David Cameron's comments about accountants yesterday in his speech on tax avoidance has created a hostile reaction from the Institute of Chartered Accountants in England and Wales. Accountancy Live has reported:
The UK accountancy profession has been left reeling by Prime Minister David Cameron's outspoken attack on the industry.
Speaking at the World Economic Forum in Davos, the PM dubbed the profession part of a “travelling caravan of lawyers, accountants and financial gurus” engaged in tax avoidance.
Why anyone in accountancy should have been left reeling by this is baffling: the statement is true; these things don't happen by themselves. But it's clear that Michael Izza, the ICAEW's chief executive, who is at Davos is not happy. He is reported to have said:
As a profession we spend a great deal of time working with policy makers to achieve this balance. Which was why I was disappointed to hear the prime minister again dismiss accountants, this time as an “army” of avoiders.
We don't recognise that description. Our members do not support illegal tax evasion or the kind aggressive tax avoidance that we believe to be unethical. In fact, an effective accountancy and finance profession can and does help solve many of the problems the Prime Minister wants to address.
He added:
Professional accountants everywhere are helping their clients pay the right amount of tax to the right governments at right time.
I know and respect Michael Izza, but on this occasion have to say he has just got this wrong. As example, the transcript of the hearing before the House of Lords I attended on Wednesday will show that Bill Dodwell of Deloitte, who was also giving evidence, said he could not see how Starbucks were avoiding tax in using the arrangements they did in the UK.
Now if Michael is agreein with Bill that there was no tax avoidance then his comment is justified.
If on the other hand the Prime Minister is right in correctly reflecting the mood of the country that the schemes used were obviously abusive tax avoidance, which the Public Accounts Committee concluded as do I, then both Bill Dodwell and Michael Izza are wrong because it's very clear that armies of accountants to create such schemes, account for them, submit tax returns for them, and justify them.
And let's be blunt about it: the profession has got its judgement on the rights and wrong of doing that seriously wrong. Now it's been rumbled there's no point spitting fire; now is the time for a little remorse and real change. And candidly to pretend that accountants aren't part of the problem on this issue is just asking for trouble when so very clearly they are at the heart of the issue.
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Bill Dodwelll is of course right. When you actually look at Starbucks position in detail there was no tax avoidance. The interest payable to the US actually meant more tax was paid overall. The (small) coffee profits were at commercial prices as was the royalty payment. Even adjusting for those still results in a loss. But then you can’t appeal the Court of Public Opinion so it’s another piece of folklore.
Respectfully, utter nonsense
Which bit is nonsense?
It would be very helpful to the debate if you could clarify exactly what you think is objectionable about Starbucks.
Read the PAC
Read Tom Bergin
Read my book when it comes out
And you’ll still deny it I know
But that does not mean there’s no tax avoidance: far from it
That’s because by your definition everything legal is acceptable and so avoidance cannot exist
And that is wrong
Well you can take issue with Dodwell (among others) on the GAAR panel. Hopefully, there will be full transcripts of the discussions for transparency and amusement purposes.
I’ve read the full PAC transcript, Bergin and done my own extensive research of the accounts and other publicly available information. I have to say I agree with David B on this and like Pellinor I would appreciate it if you clarify your objections (rather than dismissing alternative views). For the sake of the argument, lets agree that tax avoidance is acting outside the intention of the law (so tax payers must act within both the spirit and the letter of the law).
I think the PAC has done the job, well
I think it says everything that you are refusing to be drawn into this debate. Is it because you know you will lose the argument with anyone that knows what they are talking about? The PAC didn’t. That is clear.
I don’t have time to waste going over old ground
You’re rather putting words in my mouth.
I think “avoidance” is quite a wide word, which covers a range of activities. I’m of the old-fashioned school that divides avoidance from evasion with a prison wall, but the other end of the spectrum is nothing like so clearly defined. There’s unacceptable avoidance near the evasion end (some EFRBS planning, for example), and there’s sanctioned avoidance at the other end (like choosing to use an ISA), and in the middle there’s a big grey area.
I’m very uncomfortable with the dark end of the spectrum, but I can’t find an easy place to draw a definite line. My own feeling is that the more steps you have to take to avoid tax, the less acceptably you’re acting. Picking an ISA over a taxable savings account is no extra steps: that’s fine. ABC Inc setting up itsEuropean HQ in Ireland instead of in the UK is no extra steps: that’s fine. DEF Inc shifting its HQ from the UK to Ireland after 10 years is something it didn’t necessarily need to do, so it’s heading off towards the darker end; but on the other hand, if it’s getting to a position that’s ABC Inc could acceptably arrive in then I can’t object too much.
Setting up a new non-trading entity in a jurisdiction you don’t currently operate in is a step; a carefully worded agreement with no obvious commercial function is another; receiving cash which is then immediately passed on to another entity is a third: carry on like this and you’re going to end up in very shady territory very quickly.
I wouldn’t like to say how many steps is too many: that’s for the courts to do, and of course the Ramsay approach is aimed at just that sort of thing.
That’s why I quite like the GAAR. It starts at the abusive end of the spectrum and starts striking down objectionable schemes: it doesn’t jump into the middle and arbitrarily decide where the line ought to be. I’m slightly worried that it’ll creep, but that’ll take a while and we can watch out for it. But overall I’d rather have a middle ground that the courts decide on, than a non-statutory ill-defined line.
Well I’d much rather have simpler legislation that made the grey area a bit narrower, but that’s taking time to come through.
But coming to Starbucks specifically: I can’t see that they’ve taken unnecessary steps. A global enterprise like that has centralised IP, by it’s nature, so a royalty is appropriate, and a rate should be agreed with HMRC. Tick. Whether it gets paid to the US or the Netherlands is immaterial to the UK position, really – either way it’s a elgitimate cost in the UK. Centralised supply chains are commercially very popular: I’m not a supply chain expert so can’t comment on theirs specifically, but I’m not surprised to see one in the group. If you’re having one, why should it not be in Switzerland if you want it to be? No extra steps there – tick. What else do we have? Financing? Like royalties: everyone has some, HMRC should check it. Tick.
The main objection I’ve seen from you is an implication that the reported profits must be understated because (a) they’re low and (b) Starbucks have said the UK is profitable. But companies make losses all the time, especially when they commit themselves to expensive shop leases; and you get very different measures of profits. The sort of internal reporting Starbucks would be doing would almost certainly be on EBITDA under US GAAP, which is a strange beast at the best of times; PBT under HMRC GAAP is always going to be a lot lower than that just because ITD&A exist – OK, the tax is below the line and the D&A will be added back, but the sort of shopfits Starbucks do have masses of capital allowances to bring PCTCT down again.
So that doesn’t make me suspect them of anything either, it just looks like a business that’s not doing as well as the bloke with a Powerpoint presentation said it was going to when they had a UK strategy meeting about expanding massively in high-profile locations.
I just can’t see anything that looks to me like evidence of anything objectionable. At least not in the UK tax sense.
The point is a simple one: Starbucks say they’re profitable
And they report losses
And there’s evidence of potential over-pricing into the UK
That looks like choice, not chance
Well yes, but profitable at EBITDA level and loss-making at PBT level wouldn’t be at all unusual, surely? If the fact that you depreciate your assets is prima facie evidence of tax avoidance, then the definition of the latter may be a bit broad 🙂
And any pricing is potential over-pricing, that’s why HMRC do TP checks. But “higher than I would have thought, off the cuff” is not the same as “too high”.
I’ve gone back and re-read Bergin, and I still don’t see any tangible evidence of anything objectionable.
All it comes down to is “the accounts show losses at PBT level, but other reporting says there were profits at some undefined level”.
Which to me could mean that EBIDTA was doing OK, or that the US was stripping out the royalties etc as a consolidating adjustment, or that the individual coffee-shops were doing well in aggregate but overheads were a drag, or that the Exec in charge of Europe wanted to put a brave face on things… or that the statutory accounts were deliberately understated.
But that last one seems less likely to me – cooking those books is fraud, and what with audit and SOX and so on the risk is quite high; whereas internal reporting is another matter, and everyone expects reports to analysts to gild things a bit. I’d be amazed if I ever saw a company press release that portrayed the results as being worse than the stats showed.
I’m not saying the transfer pricing is all OK – I don’t have any evidence of that, particularly, other than that HMRC have discussed it and knocked the royalty rate down a bit. But nothing I’ve seen has provided anything more than allegations to sugegst that it’s not OK.
Respectfully there are none so blind as those who do not wish to see
Equally, there are those who see reds under the beds.
I think you’re jumping at shadows, at least in this case. But I’m quite happy to be shown something plausible, like a figure for how much tax you think Starbucks should have paid.
How hard would it be to take the Starbucks accounts and derive a sensible-looking tax comp from them to estimate how much tax they should pay based on your principles? You’d have to make some assumptions, naturally, but then anyone who’s calculated CT QUIPs has done a comp with a few assumptions in it.
Searching through your blog for the last couple of months, the only thing I can find which looks like an estimate of the tax due from them is “The argument, at least in the case of Starbucks, is that the total tax lost may well be less than £10 million — and that I conceded could be true” back in November.
So you seem to be complaining that there is avoidance which is significant even though you don’t have an estimate of the scale of it, and it may well be less than half the amount that the company has offered to voluntarily pay over anyway.
I just can’t see where you’re coming from, unless you’re simply saying that the underlying accounts are misleading. But if you sweep away all the numbers you’ve got nothing to go on either: the better thing is to adjust the figures to what you think they should be based on the facts as you understand them, otherwise this debate is sterile.
Apologies if this is in your forthcoming book – from an advert in the House of Lords I understand it’s not out for a couple of weeks yet.
I don’t make such speculation in the book
But you’re also right – the sums involved are probably in the region of the sums Starbucks has offered to pay
But in this sense it is a small player
So if Starbucks is a small player, why make it such a whipping boy? It seems a trifle unfair.
You call £10 million of avoidance insignificant?
You’re the one who just called Starbucks a “small player”!
I think “the amount of tax avoided by Starbucks” has become a significant concept in the current debate and therefore warrants some close attention, although I agree that £10m is smallish relative to other amounts being bandied around in respect of other firms.
It is of course your estimate, and as the figure has significance I’d like to see the foundations of that estimate: if it were insignificant I wouldn’t bother asking.
Respectfully you are wasting my time
The issue is one of principle
Maybe that’s what you’re finding hard?
I agree, the issue is one of principle.
The main principle I’m worried about here is that claims should normally only be made where there is evidence to back them up. You are making claims, but not providing evidence.
Another principle is that of proportionality. You have said that Starbucks are “a small player”, yet you’ve said some very harsh things about them – especially so given that you haven’t backed up your assertions. Is this really fair?
I don’t call £10 million small
I think it’s smaller than others
I think all tax avoidance is serious
And as for the assertions – the evidence has been clearly tabled
Your claims may very well turn out to be well-founded, of course. It’s just that if those foundations aren’t visisble, your claims lose a lot of their force.
For heaven’s sake: the matter has been investigated by the PAC
The evidence is clear
What are you trying to find?
My comment seems to have disappeared. Rather than retype all of it: I’m trying to get a simple statement of what Starbucks have done that’s objectionable, in slightly more detail than “avoided tax”.
You say the evidence has been clearly tabled, but where? Bergin has none, he just says Starbucks claim to have made profits even though the stats show losses. The PAC simply made assertions, they didn’t back them up. You’ve referred back to Bergin and the PAC. The statutory accounts don’t suggest anything.
Where did you look that I haven’t?
I got bored of your time wasting
I rather suspect I’ve spent more time on this than you have, so if anyone’s time is being wasted it’s mine. I’ve responded rather fully to your comments, explaining what I’ve done and where I’ve got things from, but you reply to mine with simple assertions.
I really want to understand both sides of this debate, but you’re not giving me anything to go on. What have Starbucks done that constitutes avoidance?
“The evidence is clear” isn’t much help if you won’t even tell me where to look to find it.
Starbucks used structures with questionable transfer prices to shift profits to low tax jurisdictions
But you can’t see the issue
I rest my case that you’re not looking
David B
Are you with Starbucks? If not, your comment that
“The interest payable to the US actually meant more tax was paid overall.”
makes no sense. Do you know that the interest paid by the UK Co appeared, in the same amount, in the US parent ? I can’t see that from the public records. Yes, US parent was in receipt of interest income, but was that from the UK ? Who knows ?
Even if it was, did Starbucks in the US pay tax on it, again, I don’t know. You seem sure it did but I’m not sure what your knowledge derives from.
“The (small) coffee profits were at commercial prices”
It’s a coffee chain, those were always going to be its profits. I don’t think anyone has ever doubted it sold to the customer at commercial prices. Did it buy from Switzerland (that well-known coffee plantation) at commercial prices ?
“as was the royalty payment. Even adjusting for those still results in a loss”
That’s the great thing about transfer pricing.You don’t need to enter into abusive avoidance scams, you can just arrange the pricing so that, whatever happens, profit never falls into first world democracies.
David Gauke, referring to an avoidance scheme that was being marketed by a major accountancy firm (PwC) said
“When millions of hard working families are playing by the rules, paying what they have to, we will not put up with the use of cleverly structured schemes designed purely to get around the rules.
I hope that real lessons are learnt from the Court of Appeal’s decision.”
http://economia.icaew.com/news/july12/court-of-appeal-backs-hmrc-in-tax-avoidance-case
Well spotted
and HMRC didnt even need a GAAR to strike it out – see they can do it when they want to !
I note that both you and Mr Dodwell are on the Aaronson panel to draft the guidance for the forthcoming GAAR. I foresee some lively meetings!
… and Voak who Richard has also had a run in with in the past…
Although I am not religious in response to some of your contributors:-
“Hear now this, O foolish people, and without understanding; which have eyes, and see not; which have ears, and hear not:”
I’m drawn to Willard Foxton’s article in New Statesman, which highlights the problem with large scale tax avoidance
http://www.newstatesman.com/blogs/voices/2012/06/tax-avoidance-isnt-left-or-right-issue-its-cancer-eating-our-democracy
As an FCA myself, I’m with Richard.
I’m sick and tired of hearing the same old tired justifications that, if something isn’t illegal, it’s ok to do it. Is there really not more to life than such a simplistic view?
And, while I understand Michael Izza’s almost imperative defence of ICAEW, he cannot be unaware of where a great deal, if not most, of legal but questionable tax avoidance schemes emanate from; of course, ICAEW members are involved.