Mondelez, which owns Cadbury, is facing controversy over its tax arrangements after it was reported that it had not paid UK corporation tax last year.
An investigation by the Sunday Times found the company was wiping out Cadbury's bills using interest payments on an unsecured debt, which is listed as a bond on the Channel Islands' stock exchange. The interest paid on the loan can be offset as a loss against gains made elsewhere in the company.
The arrangement, which is legal, meant Mondelez was able to pay no UK corporation tax despite accounts showing that Cadbury UK, its subsidiary, made profits of £96.5m in 2014 and £83.6m in 2013.
This is classic tax abuse. A US company buys a UK company, ladens it with debt incurred to buy it which has, as a consequence, nothing to do with the cost of doing business in the UK, and then pays interest on that debt out of the UK via the Channel Islands Stock Exchange, which for reasons that continue to dumbfound, is recognised as a stock exchange by HMRC despite the fact that most of the securities on it are not traded and that it has been surrounded by controversy throughout its recent history.
The situation that Mondalez is exploiting is, of course, legal. But there are options available to end this abuse.
First, HMRC could remove its recognition of the Chanel Islands Stock Exchange. If it did that then tax would have to be deducted at source on payments made on the securities listed on that exchange, removing their attraction over night and ending that possibility for abuse.
Second, all payments of interest on intra-group transactions could stop having tax relief allowed upon them. That would be a simple, effective, clear and, in the presence of persistent abuse, necessary change to the law. It would not impact profitability of any group either, except by stopping tax relief from which they should not profit so it is also neutral with regard to tax compliant business and provicdes them with a level playing field on which to compete.
Third, all interest paid by a business in connection with its acquisition by its current owners should be disallowed for tax. If those owners can make the claim, so be it; let them do so if it is appropriate, but the acquired company should have nothing to do with this.
To put it another way, this abuse could be stopped now. It's time it was done.
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In the meantime no more cadbury or kraft products will pass through my mouth! It really is a pleasure not to purchase from all tax avoiders
I have to say this is a boycott I will enjoy
And nor will it be hard….they make crap chocolate anyway
I would include mondelez products as well
Umm……….No choccies made by Cadburys in my house this Christmas – or after for that matter!!
Would Cadbury’s not now be subject to the Diverted Profits Tax?
No: They are taxable here already, but claim they have no profit
W. Edwards Deming in an address to Fordham University said “We’re living in prison. Under the tyranny of the prevailing style of management.. . . We need to throw overboard our theories and practices of the present, and build afresh.”
At the time I thought he was talking about the leadership creating conditions that made it impossible for the workforce to do a really good job. Having thought about it again, particularly in the light of events such as Mondelez/Cadburys, VW, Siemens et al, I believe that, in his wisdom, he was also talking of the dulling of moral imagination that you get when you judge your board performance only by monetary achievements and not by value to the users and the larger society.
It is not enough to avoid there products. Advent is now here and as in John the Baptist’s fiery rhetoric we need to demand repentance and call out these economic scribes and pharisees for the pariahs they are!
Is it possible to find out which Mondelez directors, accountants and lawyers signed off and/or advised on this arrangement?
It is about time that the personal morality and integrity of the individuals involved is exposed and challenged, rather than allowing the men in grey suits to hind behind a cloak of corporatocracy. Business decisions are made by people, not companies.
It is the people who are really behind these tax avoidances that should be brought before parliament and the media to answer for their actions – not the muppets that usually get to take the blame for someone else’s decision. Personal shame is as much, if not more, of a deterrent than financial penalties.
Companies House will have the details
You think the morality and integrity of someone who is doing something perfectly legal and which is subject to HMRC scrutiny and information gathering powers is going to affect whether they continue to do it? curious. This structure is subject to thin capitalisation rules, transfer pricing and the debt cap. HMRC have plenty of opportunity to attack this if they want to. They appear to have chosen not to.
Allowing interest payments to be tax free to the recipient and non deductible for the payer will just create more opportunities. More effective is the proposed interest cap BEPS proposal which HMRC are consulting on in my opinion.
Shall we get real here? Every intelligent observer knows the powers available here are inadequate: even Big 4 partners have told me so. Even you do in para 2, in contradiction to para 1
And,caps have never worked
The benefit of public scrutiny in front of a parliamentary committee is that we the public can hear from both the corporate executives, their advisors, public officials and politicians. If the argument is that it is perfectly legal and morality has no place in business, then the pressure is rightly on the politicians to change the law and the officials to ensure it is followed to the letter. Get these discussions out from behind closed doors and in front of the electorate.
The powers are fine – excessive, even. The implementation of them is patchy.
The powers are not fine
The implementation is patchy
So we need new powers and people
You dispute that cadburys aren’t subject to these rules?
The power and legislation is there for hmrc to use. The issue is they choose not to. More legislation feels like it’s not going to change hmrcs desire to use it
I hadn’t realised big 4 partners informed your thinking so much!
Your argument makes no sense unless viewed as prejudice
Does it occur to you that there might be commercial reasons for lending intra group in multinationals? Having a single company in the group managing the group’s cash position, dealing with banks, etc. and lending funds intra group is far more efficient than requiring hundreds of different entities to make their own arrangements? And if intra group interest expense is disallowed would corresponding receipts be tax free?
Of course it occurs to me
Since costs are invariably in high tax jurisdictions and income in low I am happy for receipts to be untaxed if expenses are not deductible, but of course that condition would have to apply if a claim to be non-taxed was made
To claim a deduction against UK corporation tax on its profits, the relevant UK companies must have navigated their way through, among other things:
* transfer pricing – could they have borrowed an equivalent amount, at equivalent rates, from a third party lender?
* the world-wide debt cap – is the UK loaded with more debt than the worldwide group?
So, we have UK companies that are no more geared than the rest of their group, with debt that could have been borrowed from a third party on similar terms, and then claiming tax deductions for their cost of finance. What is the problem again?
As a result of BEPS, in addition to the existing rules, we will probably also have an “interest barrier” from 2017, similar to the one that Germany has had for a few years, capping debt deductions at around 30% of EBITDA.
If the debt was not listed on CISE (to qualify for the Eurobond exemption) then it could almost as easily be listed in say Ireland, or Luxembourg.
The real issue, surely, is that the intra-group interest is probably not being taxed full on receipt. I expect there are ultimately US shareholders for the lender, but I doubt there is any US tax being paid on a current basis.
So, for your second proposal, in essence you would treat intragroup debt costs like a distribution? No deduction on payment, no withholding, and exempt on receipt?
But how would your third proposal work? Would a UK parent company be able to surrender group relief for its own debt costs against the profits of its UK subsidiaries?
I think my suggestions are clear
The current regulations have not stopped an abuse – so there is a problem
The CISE is used to get funds out of the EU – so the others need not be substitutes
And I suspect very strongly the received interest is not taxed
But my suggestion makes that irrelevant
If the recipient of the interest was a pension fund which was tax exempt would that change your view out of interest?
It would not be: I am only talking Intragroup transactions which cannot embrace a pension fund
Sorry, remind me why it is an abuse for a company to claim a tax deduction for its costs of intragroup finance, when the same deduction would be available for third party debt?
And why is it a benefit for the debt to be listed outside the EU? The lender need not be in the Channel Islands for the debt to be listed there. The same applies to debt listed in Ireland, or Luxembourg.
Your suggestion is similar to the BEPS interest proposals but without the 30% EBITDA allowance – a denial of “excessive” deductions without any regard to whether (or not) the interest is taxed on receipt. The BEPS proposals on hybrid instruments only deny a deduction if the receipt is not taxed, which seems better to me.
Because Intragroup interest is almost all about profit shifting
So the easiest way to tackle that abuae is to cut it off at source
Listing that debt in the CI just shows the extent to which companies will go to abuse
You also must remember that companies have a responsibility to maximise shareholder returns. If they are able to get around paying tax in the present system it is the government that is responsible for this. The fact that this continues to happen implies the government has intentionally let this situation occur.
There is no legal obligation at all on a company to maximise shahiolder return
You are, quite simply, wrong about that
There is a legal obligation (section 172 of the Companies Act 2006) to “promote the success of the company for the benefit of its members as a whole” while having regard to the interests of employees, suppliers, the community and the environment, etc.
Here it is: http://www.legislation.gov.uk/ukpga/2006/46/section/172
Directors will rarely go wrong (at least in legal terms) in seeking to maximise returns for shareholders, but they could easily run into trouble if they deliberately tried to run the company in a way that did not have shareholder interests at its heart.
No serious lawyer or accountant I know thinks that the obligation has anything to do with maximising anything
Indeed, given a matrix of goals is specified it is almost impossible to see how maximising the return to one party could be consistent with the obligations to others
And if you knew anything about running a business you would know it is impossible to maximise profit
“No serious lawyer or accountant” – isn’t that the “no true Scotsman” fallacy? Surely you are not saying that anyone who disagrees with you is not “serious”?
That section of the Companies Act does not talk about “obligations” to others, or a matrix of goals; rather, it requires directors to “have regard to” various specific factors amongst other matters. No rational person would seek to maximise returns (not just profits, but capital appreciation too) all the time and at all costs; but as the law recognises the heart of a director’s duties is seeking the success of the company for the benefit of its members. Surely you have heard of enlightened shareholder value?
No, I was referring to all the informed people I know
OK let’s put it a different way Richard, there is also no obligation for a company to maximise the tax they pay. Its easy to have the knee-jerk reaction to the Daily Mail story, to blame the dishonest accountants, but ultimately the problem rests with the government. There will be a public outcry, the chancellor will promise to get tough on businesses, small companies will be made to pay higher taxes while Starbucks and Amazon and Barclays and all the others continue to pay nothing. This problem has been around for years, the government does not want these companies to pay tax, why don’t we just make things simple and make multinational corporations exempt from taxation?
I have never ever said there was
Only a fool would invert the claims
Dear Mr Murphy
Would you be ok with me starting a petition to call on HMRC to implement the measures you are calling for, and quoting you as the source of the idea. Wording would be ‘We the undersigned call on HMRC to:
Remove its recognition of the Chanel Islands Stock Exchange.
Stop allowing tax relief on payments of interest on intra-group transactions.
Disallow tax on interest paid by a business in connection with its acquisition by its current owners should be disallowed for tax’
It would be headlined ‘Stop the Cadbury Tax Abuse’
Regards
Ann Bywater (38 Degrees)
Of course, if you wish
Send me details
I would make the last line ‘Interest paid by a business in connection with its acquisition by its current owners should be disallowed for tax’
Thank you. Here is a link to the petition:
https://you.38degrees.org.uk/petitions/stop-the-cadbury-tax-abuse?source=facebook-share-button&time=1449566212
I will support via Twitter
Calling on HMRC is the wrong route. These suggestions would require Parliament to change the law.
Also: have you thought through the implications of the changes on perfectly ordinary businesses in the UK? I can see serious problems with a blanket disallowance of inter-company debt; and the bit about “interest paid by a business in connection with its acquisition” doesn’t make sense: the interest is paid by the new owner, not by the existing business.
I’d be more than happy to discuss the tax implications with you if you’d like help targeting your campaign.
Posted
But I would not Ann that there is no Uk issue – Andrew is wrong
There is a very clear problem – it is Richard who is wrong.
Say you have two companies with some common shareholders and some people who own shares in one but not the other (this is *very* common among small businesses).
At the moment, one company can borrow from another quite happily, and can compare the benefits of doing that with borrowing from a bank.
Under Richard’s idea, if a company borrows from a related company it would pay more tax than if it borrowed the same amount from a bank. Conversely, the lender gets tax-free interest, where bank interest would be taxed.
So banks would get a competitive advantage, and small companies that have done well and have some spare cash to reinvest would lose out.
Also, financing suddenly becomes much more complicated, especially given all the loans that are currently in place between such companies. You’d end up pushing companies into having to refinance themselves to avoid losing the tax relief.
Financing is one of the big headaches for small companies, and this would just make it worse.
Do you really want to push a campaign that would give banks a competitive advantage, and causes problems for small businesses?
Andrew
Sorry: this is a non issue
What you’re actually describing is a situation where all too often frauds on minoritiess are taking place and R&D rule I suggest will encourage good governance
Richard
Changing to your suggested rule would immediately disadvantage minorities that are currently being treated fairly!
Well, it would disadvantage half and unjustly enrich the other half. Neither is a good thing.
You are essentially proposing a shotgun approach, and then claiming that catching innocent bystanders in the blast is good for them.
Respectfully, we are talking a tiny number of cases
And no system is perfect
The minority might be wiser to ask that the excess funds be distributed
I suspect you gave not considered that
That is quite apart from the fact that where there are common majority shareholders in A Ltd and B Ltd, you are essentially telling them that surplus cash ought to be distributed from A (with tax paid) and then B should borrow it back again from a bank, rather than allowing A to lend directly to B.
Again, your suggestion would cause problems for businesses, give banks a competitive advantage, and complicate matters all round – simply so that you can attack a small number of transactions that are already subject to anti-avoidance rules in any case.
I am saying shareholders should have the right to decide how their capital is allocated – one of the fundamental tenets of free markets you appear to want to deny them
An interesting idea on your part
Hold on, you said that minority shareholders should demand that surplus cash be distributed to them. How does that constitute *me* denying them the right to do what they like with it?
I am the one saying that the tax system shouldn’t penalize people for making perfectly valid commercial decisions.
It’s *you* that seems to be deciding that if people want to leave their money in a company, then tough – they shouldn’t be allowed to without a tax charge.
A minority does not make a decision about lending to a majority unless they have a very good shareholder agreement written by me
I am very aware of thee scenarios
They are almost inherently latently abusive
So back to the question I posed earlier as it’s highly relevant to this post from a private equity context. If, on an acquisition, the recipient of the interest on a shareholder loan is an exempt pension fund, should the pension fund be taxed on the interest income?
It won’t be
The pension fund is not a connected party
And pension funds are not taxable on their income
And I am suggesting that the exemption only apply intra-group
You are, in other words, utterly missing all the points I made
It takes some skill to do that
Apologies, I was responding to Ann’s penultimate paragraph I should have made that clear. The pension fund would be connected for transfer pricing purposes and the acquired group would likely be a close company under that definition.
Accepted
But still you spectacularly miss the point that the pension fund would be tax free anyway
its tax free on the interest income, and also tax free on the subsequent sale of the company. The value of the company is increased partly via the tax relief given on the interest expense – by removing the relief you are depressing the return of the pension fund (which presumably is not government policy). I use this as a demonstration that there can be unintended consequences of these sorts of changes
Pension funds are huge investors in this type of activity so I dont think it can be written off as “inconsequential”, ie it needs proper policy consideration.
Anth – It sounds to me, as a lay person, that it must be extremely difficult to avoid any unintended consequences at all in dealing with tax abuse. However I really feel something should be done, and urgently. Inequality in the world has reached ridiculous proportions. Millions are dying of starvation while we argue about details. I would be happy to sacrifice some of my pension if that is what it takes to make the rich also pay their fair share and alleviate the suffering of so many.
I assume that you would also propose that interest received through intra-group lending should also be exempt from UK taxation?
And how do you intend to deal with the situations where intra-group interest payments are denied tax relief under your proposals but the corresponding interest payments are taxed in a foreign jurisdiction?
All payments would be non-deductible
Receipts would be taxed if relief given abroad – assuming there was an equivalent tax system. Otherwise not
(Too many Andrews, sorry.) The answer in relation to intragroup interest paid to a foreign jurisdiction under this sort of tax regime is that the interest could well be taxed there, even if relief for the payment is denied in the UK. This (non-deduction and inclusion) is one of the outcomes that the BEPS proposals on hybrids is seeking to avoid. In relation to Anth’s question, the BEPS hybrids proposals do not treat payments received by an exempt person (pension fund, charity, etc) as a non-inclusion situation, so the deduction does not need to be denied.
Notably, the BEPS proposals on interest – the arbitrary 10% to 30% interest barrier – do precisely the opposite, partially blocking interest deductions even where the recipient is taxed on the full amount.