have a very different view of what the high life is.
£9,000 a year (and this after a 40-odd year working life paying tax) for a couple to cover all living costs doesn't stretch to much in the way of hot springs vacations once you've paid for food, heating and so on.
Benefits are a safety net, they're not some route to easy luxury. Living on benefits is hard and not a whole bunch of fun. Yes there are some people who abuse them (though fewer than many would think) but that's the price we pay for having that safety net there. To get rid of them would be throwing the baby out with the bathwater.
A family member of mine is the head for a large region of Scotland for the Department of Work and Pensions.
They say that it is terrible what goes on. The average pensioner scrapes by and often do not take all that they are entitled to despite paying into the system for decades as you said.
On the other side is a huge amount of people claiming incredible amounts and have never worked in their life.
The people that do work hard and hit a rough patch are consistently those that claim the least, often waiting a lot longer than they need to before claiming anything.
Uk has the 4th largest defence budget in the world of £46.3 billion. We spend £62.3 billion on welfare. [http://www.ukpublicspending.co.uk/year_spending_2013UKbn_12b...]
Estimates put abuse (fraud, payment through mistakes) at 2%. Yes that's a lot of money, but that's not going to turn the country's fortunes around if it were eliminated. Realistically there is likely to be a minimum realistic level of fraud which balances the cost of catching offenders against the cost of the offence, and the side effects in excluding those who are actually valid claimants.
Those using the system as it's intended (that is being genuinely out of work, unwell or whatever) are a bit trickier. There are bits of Scotland that have terrifying problems. I live in Glasgow and the east end has areas where there are three generations of families who've never worked.
That's obviously a major problem but there are a few things it's worth thinking about:
1) Long term unemployed - that is longer than 12 months - is less than 30% of the overall unemployment figures. That's obviously pretty high (though not surprising, it's harder to get a job when you've been out of work for a while so it's self reenforcing) but many of those will be people who genuinely want a job. The people I mention who've never worked and will never work are a tiny fraction of that.
2) Contrary to popular belief, these people are not living any kind of luxurious existence. People point to satellite TV without realising that most of those decoder cards are pirated and designer clothes without understanding that for the most part they're fake.
3) How you deal with it is complex - pulling benefits from these people is more likely to drive them to crime than to work.
4) How do you make sure you get people who are genuinely on the take without removing the safety net from those who need and want it?
So I'd argue (a) it's a smaller problem than many suggest and that (b) the solutions are a little more complex than the swift kick up the arse that some feel will sort things out.
The UK hasn't had ring fenced taxes for decades if ever.
Google is in a slightly different place because it benefits less directly from this infrastructure. Which doesn't mean they shouldn't pay more than they do now, of course.
Google is ought to pay taxes like everyone else. Without the UK infrastructure, there would be no businesses to advertise through their service.
Taxes fund healthcare and security. Without healthcare, people would die and Google would have less customers. With no police and justice system someone could just go and bomb Google's UK datacenters.
Trying to rationalize why one company should not pay taxes while others do is bad.
Google extracts profits from UK economy and doesn't pay anything in taxes. It's bad for every UK resident.
If there was no Google, people would use directories/yelps/UK-based search engines which would pay taxes. In this case, from the economic point of view, Google is simply a parasite.
Over 90% of companies pay 19% of income tax + over 20% VAT tax. They often times coexist in the markets with the corporations paying 1%.
It's not important whether it's Google or Apple or BP - they should all pay the same taxes the small/medium business owners pay. Corporations use the same infrastructure that small/medium business owners pay for. Meanwhile they say "fuck you!" to said people and pay their 1% in the Bahamas. Additionally, they get enormous competetive advantage through lower taxes while medium or small companies need to gain it through superior products.
To be clear, VAT registered entities do not pay VAT in the fashion you imply. VAT is due on a VAT invoice. Companies usually do not do business with sources that are not VAT registered. It is a round robin scheme for VAT registered entities.
Simple example.
Month one, Google sells a tablet. Customer pays VAT. Google gives VAT income to HMRC ( once per quarter ).
Month two, Google sells a tablet. Google buys goods plus VAT. Google subtracts VAT out from VAT in. HRMC pays Google if amount is negative. Google pays HMRC if amount is positive. This month Company X paid more VAT on stationary than they collected from sales. In this case they get a refund from HMRC.
In no case does Google pay VAT. Nor does any other VAT registered entity.
The entities that pay VAT are those who are not VAT registered. Those that are VAT registered are collectors for HMRC.
Google, Starbucks, Amazon have never paid VAT. They have at most passed on VAT payments made by their customers.
It is not particularly bad if you take into account where they actually make their money.
Would you levy UK taxes on every penny Google makes, simply because their sites are accessible in the UK and used by UK residents? That would make no sense.
Google should be taxed fairly on the business they do in the UK, sure, but nothing more. I think that was the grandparent's point: Google likely does less business in the UK than Starbucks or Amazon, and even then the business that they do perform is more immaterial and it's harder to identify the source.
Thus it makes some sense that Google's evasion is "less surprising" in a way, because it is on a smaller scale. No one is saying that Google should not have to pay taxes on the business it does in the UK; we are simply quantifying what it means to do business and in what way.
This is, in fact, quite logical thinking, and there's no need to be alarmed.
You check they're not using weird accounting to set up a (tiny) business in a low tax regime, and then syphoning money out of the high tax regime into that low tax regime.
Google has customers in the UK buying ads, and people in the UK viewing ads - it seems reasonable that they should pay UK tax on those bits.
After all they make their money in the Bahamas.
If comes down to the two definitions of fair - is it fair that you pay for what you use, or pay that you pay what you can afford?
A tax system tends to walk the line between the two of these but it's very rare than any tax or tax system makes it a simple matter of charging for resource usage. There are elements of that, sure (and Amazon and Starbucks will pay additional road tax, fuel tax, property charges, NI on employees and so on so they are paying more than Google in that way) but part of it is you pay what you can afford.
In the same way prices aren't set based on what something costs, they're primarily based on what something is worth (go look at the cost of a Starbucks Latte and then we can talk if you disagree), that's how many taxes are set. Corporation tax is (or should be) Google paying for access to the market they wish to operate in - that's what the UK government is offering them and that's what they should be paying for. If that's a good deal for them (and even paying full corporation tax it is) then great, if not they can go somewhere else.
It's the equivalent of the argument that taxes are the price we pay for living in a civilized society. Taxes are the price you should pay for operating in an attractive market.
Google have a main office in London http://www.google.co.uk/about/jobs/locations/london/ , and also the campus startup/co-working space at http://www.campuslondon.com/, so clearly they do provide jobs to the UK.
If that's a significant percentage of their worldwide operation, I can only guess. Given that they say about the London office "We’re one of Google’s largest engineering operations in Europe", probably yes.
I don't buy this. It's absurd that a UK business can pay to place ads on the Google UK website, presenting them solely to UK consumers, and yet the money involved in this transaction never touches the UK.
It goes straight to Ireland, then the Netherlands, to Bermuda.
There would be taxes on the profits of a UK company, which IMO is the wrong way to go about it; just tax the income made by UK investors who own shares in a company (wherever that company happens to be based). The money can bounce around through as many shell companies as you like, but at some point it becomes an individual's income; tax it there.
I'm no accountant or tax lawyer, but it's obvious Google are playing games with the UK. According to their own filings, they made $4bn from UK sales in the last financial year.
The representative yesterday shrugged it off and tried to make out all Google do in the UK is have a bunch of promotions/localization staff. They (Google UK Ltd) receive all their income from Google in Ireland, and end up reporting a loss, meaning they pay a nominal amount of tax to the UK tax authorities.
$4bn in sales from the UK market and they pay UK tax authorities around $5mn in tax.
That's why people are angry, and that's why their representative was getting laid into by MPs yesterday.
Maybe you should consider what is really hurting the Economy. The fact that your government is borrowing 5 billions every two weeks on the markets to keep functioning because its damn broke and cannot handle a budget, or the fact that Google did not pay (while absolutely legal) a few hundred millions in last year. If you apply the 80/20 rule, I think your attention is well misguided.
It's all a matter of priorities, and proportions. And the media (usually state-controlled, at least partly) certainly want you to see the "skin rash" rather than their own mistakes, because you should be way more angry by how lax they are with YOUR money in the first place.
Sorting out the government debt needs to happen but the 600-odd MPs and hundreds of thousands of civil servants employed by the UK government may well be capable of dealing with as many as two things.
The two things aren't linked, the fact that we need to get our house in order is surely a reason to make sure we're ensuring we can get in whatever revenue we can?
Well, it is fairly obvious that fixing the huge debt problem in the UK and all developed countries in the similar situation is the most urgent thing to do instead of trying to fill the hole with the "missing" taxes here and there, because no matter how Google and other will pay in tax locally it will never make up for the huge hole they are digging everyday through their inability to keep a straight budget.
To blame Amazon is to only look at one side of the argument...
What about the high levels of rent on the high street, and the costs of parking etc.?
Councils, landlords and others all have played their part in the damage to the high street too.
No corporation pays taxes, they simply collect taxes for whichever government entity has its hands out. The reason why this works so well is that in general people are ignorant. It also helps that many are selfish, thinking that since they don't buy from X they aren't subject to the tax somehow.
So yeah, its annoying some companies are not paying into the local coffers but that is only the real issue being buried by those who like the populace clueless in tax matters.
In the states, I am not sure how the UK works, we have withholding tax where taxes are deducted from our pay before we see it. It helps hide the burden of government. So does taxing corporations.
Think about it, if every purchase you made had a line entry for "THIS IS THE EMBEDDED TAX" what do you think people would do?
Accounting like this is very much like (grey-hat?) hacking; you have a very large and complicated system and you simply need to find the weakest spot.
Defending against that can't really be done when you only have control over a single component of that system.
At least this way each country would be incentivised to enforce tax locally in a controllable and predictable way. And I'm sure that whilst some companies might wish to pull out, most would stay.
a profit is a profit, it may be less than before but if you're still creating profit you wouldn't give it up.
What is needed is a strong European effort to align taxation, which would remove any benefit from schemes like the Double-Dutch and Double-Irish, and then levy heavy taxes on capital flight outside European borders. This, of course, if our elites actually cared about tax evasion, which they really don't -- can't risk to find those revolving doors shut when it's your turn to bow out.
This /really/ doesn’t align with my morals, which are definitely not a popularity contest.
To misuse a famous quote:
"There are two ways of constructing a tax system. One way is to make it so simple that there are obviously no deficiencies. And the other way is to make it so complicated that there are no obvious deficiencies."
I would argue there is something obviously wrong. And I blame the government for not fixing it quickly. And the people for not being loud enough.
The more rules and regulations there are the more easy it is to game the system
The simplest tax is the most effective, but of course bureaucratic behemoths are too stupid to realize that.
I can see why you would try it on, the sums involved have to be huge, but it is fundamentally immoral to operate like that.
err. no it isn't.
It's quite clear what the intent of the tax laws is, and it's quite clear that announcing a loss to the tax office but a massive profit to your investors is at the very least duplicitous.
If it was then what they are doing would be illegal
Interesting worldview there...
That most ordinary people would agree that this is the right approach tells volumes about the society we live in.
Someone out there has a moral code that encourages stoning women to death. Doesn't mean that has got anything to do with anything being as it is a vague and meaningless concept that doesn't inform governance.
> Availing yourself of a market
By which you mean acting as a VAT collection body and sending that money to the treasury for transactions within that market that occured under your business.
> the facilities and workforce of the UK
Would you rather the roads were empty because the people of the UK had no jobs?
There are ways to address this issue as discussed endlessly. But the last thing this is is immoral. It may not be just nor fair, but those do no interact with the morality of a benign government and their laws and regulations. It doesn't help the argument but it is rhetoric that is being thrown around that as much as anything hinders progress on this issue
I didn't claim morality was objective, no need to behave as if I did.
By which you mean acting as a VAT collection body...
What are you trying to say here? That because they collect VAT that's ok and they should be exempt from other taxes?
Would you rather the roads were empty because the people of the UK had no jobs?
False dichotomy. It's not the ability to move profits abroad that keeps people employed in the UK, arguably it sucks money out of the country and is a net loss to our economy.
> it is fundamentally immoral to operate like that.
Sounds pretty objectively-stated to me.
Count me in the camp that disagrees with you. Normal people do all sorts of perfectly legal tricks to pay less income tax. They're not cheating; they're just paying the minimum they're legally required to pay. Same deal for business. Whatever they can get away with without breaking any laws is the minimum requirement. Paying extra tax out of some patriotic duty is illogical, as is not taking advantage of the perfectly-legal loopholes found.
It is not up to the businesses to pay more tax than the current legal framework requires; it's up to lawmakers to amend the tax code so that 'undesirable' loopholes are closed.
Businesses act to maximize profits. There is nothing immoral about this.
I really disagree with this worldview.
When business dump toxic byproducts into water supplies, in places where nobody has yet legislated against that, is it not immoral?
I agree it's up to the lawmakers to change things, by the way, but I don't agree that it's always the right thing to do for companies to walk as close to the line of illegal behaviour as it's possible to get, just to maximise profit.
The morality of it is irrelevant because it is deemed to be an infraction of a law in most places
All these loopholes are perfectly legal and companies actually need to exploit them to remain competitive.If they didn't then any competitor could decide to do this and could earn 30% less and still make a bigger profit.
It would of course have been great if the representatives had been self-aware enough to agree that they might not be taxed effectively in a global market and that they would be willing to co-operate with aligning global tax incentives in a way that leaves it a level playing field for all competitors; but that's probably a bit much to ask ;)
I don't disagree with what you're saying otherwise.
Example: A company, acting "morally" as you define, pays more tax than it is required to under the law. In so doing, it incurs a loss so severe that it must cut staff in order to remain viable. Among those employees cut are some of the more vulnerable - those with low savings, poor health, or babies on the way.
Has the company acted morally?
Consider another issue: Should the same company pay more than its legal obligations in every jurisdiction to which it is subject? How should it allocate its extra giving? What if, in some of those jurisdictions, there's a good chance the extra money will simply go into private pockets via graft and corruption, instead of serving the public good? (There are such jurisdictions in the EU, yes?)
These issues are not as clear-cut as you suggest. It's far better for the tax law to best reflect the morality of the citizenry, and then fully excuse the citizenry (including business entities) from seeking to legally minimize those taxes.
Usually not an issue in this case, since corporation tax covers profits. If anything, corporation taxes encourage greater employment.
Amazon are not profitable as far as I read their sheet.
In the US a corporation's legal responsibilities are to it's shareholders ... it might be fundamentally immoral but it would be unethical to operate the company against the interests of the shareholders too.
It's the laws that need to be changed rather than blaming the companies for being good at accounting.
Absolutely agree the laws need to be changed. I, personally, would be looking to stop the 'convenient' reporting of losses in markets that are actually highly profitable but not tax efficient. There's an interesting comment on the Starbucks press release that coves it quite nicely -
"How can Starbucks tell Companies House and HMRC that its UK business is loss-making but tell analysts in SEC-regulated calls that the UK business is profit-making, without either making misleading financial statements or filing false accounts?"
I agree - it's possible that Starbucks UK is not pofitable, and that the parent company is, or vice versa. But reporting the same thing in different ways to different audiences seems fishy to me!
Aren't they just transfer pricing their profits out of the UK to Switzerland and the US?
If a person did it, we'd call it immoral. When it's a group of persons doing it, we'd call it immoral. But when it's one group of persons doing it -- the employees -- in the name of another group -- the owners -- it's suddenly unethical not to do it? I don't get that.
I guess it'd be unethical for the employees to act one way when they know the owners want them to act another way. But if the owners willingly let the company act immorally, then they are themselves acting immorally. Which is, of course, the case.
It is a fundamental shift in finance theory that occurred about 25-30 years ago. Many people will argue that management should put the shareholders above all else. I think there is a somewhat muted, but real discussion happening in a lot of places that the currently accepted system may not be the best one, but for now, management has a fiduciary responsibility to shareholders.
The crazy thing is that people "blame evil corporations" while having almost 100% of their retirement invested in the corporations they dispise without even realizing it.
Unless you have no savings, you are likely a shareholder in a number of companies which are using transfer pricing to save on taxes.
You are much more likely an investor in a unit fund that itself holds shares. As a result you have no say over anything, and pretty much no alternative but to join one of these schemes.
You could say you don't want to be invested by not investing in mutual funds/ETFs etc.
But, almost every American with savings does invest and is the direct beneficiary of transfer pricing.
You and others could decide to allocate a portion of your capital gains back to the UK government as a gift, but I think that is "very, very unlikely".
[Also] One strategy could be to only choose small cap names, then you are unlikely to hear of any of the "evil" things the corporations you own are doing... Obviously that would create problems with risk in your portfolio.
Would we? It's pretty rare that I hear of someone being accused of immorality for taking every tax deduction allowed by law. If people want to complain about tax deductions, they usually say that the law is bad, not the people who follow it as written.
I think countries should arrange their tax rates and accounting rules so that there's little incentive to avoid taxes by moving money around, but I don't think it's in any way immoral to pay as little tax as the law requires. Governments are not charities and do not run on donations.
You don't strike me as having a libertarian bent, but that's essentially the argument used to justify taxes as immoral:
If I steal from my neighbor and distribute the proceeds to the community, including my neighbor and myself, it's theft – immoral.
But if the whole community gets together and vote to steal from my neighbor, and his neighbor, and everyone's neighbor, and split up the proceeds – that's suddenly moral?
Point is, not all arguments generalize from "a person doing it to" to a group doing the same thing collectively.
I think this attitude is at the heart of the problem.
Even in a jurisdiction where I might see some benefit from the taxes, I'd probably see more benefit from that same amount of money in my pocket. It's perfectly rational to want to minimize one's tax obligation, especially to foreign governments.
http://hbr.org/2010/04/the-myth-of-shareholder-capitalism/ar...
"Shareholders do not own the corporation, which is an autonomous legal person. What’s more, when directors go against shareholder wishes—even when a loss in value is documented—courts side with directors the vast majority of the time. Shareholders seem to get this. They’ve tried to unseat directors through lawsuits just 24 times in large corporations over the past 20 years; they’ve succeeded only eight times. In short, directors are to a great extent autonomous."
I do think though, that US law dictates that they must work for shareholder value.
It's hard to see how we wouldn't end up here if they aren't actually breaking any laws on their way to this destination.
Earlier HN discussion: http://news.ycombinator.com/item?id=3227980
They are amoral.
Companies are made up of people, and these people are the ones taking the actions.
Corporations, like Nicheian supermen, are not subject to ordinary rules. If you were dodging taxes, your ass would be in court, not before parliament.
The companies in question are availing themselves of the laws available to them to get discounts on their tax obligation, just as an individual might claim their children as tax exemptions, and use charity contributions as write-offs.
As you indicated elsewhere, morals and law do not necessarily align, and you are trying to attach morality to a legal obligation here. That companies do the same thing as everybody else does shouldn't be counted against them, especially as it is legal.
I'm guessing the UK would love to have the 12% taxes that are currently paid to the Swiss ... There's an easy solution! Set the tax rate to something reasonable. Start a tax war and set your corporate tax rate to 11%. Eleven percent of everything is going to be way more money than 30% of a loss right? I live in the US and would love to see the same thing happen here as our tax code is atrocious.
And the bottom has been reached if the profits are being parked in Bermuda ... that's an effective tax rate of 0% for the company and an effective income of 0 for the government too.
A government doesn't have to compete like this if it holds the key to its market. If the rules are changed adequately you absolutely can say that they must pay to play, and pay what you ask.
A mail-order company like Amazon is a different beast in this respect, but something like Starbucks which has hundreds or thousands of physical locations can't just set up somewhere else if you set the rules right.
Starbucks followed the law. You may not agree with the way they did it, or what the law says, but AFAICT nobody is arguing that they've done anything wrong (in the legal sense) right now.
The avoided taxes are corporate. All the VAT, taxes related to the jobs they've created (which are legion, as you yourself have admitted), local taxes (I am unfamiliar with how these work in the UK, but I presume they exist)... are still being paid. Starbucks is significantly improving the state of the coffers, and it's also minimizing how much it does so, as is its right and responsibility.
It makes no sense to me that a local or national chain should be at a disadvantage because they pay corporation tax in the UK, when a multinational can essentially run the same business but spirit away the profits when tax-time comes around.
That's what I mean by the government holding the keys to the market, it should be possible to say that if you want to operate here and have access to our (clearly lucrative) market then you run by the same rules as everyone else, giving an honest account of the profit and loss made on the business in this country.
"The avoided taxes are corporate."
So? The corporation is operating a business in the UK.
VAT is a tax on the purchaser, not the company. PAYE is a tax on the employee, not the company. Yes, they pay 'business rates'. As they are required to. And no, I'm not suggesting what the are doing is illegal, I'm suggesting it should be made so.
The benefits of Starbucks operating the UK without paying corporation tax is debatable. Is it really improving the coffers if people would go for coffee anyway, in a place that does contribute back to the society it's operating in?
Amazon "sells" all the e-goods they can from a notional location in Luxembourg so that they can charge a 3% VAT rate on them. Small physical goods are / were shipped out of Jersey (although how many of them actually came from Jersey and how many were notionally shipped there and back again? Your guess is as good as mine...and I wouldn't put it past Amazon to push that little loophole as far as they possibly could) so that they incurred no VAT at all, until the government finally clamped down on that little scheme.
Trust me, if they can avoid the VAT, they will do so, and pocket the difference at the expense of local suppliers who can't afford the economies of scale that would permit them to set up these schemes.
And if you really think Starbucks artificially moving profits around by charging more than the market rate for coffee beans from it's own traders in a low-tax country is legal, I have a bridge to sell you. Unfortunately, the Inland Revenue just doesn't have the manpower to clamp down on the proliferation of ways in which companies can play these kind of "Hollywood Accounting" games, which is why some kind of alternate-minimum-tax approach is the only workable solution IMO. (Assuming you believe in corporation taxes in the first place of course, which is a whole separate kettle of fish!)
I think both solutions would probably be great - fix the glaring problem that multinationals can avoid corporation tax though legislation (where local and national firms can't), AND then try to maximise take (and employment and all those other good things) by adjusting tax levels.
Sound good?
--edit-- if his is broadly in line with what you were saying from the word go then sorry for being an argumentative arse. Need more sleep...
It makes sense to try enforcement instead.
(That said, I'd love to see the world's longest tax code, the UK's, simplified).
A multinational's access to resources and ability to exploit tax systems internationally is at the least unfair to smaller national businesses, and you could say to nations as a whole. Either we need to admit that corporation tax is dead and we need to tax end points like transactions or consumers, or we need to admit that unilateral taxation is dead and we need to collaborate internationally.
Centuries old thinking about business and tax does not apply in globalised business - and that includes your own, which would just provide a race to the bottom and would achieve little.
Furthermore, I think you are making the unwarranted assumption that it's a race to zero, as opposed to some balance point greater than zero where the companies actually have some reason to pay that tax. If we're all paying taxes for the common good, then presumably there's some common good in it for them, too? Or are corporations only things that we extract money from?
On the other hand, corporations, especially multi-nationals, are an abstract concept. They do not have a need to reside in any one place or another, except for maximising profit.
It makes little sense to try to locally tax entities that have no afinity to a location.
Finally, at some point a corporation's taxes are distributed to people, via wages, dividends, etc. and these are taxed. This is also the easiest place to tax.
It makes little sense to me to allow multinationals a huge advantage over local business by letting them whisk away their profits.
These profits are indeed distributed to other people, in other places, not subject to UK taxes. It's not only (IMHO as I said below) immoral, it also distorts the market.
Instead of taxing corporations' profits, why not tax individuals more and re-coup the taxes from the owners and employees instead of the corporations?
I agree there are probably easier things to enforce. OTOH a tax on company profits seems inherently reasonable to me - it scales down and is less of a burden on companies that are having a hard time, getting more of a take from the successful firms that can afford it.
Things like payroll, VAT and business rates are based on some kind of consumption and are independent of the magnitude of your success. Changing the tax on these things will probably control how successful/profitable you are, meaning if you set it too high your revenue drops off from businesses failing - so clearly you can't optimise on consumption taxes alone. Hence the need to also tax success in some way.
Unfortunately, taxing a very direct measure of success (income) doesn't work. What alternatives do we have? This is the key question.
Both are just gathered by the company on behalf of the exchequer and as such are not taxes the company pays.
At the moment profits in a business are taxed, then when a shareholder receives those profits as a dividend they are taxed again but with some kludges to undo the double taxation. We would be better off dropping it and focussing on purchase and income taxes.
I know that Starbucks is convenient and consistent, but there are reasons other than their ethics to drink elsewhere. In London, at least, there's no shortage of UK coffee shops that make a product superior to both Costa and Starbucks. Prufrock Coffee and Department of Coffee are notable examples.
AFAIK none of these tax avoidance methods are available to small, single country companies. HMRC are happy to sue small companies, whilst cutting sweetheart deals with multinationals with deep pockets for lawyers.
//edit//It seems like Laffer Curve applies to companies as much as it does people.
quick point 2: Seriously, income & profit generated from a country should be subject to the tax of that country. I don't know why this isn't obvious to everyone, especially HMRC/the Treasury when they write the rules.
final point: I'm not sure companies should be taxed at all. Just make it law that anything accounted for as "profit" must be paid as dividends, and charge people income tax on the dividends. Do this at source, like PAYE, for all dividend payments leaving UK-active companies, even the ones headed to foreign citizens. (this would mean companies could re-invest in growth for free, but that that growth would have to take place in the UK.) Subject all "brand value" payments, and indeed all other transfers abroad, to scrutiny / valuation (should be easy for big companies, as there's only one brand.) This would work anywhere, not just in the UK.
Providing jobs and products people want is already quite the social contract contribution.
At the very least a tax code that people can actually understand would be a decent start. I think it's pretty silly to point your finger at other countries for making "shady deals" with companies. Pretty much every nation does it, that's one of the reasons why tax codes are so complicated in the first place.
The writer here sounds laughably out of touch.
Of course corporations try to pay as little as possible to the tax man and of course they shop around for the best deal. They do so for paper, why not for tax?