There has been a lot of reaction to my comments on HSBC and Rolls Royce. Some agree with my sentiments; a great many do not. The lines those who disagree appear to be taking seem to fall into one of four camps.
First there is the "it's legal, so what are you worried about?' camp.
The second is the "what do you want, a voluntary contribution?" argument.
The third might be called the "they'll leave if you tax them" brigade.
The last is "but the accounts show the profit wasn't made here, so what's the problem?" school of thought
The first group clearly have no idea of the difference between legality and ethics.
The second ignore Starbucks, but leaving that aside my answer is, of course not: what I want is a tax system that ensures tax is paid in the right place at the right time, and we clearly haven't got it.
The third are just tedious; this argument has been offered for decades and the reality is that people do not leave. They try to shift functions to tax havens but as has been shown time and again companies who "leave" the UK mysteriously keep their head offices and everything that goes with them right here in the UK, so this argument is just nonsense. The "move" is almost invariably a tax planning exercise and nothing more.
The last show a complete lack of understanding of international tax, where under current tax rules the right to re-write the accounts always rests with a tax authority and rightly so because every tax authority knows what is presented to them need not have much relationship with economic reality. The trouble, of course, is lack of resources to do just that.
The result is that as it stands the international tax system is arbitrary at best and open to so many choices that the UK tax system is now basically a voluntary payment system. And you don't have to believe me when I say this. Take this form Martin Sorrell of WPP, speaking last December:
"You can have a procurement department in an offshore base; you can have a brand operation in an offshore base. And the criticism of some companies — Google is an example, Starbucks and Amazon — have done just that. Companies even based in the UK can do that."
Asked how the rules should be improved to ensure multinationals delivered a fair contribution to local exchequers, Sorrell said:
"I hate the term 'corporate social responsibility' but all of those contributions you make ... are a question of judgment. There are the rules, if then companies choose just as they chose ... to make a contribution to all the stakeholders on a long-term basis all credit to them."
In other words, if anyone pays tax in the Uk is pretty much down to the option of the company. I don't accept that as a basis for taxation.
I am suggesting that tax should be based on clear economic indicators: where sales are made, where people are employed and where tangible assets are. I did that for HSBC and showed more profit would be declared here on that basis. I believe that would reflect economic reality. I like that. I don't want companies to decide when to donate or not; I want them to pay what they owe.
I'm not blaming HSBC or Rolls Royce or accusing them of anything. But I am saying that their results and tax paid do not seem to reflect those economic indicators, and using accounts to suggest that is a perfectly reasonable use of public domain data. And I intend to keep doing it because even the OECD now recognise that this may well be the direction of travel that is required for international taxation because as they note in their February report on profit shifting:
“[tax] base erosion constitutes a serious risk to tax revenues, tax sovereignty and tax fairness for OECD member countries and non-members alike” and that “what is at stake is the integrity of the corporate income tax”.
That's my concern too, and I'm evidencing why it is an issue. That's all. But the vehemence of the response suggests I'm clearly hitting a target. So I'll keep doing so.
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But you’re not following those principles for Rolls Royce.
Are you essentially saying that if RR has an operation in the US which sells a load of engines to Boeing, the profit on that sale should be booked in the UK?
Why should it be in the UK? Is it simply because it’s owned by a UK firm? How does that work for Amazon?
You haven’t shown anything for HSBC: you’ve calculated that if you ignore where profits actually arise and deem them to have arisen in the the UK, then more of them will arise in the UK. You’ve completely begged the question of why they should arise there.
Of course I am saying that the profit on RR engines made in Derby should be booked in Derby. Where else?
Do you know anything about transfer pricing?
Unitary tax would achieve the same goal – of splitting the profit. Of course some is in the US – biut it cannot be that none is in the UK. Impossible
Unless I see some evidence of even some basic knowledge from you soon I am going to delete all your comments henceforth as time wasting nonsense – which they are
I know a fair amount about transfer pricing. I’m as familiar with it as I am with dividend taxation. Bit rusty on commissionaire structures, it’s a while since I advised on one, but otherwise OK on it.
All this comes down to is a difference of opinion about how the profit should be split.
I think one should look at the whole chain of events and services and allocate profits to the different activities.
You appear to think that you should book it all in the UK, unless you really have to give some of it away elsewhere.
I say that because you aren’t applying your arguments even-handedly between RR and Amazon. If RR should be taxed based on where their operations are rather than their sales, why should Amazon be taxed based on where their sales are rather than their operations? The only common factor is that you tend to find that profits should fall in the UK, whereas I’m not nationalistic about it.
I have never said book it all in the UK
As I more than adequately demonstrated on HSBC
For trolling your time on this blog is now over
Excellent posting, Richard. You have laid out the principles of an equitable tax settlement fit for the 21st century superbly.
Re your comment “The first group clearly have no idea of the difference between legality and ethics.” I suspect the answer is more worrying in that they do know the difference, but simply think it’s irrelevant.
i think the issue is that you clearly disagree with a number of tax rules in the UK (which is fair enough) but you appear to want to attack people like RR for claiming them, rather than lobby/campaign for their repeal or blog about why they should be abolished
SSE is a classic case in point, it accounts for a third of the RR tax rec, is a vanilla statutory relief and partly explains the low RR UK tax number. I can understand you not liking the relief but I struggle with you bashing RR for claiming it (as an aside, we only introdcued the relief to be “tax competitive” with most of europe who have something similar). I think thats why people are confusing the “its legal so what” argument with the voluntary contribution argument with all the others
It is fine to campaign for a fair tax system, and to use examples (starbucks et al) to demonstrate the ridiculousness of the current situation, but to critiscise companies for claiming statutory reliefs confuses (and possibly) undermines the campaign for a fairer and clearer system.
just my opinion obviously !
I really don’t think anyone could accuse me of not campaigning for reform in the law
If we get a general anti-avoidance rule it will in no small part be due to me
Which is, perhaps, why I am on the committee overseeing its introduction, appointed by HM Treasury
And an evidence base always helps, which is what I create
You can rest assured that the GAAR cobbled together by you and Meacher will never see the light of day.
No evidence of global GAAR research, no lessons learnt from recent GAAR reviews in Canada, Australia and South Africa, poorly drafted to the extent the courts will probably rule it void for vagueness and no explanatory notes to it.
And did you and Meacher ever put the draft bill out for general comment and submissions.
Well that’s an interesting idea
Because of course my GAAR will not become law
But it may do when adopted by a future government if the existing GAAR does not work
Anthony –
Geeky point of order… SSE isn’t actually a relief and RR didn’t claim it. SSE is an exemption. If the requirements are met, then a share disposal will fall within that exemption. It will either apply or it won’t apply – there is no claim.
Also, SSE will have no impact at all on the trading profits of RR. It’s an exemption from Capital Gains – so I can’t really see how Transfer Pricing is in point re those amounts.
Back to the discussion 🙂
It was also a massive error of judgement by Brown that needs to be reversed
i didnt say it was in point re TP, i said it accounts for about a third of the tax reconciliation – which is relevant as the gain makes it through to pre-tax profits which everyone is complaining arent taxed.
you are right its an exemption, so what you are saying is RR had no choice about whether to claim it or not, so dosent that make the criticism even worse as they had no choice about it?
as for the general anti-ABUSE rule, I thought you were on the committee writing the guidance notes RM, rather than a committee overseeing its introduction (unless there is another committee you are on – if so, please sort out a clearance process, paid for by the taxpayer if necessary. This was one of the key recommendations for the GAAR which has been strangely ignored).
Re GAAR – I am unable to comment
Re the rest – tax reconciliations disclose what companies want to disclose
If I understood one of the comments then I nearly wet myself laughing at the absurdity of it….to suggest that RR sell an aero-engine with all the R & D that goes behind it, is virtually a loss leader!
I accept that supermarkets may sell milk, for example, as a loss leader, but Rolls Royce and aero engines?
Please can someone tell me how many main aero engine manufacturers there are in the world?
Almost half RR’s revenue is from service contacts – given sales in US and Asia, you can see why so much tax incidence is off shore.
So half is from making engines in the UK – as I suggested
Rolls Royce make virtually no profit from the sale of the engine, it is all about getting the long-term service contracts, not very different from a razor-razor blade model, or printer-ink model.
That said, if the R&D is being done in the UK, that is where the bulk of the profits should arise as the service contract only exists off the back of that R&D. The country where the service contract is being provided might have a different view on that.
I have answered this point many times before
Try servicing an engine you have no built and see what the profit is when there are about 2 engine manufacturers in the world
No engine built = no profit
Fact
So tax is due on the build
Oh I get it, I can now see how this works out?! Here we have natural group of “loss leading” items, milk, razor, printer and aero engine. We of course live in absolutely crazy world. Of course there couldn’t be a departure between the underlying economics of the position and the accounting/tax fiction when the dividing up package sold to the client! The service element being loaded at the expense of the hardware bit? That just couldn’t happen?
@ Tom: So you’re suggesting that RR sell an engine at virtually no profit from the UK and ‘allow’ the overseas service facilities to make all the profit on future servicing, without the UK manufacturer getting a share of that. That may make sense at a global level but it doesn’t seem to be an equitable sharing of profits between eth countries.
It’s a bit like the old car dealer model – they may sell a new car at virtually no profit but it’s on the basis they lock the custiomer in to having services done at that garage. If I as an independent car mechanic suggested they let me do the future servicing I think the dealer would want me to share any servicing profits with them. So going back to the RR model you suggest might be in operation, shouldn’t the opverseas service facilities share the service profits with the manufacturer?
My view is that the bulk of the profit should arise where the R&D for the engine is done (the UK), as that is the true creation of value, followed by the manufacture. As for servicing profits, RR doesn’t force its customers to take its servicing contracts, in fact many airlines have their own servicing centres, who obviously don’t share any profits with RR.
My suggestion happens to achieve that result