OK so this isn’t going to be exactly a revolutionary statement as most people seem to agree, but I think big, rich, multi-nationals like Starbucks, Google, Apple, Amazon…etc. SHOULD pay more tax. So why bother blogging about this? And repeating what countless others have already said? Well I specifically want to refute some of the (so far few) arguments on the other side. Not many people have risked bucking the trend and arguing for the companies however few like this opinion piece in The Register and this in the Telegraph and now this in The Guardian are arguing that the public are wrong in this case and I’d like to look into their arguments a little closer.
The arguments basically come down to one or more of the following:
- The multi-nationals ARE paying the legal amount of tax
- We must not be seen to be discouraging business
- Corporation Tax is the wrong type of tax and we should be paying more in income tax and VAT as economically that makes more sense
- Companies do pay loads of tax (rates on property, national insurance for employees… etc)
- Companies have a duty to their shareholders to save as much money as possible
- We’re complicit as we drink Starbucks coffee, use Google services and buy cheap products from Amazon
- It’s difficult to measure where profits are made – particularly for IT services
- Mob mentality is wrong
- If we don’t like it – change the law, don’t try to shame corporations into paying an appropriate level of tax as they see fit
and I’d like to examine each of these arguments in more detail as I believe most of them don’t stand up to scrutiny.
The multi-nationals ARE paying the legal amount of tax
Not one of the companies have been found to do anything illegal. So far it appears they are using legitimate techniques to reduce their tax liabilities, usually by routing payments through subsidiaries in other countries with lower overall tax rates. For example Starbucks UK pays a 6% royalty to Starbucks Netherlands and 20% to Starbucks Switzerland. It’s presumed (though has not been clarified as details of it’s Dutch and Swiss tax situations have not been disclosed), that this leads to loses in the UK, and instead profits in the Netherlands/Switzerland on a lower tax rate. Some writers argue this is not tax avoidance as they are not breaking the law and are even paying tax on those profits – just not in the UK. Personally I’d argue that while it is not tax evasion (which is illegal), it certainly seems to be tax avoidance (which is legal though morally ambiguous) as it seems to be being done specifically to reduce the tax bills. Paying royalties to Starbuck’s Seattle makes sense as that’s where the company was created but paying large sums (especially when you consider that the coffee raw material is one of the smallest actual costs) within company entities is purely down for tax reasons. Every company organises legal entities for tax reasons so I’m not picking on Starbucks here – I’m just stating fact: Legal entities are used to reduce tax liabilities in other countries.
To say Starbucks are “getting away” with tax avoidance is like saying I got away with driving 30mph in a 30mph speed limit zone this morning. That’s the law.
Dan Hodges – The Telegraph
I don’t agree with this statement at all. Laws unfortunately are complex and not simply black and white. Any law can be got around with enough lawyers and trickery. Seriously – name the law and you can come up with numerous examples where money or influence where used to flaunt the law. It was certainly not the intention of European tax laws to allow companies to move around profits to reduce tax liabilities – that’s a side effect. Unlike, say tax benefits to pension saving (which are specifically designed to encourage saving by making it beneficial to you from a cost perspective) or tax benefits for venture capitalism investment (which again reduces your tax bill in return for you encouraging entrepreneurship), finding loopholes in the law is not an intention of the law. So I would argue that this is more like companies travelling at 60mph but avoiding a speeding ticket on a known technicality. Because of the legal technicality it’s not breaking the law per se but it doesn’t take a genius to see that Starbucks only making a profit once in the last 14/15 years of trading, either points to a massively flawed business model or some very fishy accounting. Also, unlike a 30mph speed limit, which applies to all, using offshore entities to reduce a tax bill gives unfair advantage to multinationals.
Similarly when we are chasing down celebrities for using legal, but morally dubious, tax avoidance methods, why should we not use similar standards for businesses?
We must not be seen to be discouraging business
This is a valid point. Business is important and should be encouraged. Businesses bring important benefits to a country (primarily employment) and good business begets other businesses either by proving a business model and encouraging competitors (Starbucks launching the “coffee culture”), or by creating a wider eco system for raw materials, parts or accessories (Apple’s iPod as well as creating various supply chains launched a whole industry in iPod accessories for example). This is particularly true for manufacturing jobs where being based physically close to suppliers can result in more efficient businesses, but also is true for service or software industries where a critical mass of companies will result in a high quality and talented work force in the community helping to grow your business.
There is no doubt that tax is a large cost to businesses, and companies will naturally be drawn to countries with favourable tax rates – both for the cost savings and for the message this sends that those governments are probably business friendly on other areas and won’t wrap companies up in red tape. This is not just exotic sounding locations like the Cayman Islands or Belize but countries closer to home like Ireland and Luxembourg. Ireland’s low corporate tax rate of 12.5% compared with approximately 25% for UK companies has resulted in a major boast for the Irish economy as all the major tech giants (Apple, Google, Facebook, Amazon) have set up their European centres there and have minimal presence in Britain: as much as possible is run out of Ireland. Ireland gains as, 12.5% of something is worth more than 25% of nothing and, despite a major recession and struggling housing market, has a thriving tech market. The companies gain as they pay less tax than if they set up elsewhere, and now due to so many tech companies being there have a talented and educated work force of IT professionals to choose from. Everyone’s a winner right? No – the countries with higher tax rates are losers. There was talk of forcing the Irish government to increase this uncompetitive rate as part of the European bailouts but Ireland, quite rightly for them, fought hard against this. We will get onto the difficulty of deciding where profits should be taxed in this model later.
So, if Britain starts taking a hardline against companies, and forcing them to pay more appropriate corporation tax will this send a signal that Britain is not business friendly? Will this drive existing companies away and stop companies from coming here in future? A similar argument has been made with higher rates of income tax on top earners (and the enforcement of such by chasing offshore bank accounts being hidden from the tax man – though in that case it’s illegal) as it drives away rich people (surely the very people we actually want in our country to grow the economy).
Well, it’s a serious concern and not something to be taken lightly. However, and not being an economist at all, I’d argue the fear of this has been overblown. For a start you can’t argue, as some people try to, that on one side that the law is being followed (see point above), and then argue against a stricter enforcement for fear of alienating business, without admitting the law isn’t being followed entirely as it’s intended! Separate to that sly dig, we have the issue that a lot of these companies already have minimal presence in the UK – we’ve already lost out to Ireland and the like! If we want to compete with Ireland, then reduce our corporate tax rates and dont just turn a blind eye to some companies not following them. I would argue that Starbucks is not paying the tax it should (so no gain to the UK tax coffers), and at the same time is not going to withdraw it’s cafe’s from the UK by being forced to pay appropriate tax as the shops as the cafe’s have to be based here (so no loss from correcting this either). The status quo is the only bad thing. Granted if we made it too onnerous so as to be unprofitable then companies might well withdraw, but the arguments suggesting there is considerable room to increase tax before we get to that stage are twofold: 1) mostly these are high profit multinational companies by definition so can afford to pay more tax and 2) UK companies (Costa for Starbucks, John Lewis for Amazon) do manage to compete in the exact same fields while paying more tax (and what this says about our business friendliness to our own home-grown companies versus foreign countries is a topic in itself.
A seperate point is the current economic situation requires more taxation or more austerity. While this is not necessarily the fault of the companies being discussed here (that’s a whole other topic), we do not currently have the economic freedom to be lax on tax collection unless this is an intentional policy to encourage growth or discourage further contraction. Perhaps in the fragile state we’re in we don’t have the economic freedom to ostracize businesses and should leave well enough alone for now – but if that’s why we’re not enforcing taxes then, let’s be honest about it and not just use that as one more excuse. Ultimately, if Joe Bloggs on the street is being asked to hunker down and take austerity measures due to the economy, then the least we can expect is for huge profitable companies to pay their fair share too!
I do agree that longer term the UK does need to be more business friendly. Currently the financial industry seems to be the priority and having such a dependency on one business sector is not particularly wise – especially with questions as to it’s culpability to the economic times we are now in – not to say the future of this with the financial sector’s fickleness and threats to move to New York, Hong Kong or Singapore (again over stated in my opinion as London’s timezone, language and history are assets that cannot easily be replicated elsewhere but again a separate subject). So how to encourage businesses here should be discussed and maybe corporation tax should be reduced. But not collecting current tax rates is not the way to have that discussion.
Corporation Tax is the wrong type of tax and we should be paying more in income tax and VAT as economically that makes more sense
It may well be true. Lots of studies seem to suggest so (“recent OECD evidence (Johansson et al., 2008) finds that among taxes, corporate taxes are the most harmful for growth”). That’s not the point – that’s not the law. If that’s what you want, then lobby the government to reduce/eliminate corporation tax – don’t just turn a blind eye to some, particularly well-off, companies ignoring it and complain when people get upset about that.
Companies do pay loads of tax (rates on property, national insurance for employees…etc)
Ditto: corporation tax exists and should therefore be paid. Change the tax rates if that’s how you think companies should be taxed here.
Alternatively, if the argument here is that we’d lose these these other taxes if we chased the companies out of the country, then see my arguments about not discouraging business above.
Companies have a duty to their shareholders to save as much money as possible
No that’s not true! Show me exactly where it is written that a company MUST do all it can to make money? Companies make a product or offer a service. If that company is successful, then it may attract investors who either want to support the company or want to use the company’s potential continued success to get a return on their investment. Now shareholders own the company and shareholders have sway and influence over major decisions the company make so yes, company directors have a responsibility to keep shareholders happy but that does NOT mean the company’s ONLY responsibility is to make money in any way it can. The company was successful for a reason and that reason is very unlikely to be because it was good at avoiding tax (accountancy firms aside).
Put it this way: if a toy company sells toys in the UK and also in Kerplakistan – which has less strict safety standards than the UK, then does that mean the company has a “duty” to buy cheaper paint with, what the UK considers dangerous levels of lead in it, for toys sold in Kerplakistan to reduce paint costs and make shareholders happy? No that would be ridiculous.
We’re complicit as we drink Starbucks coffee, use Google products and buy cheap products from Amazon
For a start I’ll assume this is meant to mean we benefit from cheaper products because of the cheaper tax bills and not that, by using these companies we are happy with how they are run and so have no issues with the taxes they pay.
The question then is whether we have a net gain saving a few pounds per person by buying cheap books for example, compared to the extra taxes we pay to make up for the shortfalls that are not generated by Amazon paying it’s fair share of tax? It’s not an easy question to answer and I don’t think it’s one a reasonable consumer can be expected to make. So I don’t think buying cheap goods means we are complicit in how the goods are kept cheap – any more than I think buying an iPhone means we condone poor work conditions in Chinese factories.
However, now we know more exactly how little tax some of these companies pay, we do have a choice about whether to use them and/or express our opinion on the practices. The boycotts may not have any effect but the recent news from Starbucks suggests it is – regardless of whether you agree that is their tax bill settled now. Most people probably won’t boycott (I think you’ll have gathered by now my views on this whole affair and I still, with a little shame, bought Christmas presents off of Amazon as it’s just so convenient), but it is raising awareness – making the companies, the government, the press and even random bloggers like me pay attention and discuss the issue.
It’s difficult to measure where profits are made – particularly for IT services
OK so for Starbucks, where they basically resell us an imported product (coffee beans) in a big cup and with pleasant surroundings, it might be relatively easy to say the profits generated in the shop (minus costs) should be taxed in the UK. But what of the tech companies who have very little UK presence other than a website? Who’s profit depends on intellectual property created in Silicon Valley and support and sales in Ireland? How do we measure that profit and tax it appropriately in the UK? Is it, perhaps, valid that they pay little UK taxes since the product they create isn’t generated here (remember that tax’s are generated on profit and not sales).
This is not an easy question to answer and, it seems to me there needs to be some clarification from HMRC on this, but I do not think it’s an insurmountable problem. There should be a price for doing business in the UK. Just like Amazon’s customers have to pay VAT for products sold in the UK (regardless of where it’s created, packaged or sent from) and just like there are explicit rules on whether an individual is a UK resident and subject to UK taxes (based, amongst other things, on the amount of time sent in the country in a tax year) how difficult can it be to decide how services sold by multi-nationals, or the profits from those services should be subject to tax? Or should overall profits be divided by overall sales to obtain a breakdown of which region generates what percentage of profit? However does this measure the true cost of doing business in each different country (which is not the same – labour costs for example vary wildly)?.
To be honest, answering this question is very complicated and beyond the scope of a little blog like me – which is a massive cop out I’ll admit – but just because it’s hard to tax something does not mean they should pay no tax (or so little as to be basically no tax). This article has some interesting thoughts on it.
Mob mentality is wrong
Generally the point with this argument is it is not always a good idea for the general public to be led by some minority group or newspaper to take a simplistic view on a complex subject and when they won’t take the full facts into consideration. Or that complex policy should not be decided based on hysteria or snap decisions. Fair points and I don’t disagree that tax policy is complex but the government is the representative of the people and SHOULD be led by the people. Any argument against this is just elitist and wrong. Personally I find it encouraging people are engaged in this argument. It’s depressing how politically unmotivated today’s generation is.
There is also a difference between mobs meaning Starbuck’s shops are being damaged and non violent protests like boycotts, writing your MP and the like which attempt to correct an injustice. I think as soon as we start to see mob riots we will have lost the battle and it will be harder to implement change. However for the moment, the general public’s indignation does seem to be producing results. Starbucks is voluntarily agreeing to pay more tax (not that I agree that’s correct either but we’ll discuss that below) and MPs are now starting to sound like they might be serious about actually reforming some of the laws to make tax avoidance illegal (see next section).
In short, disregarding a popular movement just because it’s popular, without looking at the merits of their argument is as wrong as getting on your high horse without having the full facts.
If we don’t like it – change the law, don’t try to shame corporations into paying an appropriate level of tax as they see fit
This is the one point out of all the arguments I strongly agree with. The laws need to be clarified and tightened. There is no point in having corporation tax if it can be avoided by some companies so easily. Either scrap the tax, and make it a level playing ground for ALL companies, or close the loopholes. While on one side it can be argued companies will always find it worthwhile to hire expensive and clever tax lawyers to get around the law, it’s also unfair to expect companies to guess what tax they should be paying. Business need certainty to thrive and having to voluntarily pay a seemingly random number to appease angry customers is not the way to go about it.
Starbucks £20 million gesture, while an interesting move, is not the way tax collection should be run. For a start is the amount: Is £10 million a year too much (remember they made no profit apparently)? Too little (it could be argued it’s cheap when you consider 1) the size of the revenue in the UK, 2) the size of Starbucks globally, 3) the value of the UK coffee market and 4) the value to Starbucks of not having a full enquiry and stricter tax laws – none of which should be used to decide the tax bill btw)? Who knows but it seems it me HMRC should be deciding what tax they pay – not their PR department. And changing how you run your tax affairs in the future does not mean any of your past tax affairs should now be ignored. The whole reason we got into this discussion is because the companies decided to pay what tax they saw fit rather than following the spirit of the law (even if they did follow the letter of the law).
if our rulers are too stupid to write decent laws that can’t be twisted then more fool them.
Tim Worstall – The Register
I agree with little in the article this quote is from, and the wording of this quote riles me for the spirit it implies but the writer is correct – in a sense. It’s up to the government to write laws and clearly state the intention. However that ignores the fact that the UK, like a lot of other western societies, recognise laws are not an simple or easy to write and this is why we have 3 distinct areas of govenment: Legislative (to make the laws), Executive (to enforce the laws) and Judiciary (to interpret the laws). Certainly the corporate tax laws need a lot of clarification and this will no doubt result in new laws but that does not mean we should celebrate anyone (or any company) getting around the law.
This story has a while to run, and no doubt legal changes will happen. Until then we may need to reword Benjamin Franklin’s quote: In this world nothing can be said to be certain, except death
Edit – The chancellor has since amended the UK corporation tax rate dropping it down to 21% (inline with Luxembourg). This is still well above what the multi-nationals pay and is an interesting ploy to encourage the UK competitiveness and perhaps stem the flood of taxs going out of the UK into other countries. However there is a question as to how that fits into the whole tax debate which The Guardian discusses here.
Other interesting articles on the subject (will add to this as I come across more):