Tax is going bananas

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The Guardian's front page this morning is dedicated to a single story. It leads with the comment that:

Global banana companies supplying the UK are using tax havens to avoid paying tax on their profits here and in developing countries.

And it continues by saying:

The investigation reveals that large corporations are creating elaborate structures to move profits through subsidiaries to offshore centres such as the Cayman Islands, Bermuda and the British Virgin Islands, to avoid handing money over to tax collectors in the countries where their goods are produced, and in those where they are consumed. Governments at both ends of the chain are increasingly being deprived of the ability to raise tax for development or services.

The result is simple. As the Guardian notes:

Dole, Chiquita, and Fresh Del Monte, the three companies that supply several UK supermarkets and between them control more than two thirds of the worldwide banana trade, generated over $50bn (£24bn) of sales and $1.4bn of global profits in the last five years. Yet they paid just $200m, or just over 14% of profits, in taxes between them over that period, our analysis of their financial accounts reveals.

But this overstates the case in some periods and locations:

In some years the banana companies have paid an effective tax rate as low as 8%, even though the standard rate in the US where they have their headquarters and file their full accounts is 35%.

In the UK the situation is worse:

Del Monte Fresh Produce UK, Chiquita UK and Dole's UK business, JP Fresh, report combined sales in the UK of over £400m in their most recently filed annual accounts. Yet between them they paid only £128,000 in UK tax.

How does this happen? It's simple. As the Guardian notes in the second part of the report:

Think of Jersey and you think prosperous tax haven, or perhaps offshore financial centre as it prefers to be called. But exporter of bananas to the UK? Surely not. Banana boats from the Windward Islands have never actually jostled with luxury yachts in its immaculate marinas, of course, but on paper a substantial volume of banana trade from the Caribbean has passed in the last 15 years through Channel Island-based offshore subsidiaries and joint ventures owned at various times by Fyffes and Geest.

This has long been a story John Christensen and I have told for the Tax Justice Network. It's good to see it so widely reported now. And it's important that other stories are told as well, like these:

Fresh Del Monte is registered in the tax haven of the Cayman Islands, and has more than 30 subsidiaries based on the islands, where the rate of corporation tax is zero. It also has subsidiaries in other tax havens and low tax jurisdictions that include Gibraltar, Bermuda, the Dutch Antilles and the British Virgin Islands.

Why is this important? Well, as the Guardian explains:

Bananas are highly profitable - they are the largest single item by volume sold in British supermarkets and the third largest in value

.But the most intriguing thing about bananas to the companies who sell them is the way they can be packaged for financial engineering:

Transnationals have developed ways of bundling up parts of their business such as intellectual property, brands, logos, marketing, insurance and finance expertise and owning them offshore. They can then charge for the use of these to other parts of their group onshore. In this way a banana may be sold by one subsidiary of a group in the country where it was grown to another group subsidiary offshore at little more than the cost of production in the originating country. The banana ends up being sold back onshore to a further subsidiary of the same company in the consuming country at a price that is close to the final retail price.

The result?

In between, royalties for the use of brands, distribution networks, insurance, finance and marketing charged to the subsidiary in the final destination country can be made to accrue to subsidiaries based offshore in low tax areas. Through transfer pricing, the taxable profit on transactions at either end of the chain, in Latin America or in the EU or US say, is kept low. At Fresh Del Monte, the company had 48% of its sales in the US in 2005 but lost $35.2m in that country. Overseas it made a profit of $133.5m. It paid no US tax but was instead given a tax credit of $8.3m that year.

In fact, the Guardian estimates that for very £1 spent on bananas the split looks like this:

1) 13p to the growing country: 1.5p is labour, 10.5 p is costs and 1p profit;

2) 8p to a Cayman company for use of the 'purchasing network';

3) 8p to Luxembourg for use of 'financial services';

4) 4p to Ireland for 'use of the brand';

5) 4p to the Isle of Man for insurance;

6) 6p to Jersey for management services;

7) 17p to Bermuda for 'use of the distribution network';

Which gives rise to a 60p sale price into the UK.

8) 1p of profit is declared in the UK;

9) The retailer makes a margin of 39p.

Which makes £1.

In summary therefore, 47p of the price you pay ends up in a tax haven. Now of course, some services are supplied for that sum. I don't deny it. But what are they worth? I'll guarantee you, on an arms length basis they're worth nothing like the price paid. And the structure and location of those services is designed for one purpose: to make sure that neither the UK, US or the countries of origin get the tax they are due.

I call that abuse. And I applaud the Guardian for exposing this. And I should add, I am quoted in the article and was involved in discussion of it before publication, as was my colleague John Christensen who is also quoted.

What I might have added to it is an analysis of that 39p margin the UK. Just 2.2p of this will be declared as profit before tax. And the tax rate paid will be less than 30% (unsurprisingly). So maybe 0.5p will be paid in UK tax.

Sobering, isn't it? After all, how much would have been paid if all the offshore component had been taxed onshore? I can't say for sure - but I can say this: it would have been much more. And if we had unitary taxation in the UK, as the Tax Justice Network has called for that would be the result.