Rosamund Urwin wrote a great article in the Evening Standard yesterday on how we could tackle corporate tax abuse. Since she interviewed me at length I am going to borrow a chuck of the article back as it was good.
She wrote:
According to the economist Richard Murphy, who founded Tax Research UK, [current tax problems are] a legacy of the financial crisis: “After the crash, tax became the scarcest commodity in town. People know it is going to hurt them now if others aren't paying.”
There is international appetite for reform. Chancellor George Osborne joined German finance minister Wolfgang Schäuble last week in calling for an international crackdown on tax avoidance by multinationals. And speaking yesterday exclusively to the Evening Standard at the McLaren factory in Woking, Business Secretary Vince Cable said: “[These companies] have no excuse because British corporation tax rates are competitive. We deplore any systematic abuse of the tax system. The way we have to deal with it is by working with other countries, because it is very difficult for one country in isolation to deal with clever forms of tax avoidance. So the agreement we had last week with Germany was a good model of how you deal with this, but it has got to go much further because the kind of thing that we are now exposing with Starbucks and Amazon and the like is just unacceptable business practice.”
So how can we stop multinationals siphoning off money that the public purse so desperately needs?
A SALES TAX
At the weekend, former City minister Lord Myners said that the Government should consider a sales tax to force Amazon et al to put a little more into the communal pot. However, Bill Dodwell, head of tax policy at Deloitte, argues this isn't workable: “You wouldn't be able to do it under European law, because of rules around VAT,” he explains. “Also, this moves profits from one country to another. Companies should be taxed on what they have made, not their sales.” It could also force businesses that truly are making a loss to pay.
Sales are a blunt instrument for measuring activity. Industries such as retail often have small margins and can suffer from high property costs, so a different rate would probably need to be imposed for different industries, making it very complicated to implement.
Richard Murphy also opposes a sales tax but for rather different reasons: “You are not taxing profits or capital. The effect will just be to add points to VAT, which is a regressive tax, so it'll simply shift the burden from the richest to the poorest.”
AN INTERNATIONAL TAX
According to Murphy, what he dubs a FIT (a “Fair International Tax”) would be much better than a sales tax to raise extra tax revenue from multinationals. A FIT would be calculated by examining a corporation's profits across the world, and then taking into account the percentage of sales and staff that are in the UK to work out how great a share of that sum should be paid into the national coffers. Murphy extols the virtues of such a system on his blog: “Because it is simple, cheap to create, incredibly easy to operate, legal and cannot conflict with EU law, it's ready to go right now.”
DISCLOSURE COUNTRY BY COUNTRY
The worst answer to the committee yesterday (and there was stiff competition for that ignominious honour) came from Andrew Cecil, Amazon's director of public policy and seemingly of obfuscation. According to the online bookstore, its entire European arm made profits of just €20 million on sales of €9 billion last year. So MPs asked Cecil to state what percentage of profits and sales came from the UK, which he would not answer. The problem with letting companies report by regions that they have constructed is it allows them to obscure what they are doing. A small part of the remedy would be to force multinationals to break down their accounts on a country-by-country basis.
A BOYCOTT
Governments can stop awarding contracts to companies that wriggle out of tax but how much difference can individuals make, with company boycotts and perhaps even direct action? Last week, “people power” earned a surprising advocate in Lin Homer, the chief executive of HMRC. Homer claimed that customer uproar is starting to force businesses to rethink their tax obligations: “That's a helpful thing for HMRC.”
Richard Murphy argues consumer boycotts are much more likely to be successful if they are highly visible. That means Starbucks – with its coffee shop on every corner – is likely to bear the brunt of a backlash (some may also find it easier to swap the Starbucks macchiato for a Costa mocha than to give up Google). UK Uncut is planning a “day of action” on December 8 in which the protest group will turn dozens of Starbucks branches into refuges, homeless shelters and crèches. And the chain is already the butt of the best jokes: with the spoof Daily Mail Reporter twitter feed perfectly satirising the Select Committee appearance: “Boss of Starbucks uses diamond encrusted calculator to demonstrate how the company makes a loss.”
A TAX TICK
For those who want to shun the tax-avoiders by taking their custom elsewhere, the big problem is how to identity businesses that are paying their dues. One possibility, inspired by the traffic-light food labelling scheme, is to introduce symbols on products and websites that would indicate the tax behaviour of the company. Such a scheme could be voluntary (so just the “goodies” would do it) or enforced.
Tax Research, which will also publish an index next year stating how much big corporations are contributing, is currently creating just such a motif, a “tax tick”. But why not be a touch more adventurous? Perhaps the tax “goodies” could display the faces of the doctors and firefighters they fund, while the baddies could have a fresh take on the toxic hazard symbol. Alternatively, they could use portraits of individuals of a similar type: JK Rowling for the tax superheroes and Jimmy Carr for the sinners. Alas, Carr's lawyers might have something to say about that …
There's plenty to do.
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Slightly off subject but I have noticed a couple of ‘comments’ that worry me. Someone seems to be going after Margaret Hodge about the tax affairs of the family business and someone is making woopee with your background as a corporate accountant.
Does the mud slinging start now? What a fight back!
‘Watch your backs’ starts now.
They’ve been going at me for years
There is nothing to stick
And Margaret Hodge is not responsible for her brother
She is a shareholder in the company. If she doesn’t like it, sell the shares to her brother.
She also has no power as a shareholder
So why is she being blamed?
If anything doesn’t Richard’s “corporate accountant” background add more weight to his point of view?
On the “tax tick” idea where do you stand on the transnational Stemcor Holdings Limited? £6.2bn of turnover for 2011 and only net UK corporation tax payable in the year of £157k. Should they be boycotted?
I have not looked at the accounts – if they are abusing of course I agree they should be challenged
Thanks Richard. Similar to Starbucks, Stemcor has “international traders” based in Switzerland held through intermediate holding companies. They also have “marketing services” operations in the tax haven of Guernsey.
To be fair, their UK turnover is £2bn (out of £6bn) but based on their overall profits of £65m that implies expected UK taxable profits of £22m and so a clear tax gap of £5.6m (£22m x 26.5% = £5.8m less £157K). Let’s get them in front of the PAC.
I just looked at their accounts
UK current CT £5,319,000 in 2010
Where’s the £157k?
Can you source the numbers? Right now I can’t see the point people are making…if profit is £22bn as you say then current UK tax rate looks like 24% to me on a quick look
Richard. It’s their group financial statements to 31 December 2011.
Duedil only gave me 2010 where the rate was entirely acceptable
Are we sure this is not an aberration as a result? They happen – e.g. the Guardian once
Amazon, Starbucks and Google were not aberrations
Just asking
The guardian wasn’t an aberration. They claimed SSE which is a statutory tax relief as you well know
You don’t claim it – it exists
There was no basis for their gain to be taxed on
That was Gordon Brown’s fault
And it was a massive error of judgement on his part
A ‘marketing services’ company in Guernsey is not easily explained as an aberration.
I will look at other years tomorrow.
Do me a five year average
If that shows a problem ~I buy it
Hi Richard. On Stemcor, I’ve gone back to six year to calculate the tax gap. This is based on allocating group profits on the basis of the UK turnover and comparing the expected UK tax on those profits with the actual UK current tax in the accounts, but adjusting any prior year corporation tax adjustments to the correct years (which is a refinement to the analysis above).
Before 2009, with one exception, there does not appear to be much of a tax gap but that’s because they had overall group losses in 2009 and carry back into 2008.
2006 has a tax gap of £2.5m (on expected profits £18m, 16% effective rate vs 30%).
More recently the 2011 and 2010 UK tax gaps are £5m and £4m on expected UK profits of £22m and £31m respectively. So the effective tax rate is between 3% and 16% versus an expected rate of between 26.5% and 30% depending on the year in question.
Why is this? The main UK company has dramatically increased its debt from fellow group companies in the past two years from around £60m to £200m which goes some way to explaining the reduction in UK profits and diminishing UK tax take in recent years (together with the profits siphoned off into the Guernsey and Swiss subsidiaries). It is also loaded up with £360m of external bank debt which presumably is used to fund its overseas ambitions at the expense of the UK tax payer. The debt explains about £2m of the tax gap.
Have you sent to the company for comment?
I couldn’t make that gap in 2010 on data I looked at – the gap seemed smaller than that
There’s clearly a 2011 issue
I’ll see what they say.
For 2010 I think you used my 2011 UK profit figure of £22m, as I didn’t make it clear which year I was looking at. For 2010 the expected UK profit figure is actually higher at £31m. Also, I used the current tax figure of £5.39m you identified but then adjusted it for the reduction in the 2010 estimate in the following year’s accounts (which you didn’t have to hand). This is shown as a PYA of £586k given a net UK tax amount for the 2010 year of £4.7m. The tax on £31m is expected to be £8.7m at 28%. .
I like the idea of a tax tick – I was thinking of the opposite for companies that aren’t good citizens; maybe a tax tick and the opposite for bad companies..
John
There are always going to be examples where the reported profit of a group & its profit for CT assessment vary wildly. HMRC won’t always be concerned.
2 examples are the differences between what is written down for depreciation & claimed for Capital Allowances & the old chestnut of provisions which are correctly made in the accounts on a prudent basis but may not meet the requirements to likewise be allowed for tax (particularly notable for pension provisions).
Therefore, saying that a group seems profitable in 2010 but pays no CT may not be an issue.
Saying that a group seems profitable in 2003-11 but pays no CT will be an issue because you’d expect the points above to even out over time.
(Personally, I think HMRC should just take the profit/loss calculated in accordance with GAAP & not try messing around with it, except, obviously, in cases of avoidance or fraud. )
We could have a lot of fun with the “tax tick”!
Imagine if not only products and websites had to display them, but also our utility bills, our high street stores (on every entrance/exit), as well as the products, always of course, with reference to the latest accounting year. We could all see at a glance whether our airtime providers, or our water/gas/electric companies, or our grocery stores and their producers were diddling the Treasury or not!
Absolutely all for a “tax-tick” system, but that would take time to set up and publicise.
In the mean time, is there a published list of companies to avoid or, even a list of companies known for good tax behaviour? Would it even be possible (legally) to publish such a list?
Either or both lists would be useful, especially at this time of year…
I don’t see how a sales tax would necessarily shift the burden from the rich to the poor, provided the effects on the poorer members of society are reduced through an extension of the benefits system. The rich would still suffer on their purchases and would carry the lion’s share of the burden.
Big proviso
Scandinavia tries it
No one else does