It is rare that US companies are ever held to account by their shareholders: US law does not encourage it. It is rarer still that they are held to account in the UK and yesterday's Parliamentary Accounts Committee hearing on the tax affairs of three of the biggest of them - Starbucks, Amazon and Google - has to be unique. Never before have such corporations been held accountable to our parliament for the tax they do and don't pay here in the UK.
Maybe that explains why each of the companies made such a mess of this event: Amazon's rep was so bad that the Committee decided to recall the company in two weeks. Yet that, in itself, revealed the first thing we learned from this hearing, which was that, whilst it rapidly became clear that tax avoidance is fundamental to the business model of all three companies not one of them had the faintest idea how to defend their behaviour. Despite it being almost four years now since I started work on exposing Google's tax affairs, all three companies seemed utterly unprepared to answer simple questions about why they are avoiding corporation tax due in the UK. At a stroke these companies, and I suspect the whole corporate world, have lost any moral high ground they might have hoped to claim on this issue.
They did worse than that though. Starbucks admitted - for the first time - that whilst it can (quite incredibly) claim that its 700 UK stores are not profitable, through wails of what seemed like crocodile tears, its 30 coffee traders in Switzerland make an enormous 20% profit margin despite never seeing a coffee bean; a fact that the committee could not have helped noting might be related to the 12% tax it pays in that state.
It got worse for Starbucks though when they admitted that half their now notorious 6% royalty on sales made is paid to the Netherlands where they admit little product development takes place but where they just happen to have a tax deal so favourable with the Dutch government they're not allowed to talk about it, at a stroke confirming this to be tax avoidance and that the Netherlands has serious questions to answer.
For Amazon things were much worse. Their rep could not justify how an order made in the UK for a product in a UK warehouse, shipped by UK staff through the UK post and with a bill enclosed printed in this country could somehow have anything to do with Luxembourg when so very obviously it hasn't. Despite this he had the gall to claim tax must be paid where the economic substance of the deal is - even though Amazon does nothing of the sort.
But that was not the worst moment for them: credibility was lost when Amazon admitted they would not disclose on a country by country basis where their profits arise. MPs were furious and rightly so: the case for the country-by-country reporting accounting system I have created for multinational companies could not have been better made than yesterday.
Google tried harder but they had created one insurmountable obstacle for themselves. Their argument was profits should be taxed where they are earned and they said US technology drove their European profits. But for their admission that the payments made from Europe for that technology never reach the USA and instead get parked in tax-free Bermuda ended whatever shred of credibility they'd tried to create.
So what did we learn? Maybe five things. First, if this committee could tear these companies to shreds so easily why HMRC are letting them get away with these fables is hard to imagine. What's the conspiracy that has lets this happen, and who is going to explain that to the PAC? I'd be calling Lin Homer, HMRC chief executive back for another grilling.
Second, so long as companies can hide behind rules that do not demand they account on a country-by-country basis for what profit they make and what tax they pay by country this abuse will continue. Transparency became the very obvious key to solving this problem as the afternoon progressed.
Third, companies who are this unable to defend their behaviour really need to think about changing that behaviour very soon or they'll be keeping UK Uncut, as representatives of an increasingly angry British public, in business for decades.
Fourth, we need simple and effective rules to combat this cheating. I suggested one possible mechanism, yesterday.
But last of all, and most important, it is very obvious that this happens with the active connivance of governments in the Netherlands, Switzerland, Luxembourg, Ireland and Bermuda, at least. There is an international conspiracy amongst some governments (including, maybe, ours) to align the interests of states with the interests of corporations to make sure that tax is not paid by companies. That means it is paid by ordinary people instead. This has to change: these smaller states have to be made to stop abusing the larger states of Europe and beyond. If the EU can't do it then we, with France, Germany, Italy, Spain and others have to build a new tax alliance where the race to the bottom has to halted and tax has to be paid - for the benefit of us all.
The fiction that these companies play by the rules has been exposed in one afternoon as a fairy tale. It might win the Booker prize, it's so audacious, but it's no longer a basing for taxing companies. It's time some reality - even a little non-fiction - was added to this tale. And then the right tax might be paid in the right place at the right time. At present nothing could be further from the truth.
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The UK imposes a 20% withholding tax on royalties unless the there is a DTA between the countries of residence of the payer and the recipient AND the recipient of the royalty is the beneficial owner of the royalty.So forget the quantum of the royalty, if the revenue authorities believe that the royalty is bogus, they can merely refuse to allow the treaty rate for royalties and demand the 20% WHT.
keep up the good work richard
And yet another witch hunt begins…
Tax avoidance is a sane action for every business and individual. Unsurprisingly, it is widely practiced.
However, if yet another institution (HMRC) is not doing its job properly, ironically in this case not getting good value for tax payers, that’s a completely separate issue.
Richard
First of all thanks for all your hard work yesterday (and before!)
Reading the forums on Amazon I keep coming across the argument that Amazon have not broken any laws. Is this correct? as the sale appears to take place in UK for the reasons you give. Allied to this, what has the HMRC done to question their (Amazon’s) tax policies?
Another point that keeps coming up on the forums is that people will continue to buy from Amazon because they are cheaper than competitors. What would you say to these people? If you were to pay £25 for a dvd from HMV but only £15 on Amazon it would be very difficult not to go with Amazon.
For those who wish to buy elsewhere, I seem to remember in The Guardian last Saturday you mentioned you were producing a list of companies that do pay acceptable levels of tax in UK – when will this be published?
The list will not be until sme time early next year, at best
So the individual saves money by shopping with the companies who successfully avoid taxes? If the individual chooses to go to the higher priced company, what is the extra cost for? Could it be to pay the taxes? So who is it that pays the tax? It is my contention that companies never pay taxes, but always pass the cost to customer.
Why not add Apple to the pool? A few days ago, there was a headling that they only pay 2.7% on all profits being made in Europe
They could have been there
Doesn’t the prevelence of these tactics just demonstratet that taxing corporate income is unenforceable and that the taxation should be directed towards tangibles such as business rates, sales tax and employer contributions? There are an infinite number of ways to shuffle money around to avoid taxation and rather than patching up this with ever more special conditions the government should focus on the practical and measureable.
No – that’s just not true
Only those who support not taxing capital say that
We can happily tax companies successfully
Why would you say “Only those who support not taxing capital say that” in your response to me? I don’t understand the link. I am not one of those supporters, so what you say cannot be true.
You then say “We can happily tax companies successfully” as though I had said we can’t. My comment included the ways we could tax companies successfully that are not reliant on income.
Sorry if I misread you – it’s been a hectic day
Even on the blog
The single-taxers’ argument is that the value of the infrastructure, which these companies enjoy here, is reflected in the land value of the sites they occupy. Thus their contribution could be easily collected by a full land value tax – and you can’t hide land in a tax haven. See http://www.landvaluetax.org/the-lvtc-blog-by-henry-law/mps-grill-tax-avoidance-rogues.html.
There is nothing new, large multinational corps are doing this for a long time, and it’s pretty well known to everybody. Bermudas, Switzerland etc. as tax paradises? Even my parents know that 🙂 Ever been to Switzerland? Now that’s a country for much of an inspiration not only in the way they run their politics.
Tax more, they will raise prices for their services or move out of country for good. Who will pay for it? Of course we, common people. There is pretty nice correlation between amount of overall taxation in given system and progress this is system is doing.
Put a STOP to not paying taxes at all, but meet somewhere in between. Otherwise this will not be any good to citizens, just few would-be politicians chasing popularity points
Called to account?
I doubt it. Nobody who matters said anything of substance – and I note the cavalier contempt of companies sending office boys and PR flacks to lie abd dissemble to those deemed unimportant by real managers and decision-makers.
I suspect that this contempt reflects a shrewd assessment of elected politicians’ power to call any company to account.
If I were some kind of cynic, or a pessimist, I’d buy popcorn and peanuts and wait for England’s introduction to ‘Attack Ads’: a company that takes elected politicians seriously can buy serious vituperation on the loose change in effective tax-avoidance schemes.
The question is; is there any need for them to bother in this country?
I’d like to know more about the shares Starbucks staff are ‘given’. Is the 32% handling fee if they want to ‘sell/cash’ them work? (as you can see, I have no idea how it works but I’m intrigued)
I haven’t looked at the details
Amazon’s claim that they don’t break out sales on a country-by-country basis was spectacularly disingenuous.
Their entire business model is founded on using masses of data to bring deep understanding of the behaviour of every single customer, on every single point of contact. It could break out sales and profitability not just by country, but by postcode, shoe size or hair colour if it felt like it. To pretend otherwise is a flat out lie. Were they under oath?
No, not under oath
Austin Mitchell quoted my data on their UK sales taken from their own accounts back at them…
Of course the OFFSHORE Jurisdiction of London remains the worlds Premier offshore tax haven. I recommend Shaxton, Treasure Islands to anyone interested.
[…] will, whether they like it or not, remain at the centre of debate on tax avoidance in the UK unless they take steps to prevent it. UK Uncut will, rightly in my opinion, be targeting them on […]
Still curious, specifically what tax laws have been broken by these companies?
As Margaret Hodge said at the hearing – we’re not saying you’ve acted illegally
We’re saying you’ve acted immorally
But of course libertarians have no ethics so you would not understand
Really, the whole question is why such obvious tax dodges are “surprising” to the very people who wrote the laws to encourage them.
Have US lawmakers gotten so much smarter than British ones, that the “Casablanca” jokes (“I’m shocked–shocked!–to find gambling going on here!” “Your winnings, sir.”) will flow like water, or is the British public about a third as wise as we Yanks give you credit for?
[…] so obvious that tax is used as a form of abuse by so many EU member states (like the Netherlands as revealed in the case of Starbucks, yesterday) that this ruling is absurd in its logic. But absurd as it is we’ll be giving £5 […]
I suspect the reason why the tax dodgers’ arguments came across so poorly is that they were not actuallly their arguments but those of their tax advisers who also probably did most of the arguing with HMRC. I hope the Committee call in the tax advisers responsible – and the HMRC inspectors who agreed with their arguments _ Parliament really needs to understand how this entire process works.
Excellent point – although all denied having advice
I don’t think it is just an argument over morals.
I think there is a sound economic case too.
The multinationals receive a benefit, which gives them an unfair advantage over an indigenous company. How can anyone argue that a free market operates, when one party is state subsidised?
Agreed
[…] which is no longer fit for purpose. Perhaps the most important point about what has emerged is this incontrovertible fact: “Whil(e) it rapidly became clear that tax avoidance is fundamental to […]
“this happens with the active connivance of governments in the Netherlands, Switzerland, Luxembourg, Ireland and Bermuda, at least.”
As an Irish person, I agree 100%. There has been a lot of talk about Ireland’s low 12.5% corporate tax rate, and the conflicts between Irish and other EU leaders on this topic. But the real issue has always been the loopholes that mean many companies don’t pay anything like 12.5%.
“There is an international conspiracy amongst some governments (including, maybe, ours) to align the interests of states with the interests of corporations to make sure that tax is not paid by companies. That means it is paid by ordinary people instead.”
No. There is no need to posit an evil pro-corporate conspiracy. Governments like Irelands want Facebook to have a HQ in Dublin because that will provide jobs. If we offer them low tax, and tax loopholes, and therefore we miss out on collecting tax which we *wouldn’t have collected anyway if they’d set up somewhere else*, then that is a price worth paying.
“This has to change: these smaller states have to be made to stop abusing the larger states of Europe and beyond. If the EU can’t do it then we, with France, Germany, Italy, Spain and others have to build a new tax alliance where the race to the bottom has to halted and tax has to be paid — for the benefit of us all.”
Now, “for the benefit of us all” is the key phrase. Ireland would *love* to charge all these companies more and more tax and close every loophole. The race to the bottom is not something that countries engage in because they don’t like collecting tax. As long as other countries offer companies sweetheart deals, there is pressure to respond and undercut in order to entice those companies to come to *your* country. One solution is EU-wide harmonisation of tax law, for cases where a company can’t avoid registering in the EU. That could happen someday. Not soon. In the meantime the incentive structure prevents change. And it’s hard to see how a tax alliance between a subset of member states can affect others.
It is possible that tax/earnings transparency laws will have the desired effect, albeit gradually. This course of action is actually likely to be agreeable at EU level.
But for other cases one would need an agreement of the entire world, and that will never happen. So whatever plans we make have to include the fact that Bermuda will always operate in Bermuda’s interests.
We do not need a whole world agreement – no way
Just a few major states can change this for good, because they are where the market is, and companies cannot make money without the market
[…] Source […]
Richard
The publicity surrounding the abuse by mulitnationals avoiding tax has overshadowed that of abuse by the water companies. As far as I know most of them are British owned,however they are operating a monopoly in their areas yet they are paying out massive dividends to shareholders and massive bonusues to senior executives.
Can you explain to me how a business pays a tax as a pass-through entity? Businesses simply do not pay taxes – people pay taxes – whether it’s consumers, workers, or shareholders, it is always people that pay taxes. Businesses just pass them through to people. Does gasoline pay the gasoline tax, does the oil driller, does the refiner, does the gas station, or do you? It’s the same concept as with a business. And those who are so concerned that businesses pay their “fair share” should just be honest and say, “I want to tax consumers and workers, period, end of story.” Business taxes, like sales taxes, fall more heavily on the poor.
I’m bored by this one
In theory you’re right
In practice when company is laid on tax haven company we can’t find the person to pay the tax
So the company must or injustice results
If the company pays clear evidence from US GAO is capital bears the cost
End of argument unless you’re in favour of injustice
Right wing libertarians always seem to be so
I would not doubt that, at least initially, shareholders (which would obviously include pension funds and the like, not only plutocrats) bear the brunt of the cost. However, ultimately, the tax is going to fall on employees or consumers either through lower wages (now or in the future) or higher prices. Capital, by its nature will seek the highest return, and if new or increased taxes make it a price taker, it will move elsewhere, harming the industry from whence it came, and, again workers and consumers (through fewer product choices, less innovation, etc).
Using your Amazon example above, which you seem to be incredulous over, assuming the UK government is successful in collecting the tax it believes it is due, who will pay the tax? If it’s back taxes that are imposed – you are most certainly correct – capital/shareholders will pay them – but what about the future taxes? I would suggest that Amazon would be far more likely to raise prices or pay workers less. Or, they could reallocate their capital elsewhere, which has a similar effect in the long run.
Personally, I believe it’s an injustice that leftists try to sell taxing business as a way to “sock it to the rich” when it operates more as a sales tax, falling disproportionately on the poor.
I would be interested in seeing that GAO report if you have a link.
This paper says it’s nigh on impossible to prove the incidence – http://www.gao.gov/new.items/d051009sp.pdf
It makes clear that arguments are actually assumptions
So does this http://www.cbo.gov/publication/22043
And all seem to agree the short term impact is on capital – it’s only in the long term its labour
What’s the long term – and do the continual short term impacts outweigh them?
The GAO did do a good job describing the effect of corporate taxes:
“Corporations do not actually bear the ultimate burden of the corporate income tax; instead, individuals bear the burden of the corporate income tax. A corporation writes a check to the U.S. Treasury to pay its tax liability, but the burden of the tax is shifted to other groups of people through lower incomes or higher prices. The money to pay the tax must come from reduced returns to investors in the corporation, lower wages to the company’s employees, or higher prices that consumers pay for the company’s products. In the short term, the incidence of the corporate income tax is likely to fall on stockholders or investors in general. However, because corporate income taxes may lead to reduced capital investment, in the longer term some of the burden of the corporate income tax is more likely shifted to people who earn income from labor. Reduced capital investment can lead to lower productivity and, consequently, lower wages.”
I suppose what’s short and what’s long term is up for debate. My preference for economic policy would be on the side of the long-term benefit for workers and consumers. Imagine what would happen if the US corporate tax policy became one that featured a tax rate of 0%. We would probably see a good chunk of the billions (trillions?) sitting on corporate balance sheets outside the US flow into the country and foreign businesses seek to setup shop in the US. Obviously, this would be a huge boon for workers and consumers. However, under the present administration this has zero percent chance of occurring, despite it’s low cost (~$200 billion/year), as we are stuck with a President who intends to raise capital gains taxes as a matter of “fairness” even when presented with the scenario that it would reduce tax collections (http://www.youtube.com/watch?v=YoqkOrA4tEs). Seems positively mad to me, but my fellow countrymen appear to disagree.
But with a continuing short term impact the long term may never arise
That analysis is static i.e. looks at implication of one period
I look at flows
In that case capital is always paying
I buy that
[…] forgot to mention that meant we were really open to be fleeced. Which is just what the likes of Amazon, Starbucks and Google are doing. Beghind their crocodile tears on the impossibility of making money in the UK […]
Presumably you’re aware of Hollywood’s financial accounting methods:
http://en.wikipedia.org/wiki/Hollywood_accounting
Judging by recent legislation, they have the full support of the US government.