The Tories never tire of telling us how keen they are to support "hard-working families" who "do the right thing," We of the left should be equally assiduous in making it clear how much we favour hard-working businessmen who also "do the right thing," namely:
- live in Britain rather than as a tax exile;
- register their companies in Britain rather than in tax havens;
- have no truck with contrived schemes to avoid and evade paying their fair share of taxes;
- give their employees proper rather than zero-hours contracts;
- pay at least the minimum, and preferably the living wage;
- run real apprenticeship schemes and offer in-service training and re-training
- observe the laws regarding their employees' health and safety
- recognise their employees' need for sick leave when necessary, and holidays with pay;
- re-invest a large portion of their profits in research and development, and, where appropriate, expansion
- run decent pension schemes.
It is even more ludicrous that one of the accusers, Stefano Pessina, himself a tax exile in Monet Carlo who has attempted to relocate the company he leads, Boots the Chemist, to Switzerland for tax purposes, gains front-page headlines in our right-wing dominated press. Labour is consequently forced onto the back foot and shadow cabinet member Tristram Hunt is forced to grovel that Labour is a "furiously, passionately, aggressively pro-business" party on yesterday's Andrew Marr television programme.
Our Liberal Democrat election slogan, "Stronger economy, fairer society" enables us, if we have the courage of our convictions, to campaign robustly on the list above. If it is achieved our society will be fairer. And if business leaders really do "do the right thing" our economy will be stronger because employees treated fairly work better together for the common goal.
Add a dash of profit sharing and democratic participation (whatever happened to those policies?) and we could be living in soar-away Britain.
* In yesterday's Sunday Telegraph, so I'm told.
What exactly is wrong with, acting within the law, reducing one's tax liability as much as possible?
ReplyDeleteIs that not what everyone with an ISA, or who has their employer contribute to a pension scheme, does? Or anyone who spreads the selling of shares over several tax years, to make maximum use of their capital gains tax allowance — or who uses their spouse's capital gains tax allowance in addition to their own?
Clearly tax evasion is wrong. That is why it is illegal. But provided one acts within the letter and spirit of the law, no one has any moral obligation to arrange their affairs so that they pay the most possible tax.
I think the revelations regarding HSBC aired over the past three days (and counting) answer you points.
DeleteHowever, agreed that there is some tax avoidance that governments actually encourage, such as ISAs and whatever it was that came before them to encourage saving (thrift was regarded as a virtue in my youth) and allowances to business against profits ploughed back for investment, expansion and R & D.
However, there are loopholes in all regulations which permit clever accountants to outwit civil servants and find ways of avoiding tax which governments do not intend. These may be legal and obey the letter but are certainly not in the spirit of the law; something which you admit is desirable.
A recent and well publicised example is that of Starbucks, who have, quite legally, avoided much British tax on their massive turnover generated in this county by claiming that the must pay high royalties to their Dutch roasting and Swiss trading companies.
Frankly, this practice is a nuisance for a rich country such as Britain but similar “transfer pricing” has a devastating effect on the welfare of millions in poorer countries.
Turnover taxes paid in the country in which the turnover is generated would be much more difficult to avoid.
A recent and well publicised example is that of Starbucks, who have, quite legally, avoided much British tax on their massive turnover generated in this county
DeleteI think you must be confused.
No business pays any tax on turnover.
Tax is paid on profit, not turnover.
by claiming that the must pay high royalties to their Dutch roasting and Swiss trading companies
As I understand it the prices they pay to their Dutch roasting and Swiss trading companies are comparable to those they would pay to external companies if they outsourced those functions; is this not the case?
Turnover taxes paid in the country in which the turnover is generated would be much more difficult to avoid
So you think businesses should be taxed on turnover, not profit? Really? That seems a spectacularly stupid idea to me, as it would turn many high-turnover but low-margin businesses which are now viable but existing on small margins where they either just break even or make a small profit each year, into loss-making endeavours and therefore drive them out of business. Is that really your aim?
Starbucks is an American company, so why it should decide to pay royalties to a subsidiary in the Netherlands rather than to itself in the US, or a subsidiary in the UK where its profits are earned, is difficult to explain if it isn’t the avoidance of tax.
DeleteI understand the Swiss roasting company does not actually roast any coffee: it comprises some 30 people who simply test the samples for quality. So again, why in Switzerland other than for the avoidance of tax? For further and better particulars see: http://en.wikipedia.org/wiki/Starbucks#Controversy
As you know there are plenty more illustrations in this week’s papers, following the exposures relating to HSBC. It is a sad reflection of our politics that the issue has become one of party point scoring rather than the damage done to the public interest. Heaven only knows how many schools could be built, universities financed, hospitals properly staffed, railways upgraded, elderly people looked after, care workers properly paid, if these companies paid their share towards maintaining and improving the society and infrastructure that enable them to operate.
On the issue of the turnover tax, I take your point. There are pros and cons relating to all taxes, and a turnover tax is both regressive and, as you correctly argue, rather hard on firms with a large turnover but low profit margin. I merely throw it in as an example of a tax difficult to avoid. But the best approach would be to toughen up the rules relating to profits tax, so that companies, and particularly large international companies, pay their whack.
Starbucks is an American company, so why it should decide to pay royalties to a subsidiary in the Netherlands rather than to itself in the US, or a subsidiary in the UK where its profits are earned, is difficult to explain if it isn’t the avoidance of tax
DeleteAgain, I thought the point was that it didn't pay tax because it doesn't earn very much profit (it has a high turnover, but low profit).
But to the location point, I am not an expert in this, but it occurs to me that probably the subsidiary in the Netherlands doesn't just take the royalties from the UK, but from all the European franchises of Starbucks? In which case, presumably they had to pick one country in which to place their European Head Office and, well, if they'd picked the UK presumably now the Netherlands would be complaining about how they were avoiding paying tax on their Dutch turnover.
So given they have to pick some one country for their head office, the Netherlands seems as good as any other. It may be that the relative rates of tax between different countries factored into their decision. I see no problem with this. No person, or company, is morally required to organise their affairs so as to pay the most tax possible, and so tax rates should be part of the factors involved in weighing up where to locate one's head office. It is unlikely to be the single deciding factor anyway; the lowest tax may be in Burkino Faso, but lack of infrastructure may make that on balance more expensive than locating in a country with a slightly higher tax rate but better facilities. You get what you pay for.
I would also note that if you attempted to stop companies from using tax rates as a factor in their decisions of where to locate, you would take away one of the things that can enable poorer countries to compete with richer ones. A country may not be able to offer as much infrastructure, as big airports, as fast an internet connection, as its bigger neighbour, but it could offer lower tax rates, which may tempt companies to locate their head offices there and therefore mean that the poorer country gets more revenue than it would otherwise do (cf, Ireland).
I understand the Swiss roasting company does not actually roast any coffee: it comprises some 30 people who simply test the samples for quality. So again, why in Switzerland other than for the avoidance of tax?
Given it has to be somewhere, and presumably it does this checking for all the European operations, why not in Switzerland? Surely you're not suggesting that Starbucks should have separate checking facilities in every country were it operated, duplicating each others' work. That would be incredibly inefficient and wasteful.
As you know there are plenty more illustrations in this week’s papers, following the exposures relating to HSBC
DeleteAgain, I'm not up on the details, but as I understand it the problem with HSBC is that they have been involved in aiding tax evasion. Which is illegal. Simply arranging one's affairs to reduce one's tax liability, on the other hand, is neither illegal nor immoral; as above, no one is required to voluntarily arrange their holdings to increase their tax liability (if they were then, for example, it would be immoral to use an ISA to avoid tax on interest, or to offset a capital gain with a loss, or to spread sales of assets out over several years in order to make the best use of one's capital gains tax allowance).
Heaven only knows how many schools could be built, universities financed, hospitals properly staffed, railways upgraded, elderly people looked after, care workers properly paid, if these companies paid their share towards maintaining and improving the society and infrastructure that enable them to operate.
The question, though, is 'what is their share?' And we have tax rules which define what their share is. And if they operate within those rules, they are paying their share.
If you can show an instance where a company has not followed the rules, then clearly they have not paid their share and they ought to be taken to court by HMRC. but if they have stayed within they rules they have paid their share, as defined by the rules, haven't they?
(If you think that the rules are wrong, then there is a process for changing them: get elected and do so.)
No one expects firms, or individuals for that matter, to seek to maximise their tax payments, but we do need to build a system in which we all, businesses and individuals, pay our fair share. It is also important, as you have conceded, that we all act within the spirit as well as the letter of the law.
ReplyDeleteI suppose that if we think of the EU as one market (which is after all one of its purposes) then there is a case for your argument that the Netherlands may have been chosen as the destination for the royalties due from all the Starbucks European operations. That suggests that we should look at the harmonisation of profits tax within the EU rather than permit the Netherlands to operate a "race to the bottom" and act as a low-tax haven. I understand, of course, that there is strong resistance to any further harmonisation of taxes in the EU, but suspect it will come in the end.
With regard to the alleged coffee roasting in Switzerland, ethically the best place for this to take place would be in the countries where the coffee is grown, and the profits from that operation, or at least some of them, retained for development in those countries. Developing countries need manufacturing as well as low value agricultural industries if their populations are to rise out of poverty. The Swiss, by contras, are already pretty well off.
As you argue, there is a difference between legal tax avoidance and illegal tax evasion, but the difference between them at the margin is very fine. (See the Ros Asquith cartoon on page 37 of today’s Guardian.) If a company like Starbucks can be found to have made not profits at all and therefore paid no profits tax between 2009 and 2013 we must conclude that either it has a very crummy business plan or there’s something a bit fishy. For Sir Philip Green (not the same as Lord Green) to avoid nearly £300m in tax by saying that the company he ran belonged to his wife who was domiciled in Monaco must surely raise eyebrows.
What is and what isn’t legal needs to be both clarified and simplified and I understand that the government is working on this by trying to create a General Anti Avoidance Rule (GAAR). In the meantime we have to conclude that if the government put as much energy into chasing tax evaders, and avoiders operating near the margin, as they do chasing benefits "cheats," our civic society would be both financially and morally healthier
If a company like Starbucks can be found to have made not profits at all and therefore paid no profits tax between 2009 and 2013 we must conclude that either it has a very crummy business plan or there’s something a bit fishy
DeleteNot at all.
There are lots of coffee chains around. Starbucks is not one which advertises itself as being particularly high-class or exclusive. Therefore one of the main areas in which it will compete with others such as Costa and Nero is price. If there are a Starbucks, a Costa and a Nero all on the same street (which is not that far-fetched) then given that the product they offer (coffee and a warm space in which to drink it) is pretty interchangeable, then if one has particularly higher prices than the others, that one will find itself with no customers; by contrast if one has particularly lower pricesit will attract more customers than the others.
It is therefore logical that in order to attract as many customers as possible, Starbucks will lower its prices as much as it can, while still covering its costs. Therefore if it is operating its business model properly, it will make no, or a very small profit, as any profit.
That this is what we observer suggests, rather than that Starbucks has a 'crummy' business plan, that Starbucks is very good at pricing its products so as to be as low-cost as possible, in order to attract customers away form its competitors, without actually going bust.
In any market where products are basically the same so the main competition if on price, one would expect margins, and therefore profits, to be low. This is why turnover taxes are such a bad idea: to introduce a turnover tax would either make these businesses unprofitable and they would go out of business, or they would all be forced to raise their prices to cover the cost of the tax.
Either of these would be bad for the coffee-drinking customer, who would find themselves either with nowhere to drink their coffee, or having to pay more for it.
So actually the situation with Starbucks is exactly what you would expect from a business which is very good at providing its customers with low-cost coffee.
You put up a plausible case but I’m not convinced. The situation you describe is one that economic theory predicts for the long run in imperfect competition: ie so-called “supernormal” profits are eliminated and all firms just break even.
ReplyDeleteFor that to be the case then we should expect all coffee chains to be making zero profits, but according to:
http://www.theguardian.com/business/2013/apr/30/costa-coffee-sales-tax-starbucks
Whitbread, who own Costa Coffee, declared £356m profits in the year to April 2013 and paid £91.5m in tax. Of course some of that will have been generated by Whitbread’s other enterprises, but I don’t have the skills to probe further. Nor do I know how to search for what profits Starbucks has declared and paid tax on in the Netherlands, Switzerland, the US and maybe even elsewhere.
Your detailed challenges have demonstrated that the whole area is highly complex. In last month’s (February 2015) “Prospect” magazine an article by Charles Dumas argued that profits tax is so easy to avoid that we should stop bothering with it and just tax turnover, which, as already agreed, poses problems. But turnover is “real” rather than conceptual and so difficult to disguise. Martin Wolf, in this month’s (March) Prospect, proposes some other alternatives.
And then, of course, others who have been accused of tax avoidance, such as Google and Amazon, are closer to monopolies rather than completion, perfect or imperfect, so your argument of profits being competed away in order to give a service to consumers at the lowest possible price, hardly applies.
You put up a plausible case but I’m not convinced
ReplyDeletePutting up a plausible case was all I was trying to do. I don't know the real situation; for all I know Starbucks may be engaging in nefarious schemes.
However, I get fed up with this lazy 'Well, I can see that loads of people are handing them money, and they're paying no tax, they must be doing something dodgy!' knee-jerk reaction from people who clearly haven't thought about the actual economics of the business for three seconds.
No. They may be doing something dodgy. But equally plausibly they may simply be operating a low-margin business very efficiently.
Personally I think the second is the more likely explanation simply because they are such a big, high-profile target that if they were really doing something dodgy it would have been discovered by now. Tax evasion usually relies on flying under the radar and not attracting the attention of HMRC, because once they start actually looking into your accounts, they'll spot any scams pretty quick. So whether you're Jimmy Carr or Gary Barlow, you file tax returns that look legit, you do the dodgy business on the side, and you hope their beady eye never falls upon you.
If Starbucks really were engaging in tax evasion (as opposed to simply mitigating their tax bill perfectly legitimately, eg by basing their European operations in the country with the lowest corporation tax rates), I don't see how they could have been getting away with it without it being noticed.
(On the other hand, that was the theory about Jimmy Saville, wasn't it? So while I lean towards the 'they're not doing anything illegal because if they were we would have heard about it' side of the argument, I can't be entirely sure.)
And then, of course, others who have been accused of tax avoidance, such as Google and Amazon, are closer to monopolies rather than completion, perfect or imperfect, so your argument of profits being competed away in order to give a service to consumers at the lowest possible price, hardly applies.
I know almost nothing about Google, but the reason Amazon makes no profit is actually perfectly simple, and perfectly legitimate: almost every penny Amazon earns over its costs is invested in expanding the business: building more warehouses, expanding into new product areas, setting up its own distribution service rather than relying on the Royal Mail / FedEX / etc, setting up a studio to make TV programmes, and so on.
In last month’s (February 2015) “Prospect” magazine an article by Charles Dumas argued that profits tax is so easy to avoid that we should stop bothering with it and just tax turnover, which, as already agreed, poses problems
ReplyDeleteIn the specific case of Starbucks, of course, they are already subject to a turnover tax: as they sell non-VAT-exempt products to the public, 16.6% of all the money they take over the counter is handed to the government. So they are effectively already paying a 16.6% turnover tax.
all the money
DeleteOops, of course, that's not true: it's not all the money as they don't pay VAT on cold items sold as take-away.
But I doubt that's a huge part of their business (hot coffee for take-away is standard-rated, and that must be their biggest source of income, rather than people buying takeaway muffins, right?) so the main point stands: they are already subject to a turnover tax.
This long "conversation” began with my citing 10 general areas in which businesses could be doing "the right thing."
ReplyDeleteThe three you seem to find most contentious are:
• live in Britain rather than as a tax exile;
• register their companies in Britain rather than in tax havens;
• have no truck with contrived schemes to avoid and evade paying their fair share of taxes.
Clearly the first is not applicable if the company is foreign owned, though it would be desirable for the owner(s) to domiciled where they actually live rather than a tax haven. The other two seem to me to be universally sound. Two improvements are that HMRC should have enough resources to "police" the system, and that the law should be very clear on what is and is not permissible. I agree that the latter leads to a lot of genuine debate, in which you have put forward some valid arguments, but a GAAR should in time produce reliable distinctions via case law.
I think that’s about all have to say, but do feel free to have the last word if you wish, and thanks for a stimulating debate.
do feel free to have the last word if you wish
ReplyDeleteThank you, I will.
Peter I feel exactly as you do. I run a small engineering company and we do the right things make a profit and pay our taxes. Have a living wage and a profit share.We are also a family business and in it for the long term German style We need the Tax system or another way found to reward the company that does this. Long term stable UK based manufacturing for the long term doing the right things should = lower tax or other rewards. If you can point me to Lib Dem policy that's reflects this I may just get involved again!!
ReplyDelete