Is the UK government too scared of Google, Amazon and Starbucks?
bbc.co.uk
bbc.co.uk
"Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax. This so-called doctrine of “the substance” seems to me to be nothing more than an attempt to make a man pay notwithstanding that he has so ordered his affairs that the amount of tax sought from him is not legally claimable."
The influence of this case is still strongly felt today in courts, and this leaves the British Parliament with little power to make "strong" tax laws that have no "loopholes".
American courts and laws do far more to assert jurisdiction and prevent tax avoidance, but as we know American tax rates are much lower than most countries.
So yes, I think the tax laws need to be better written - but it's very difficult to do so given the historical developments and judicial attitude towards tax.
I think you're hanging too much on the courts. The quote you provided is what courts are supposed to do. The fact that they don't do it in other cases is more of an attestation to the lack of justice available to those accused who lack economic and political power than to anything wrong with what they do with tax law.
The real trouble is that profit-based tax accounting is highly subjective. If it costs you $90 to provide a service that you sell for $100 then you're supposed to pay tax on the $10 of profit. But things only cost what you pay for them. If you're selling for $100 and buying your raw materials from a corporate sibling in a lower tax jurisdiction, what is the "cost" of those materials? The customers are willing to pay about $100 for them; that seems like a reasonable total for the sum of your costs -- if you were making anything more then your powerful multinational supplier/franchisor could squeeze it out of you if you were independent, so the same goes for you as a subsidiary.
Take an example: Suppose you're a franchisee who owns a coffee shop. You have to pay Multinational, Inc. to use their trademark and fly you to their location to get some training. They're in Ireland (or whatever) and pay tax on that money there. By the time you pay them and pay your employees and rent and utilities and all that, you have just enough to pay your own salary. Then you have nothing left as taxable income for Starbucks on Third Street, Inc., but that's perfectly alright with you because you're happy to be making a steady salary, so indefinite corporate break-even is a stable equilibrium.
If Starbucks International then comes in and offers to buy your franchise, it makes no sense for that to change your now-subsidiary's corporate tax liability. And if it did, it just wouldn't happen -- instead of having subsidiaries they would continue to have franchisees "owned" by managers who make no more from the franchise than they could be expected to draw as salary from the manager position.
They call this problem "transfer pricing" -- you get to deduct costs from taxable income, and you get to decide (within reason) how much your costs are. But when profit margins are thin, a (very reasonable) couple of percentage points difference in the cost paid to a corporate sibling can easily erase all of your in-country profits.
I haven't heard anyone come up with a reasonable solution to it, other than to stop trying to tax profit and tax something else instead.
1. http://www.accountingweb.co.uk/topic/tax/uk-now-has-longest-...
I mean the way I see it, the judge is saying "hey, if someone follows the law, you can't complain if they're able to reduce their tax payable". But what I don't see is them saying "and you can't make laws to change that".
When a court gives a restrictive meaning to a given provision, it incentivizes Parliament to introduce more laws to capture the activity they wanted to capture in the first place. This has gone on for decades, and as a result, the British tax laws are a mess. When you have a massive number of provisions trying to capture essentially the same thing, then you are bound to run into inconsistencies, which lead to "loopholes".
I love how laws remind me of some of the really bad code I've written in the past, with all sorts of broken patches trying to fix it, even though I know I just have to throw it out and start again...
There is however a strong feeling that certain Large Internet Related Companies ought really to pay some tax on their UK operations.
I think it's not so much Internet-related companies as multinationals, who (unlike home-grown, smaller businesses) often have the scale and geographical diversity to play funny money games where all of their profits conveniently wind up being earned in a location where a very low tax rate is payable, even though the money was blatantly earned elsewhere. That creates a huge barrier to competition for those smaller, home-grown businesses, and obviously deprives the government of a lot of tax revenues they "deserve".
The catch is that these businesses do pay a lot of tax in the originating countries: in the UK, for example, they probably collect VAT, make Employer's National Insurance contributions, and pay all kinds of consumption and property-related taxes. Additionally, these businesses typically employ a lot of local people. Consequently, if you sharply change the rules so they can't play their funny money games on Corporation Tax and as a consequence it really does become relatively expensive/unprofitable to operate within a certain country, then if they scale down or outright leave, it still hurts, a lot.
So far, I don't see any happy ending to this impasse for the government that doesn't involve an unprecedented and IMHO implausible level of international cooperation.
The more likely alternative seems to be governments realising that taxes on local profits are effectively a competitive international market, and having to learn to live within their means, probably rebalancing the tax system heavily in favour of consumption taxes and then making a whole round of adjustments to avoid screwing poor people because consumption taxes are regressive by nature. I can believe this would work, if you had sufficiently smart people figuring out how to balance everything properly, but for sure it would look very different to the tax landscape we have in most first world countries today.
Of course there are also the more draconian options: windfall taxes, economic annihilation of tax havens until they stop undercutting everyone else, and the like. But I suspect the long term costs of breaking the rules because you're a government and you can would far outweigh any short term increase in tax revenues, so I don't see any of these as particularly likely.
Such is my cynical nature, I interpreted the 'initiative' as an attempt to distract attention from other areas of Mr Osborne’s policies. Rather like a stage magician.
It's politically convenient to blame foreigners while the general population has had their personal wealth diminished through multiple runs of the money printing press.
The rationalisation seems to be that because local firms, unless using what would now be seen as avoidance, cannot avoid profits and so corporation tax, then everyone else should jolly well pay it too. Of course, in the days when Britain's large international companies like BP returned taxable profits to the UK, the accumulation of wealth through extra national activities barely mattered ethically. Now of course, the UK is contracting both in real terms and comparatively.
It's odd. These rules were set by the very people complaining about them. And from what I've heard from some if the participants in the committee, some haven't the first idea about the Companies Act and its meaning.
If Starbucks is willing to reallocate an amount from an expense to profit for the purposes of corporation tax, I have to say, even despite any other consideration, that's its tantamount to a gift. A sensible good will payment, but a gift none the less.
Isn't that exactly what the term means?
>This from a group who were discovered to be minimising illegally expenses
Some MPs illegally claimed higher expenses than they incurred. Generally they resigned as soon as this became public. I'm not saying there's no corruption, but UK politicians are held to higher standards than practically anywhere (in no small part by the strong, activist judiciary and a strong, diverse press).
>The rationalisation seems to be that because local firms, unless using what would now be seen as avoidance, cannot avoid profits and so corporation tax, then everyone else should jolly well pay it too.
How about "companies making profits in the UK should pay taxes on those profits in the UK"? Seems sensible to me.
>It's odd. These rules were set by the very people complaining about them.
a) Who better to look for weaknesses and improvements? b) A lot of the complaint boils down to: these companies filed fraudulent accounts.
What they are doing is deliberately organising their affairs, subsidiaries and transactions such that the profits they made are actually made in locations where tax is low, e.g. The Netherlands, Ireland, etc.
Essentially, they have a company in the UK that 'licenses' certain IP or buys in certain services from their foreign holding. These licenses and services happen to cost as much as they receive in revenue here, so they make no profit in the UK. However their foreign counterpart makes huge profit by selling these licenses and services at a high mark up.
This is all, as it stands today, entirely legal. Whether it is moral or not is another issue, and whether it will remain legal is also. However, these kinds of loopholes are almost impossible to stop without huge international co-operation, which isn't really in the other states' interests.
>Essentially, they have a company in the UK that 'licenses' certain IP or buys in certain services from their foreign holding. These licenses and services happen to cost as much as they receive in revenue here, so they make no profit in the UK.
I know. I think they are lying about these prices, and thereby lying about where their profits are made. As to whether they are committing fraud and/or breaking the law, the MPs will decide that.
At the moment, it seems like the answer to that is: each company involved makes some kind of judgment as to what amount of tax paid will get the local authorities, committees, and press off their back.
Related to this is your second point, about profits. If indeed a company shows a profit on their yearly profit and loss account, then providing a false declaration to HMRC would be statutorily illegal. You can be sure that HMRC and Companies House will have a look at it, but it's going to be a waste of time for those hoping to find wrong doing, but if there were something wrong their accountants will find themselves with a letter of demand.
There is a great body of precedent in statutes pertaining to the Companies Act, and it is based on rulings not only within the UK, but also from other jurisdictions including the most similar in heritage such as Canada and Australia.
Companies have a duty to further the companies best interests. Usually this means as interpreted maximisation of profit. There are other factors though, including reputation. It is for that consideration that I describe Starbucks voluntary accounts adjustment as one of good will, a valid accounts classification in its own right.
Minimisation is avoidance surely? It's tax evasion that's illegal. Any legal means of reducing your tax bill is avoidance.
Tax avoidance is minimising your tax liabilities through legal means. Tax evasion is just not paying, not declaring, all sorts of fraud etc.
Stemcor paid £163k of tax on £2.1bl of revenue in 2011 [1]
[1] http://www.telegraph.co.uk/finance/businesslatestnews/966839...
Then there is also the question of the shares put in trust for tax purposes also...
I've noticed this approach to reporting corporate tax in a lot of the Left wing press, particularly the Guardian here in the UK. I guess this is because the numbers sound worse.
The unfortunate thing is that it cheapens the argument; because the numbers are not connected the statement becomes irrelevant. This has a knock on effect. I personally stopped purchasing coffee at Starbucks because of the reporting of how much tax they paid, given their revenue AND their 'imaginative' expenses. I'm not going to do the same when the figures aren't comprehensively explained.
[edit: not that you were doing that, I'm referring to the "politically motivated" publications I mentioned.]
To be clear, I wasn't attacking tax avoiding companies, but hypocritical MPs.
As in, property, gold, stocks, and bread.
Except that didn't actually happen [inflation], did it? And that inflation that did happen was mainly caused by energy prices and food inflation, not via the money supply.
I don't get this argument at all. Google uses advertising to gather news content via web search. It sounds like, if they started reporting on news, the media would complain about Google paying 3x what everyone else can afford and stealing all the talent.
-- Owners of small independent coffee shops are not exactly huge fans of Starbucks.
Studies have shown that Starbucks has actually increased the quantity of viable coffee shops in neighborhoods. Is this something different in England?
The Gov't not getting taxes is strictly the fault of the Gov't for allowing the loopholes to exist and be exploited. I'm sure though, that this article isn't claiming that none of the employees of Starbucks doesn't get taxed.
I think it would behoove the article writer to study and research what has happened on other parts of the world. Of course, Amazon isn't really good for B&M bookstores and that is a legitimate fear, but the rest are non-issues. I really don't get the Google argument at all.
The argument, not that I agree with it, is: there is a finite pool of advertising dollars. By taking them and spending them on other stuff, Google is cutting the funding of news/television/radio. It's like pg's suggestion that the invention of the camera may have damaged art by depriving artists of "day job"s painting portraits.
>Studies have shown that Starbucks has actually increased the quantity of viable coffee shops in neighborhoods. Is this something different in England?
I doubt it. But there are still many owners of small coffee shops who hate Starbucks - mostly the ones who can't compete because their coffee is terrible.
>The Gov't not getting taxes is strictly the fault of the Gov't for allowing the loopholes to exist and be exploited.
And now the Gov't is taking action to correct that.
Or we could start building pyramids again - with bare hands!
The allegation is not that google is being more efficient and thereby reducing employment. The worry is that there will be much less news/television/radio because google has removed its primary source of funding.
(If you believe the purpose of all things is economic optimization then this won't concern you, but many consider news/television/radio to be valuable for their own sakes)
I do not consider news/television/radio to be inherently valuable - it's creation and distribution of content that I consider to be valuable.
We only need to look at Europe to see how widespread tax avoidance plus high government spending creates an unsustainable path that puts the entire economy and country at risk.
Since silicon valley seems like such a civic minded place, I'm wondering if we will ever get realistic about what we'd really like to see happen: either support lower government spending across the board to complement the aggressive tax avoidance, or demand that leading companies pay taxes according to the state or country where the revenue is received, and not based on wherever a shell company may reside.
In the UK, about the same is paid in national insurance + VAT + council tax as is paid in corporation tax + income tax.
All reducing corporate tax rates does is cause a race to the bottom.
I'd prefer a race to the bottom than the current race to the top.
Now for Starbucks vs traditional cafés, just make better coffee. I doubt Starbucks would thrive in Italy for that reason.