Monday, November 12, 2012

More Dreadful Tax Antics By Foreigners - The Government Acts

We've seen the dodgy deeds of various swarthy chaps documented in HMRCs Most Wanted.

But one should remember that if you want a decent job done, call a professional. All bar the top two or three of HMRC's bad-boys were six-figure tax dodgers or less.

If you want to keep nine, ten, eleven or even twelve figure sums out of the Revenue's sticky grasp and also get a Guardian column to argue how the other guy's tax money should be spent, or be appointed to a Government business task force, it's best to forgo concepts like "carousel fraud" and the "long firm", and think about ordering a Dutch Sandwich with a Double Irish to go.

You'll note the absence from HMRC's list of Starbucks, Google (whose execs have the brass neck to pontificate in the Guardian about how more kids should be taught programming in UK schools), Amazon (whose Luxembourgeois variant involves some interesting VAT shenanigans with the publishers),  Apple and a whole host of famous names. They avoid paying the corporation tax that unimportant sectors like manufacturing stump up - because their UK businesses make hardly any profit. Yet strangely, they don't want to close these loss-making enterprises - far from it. They're very profitable - but the profits are elsewhere.

Now most of these techniques involve vesting the company's "intellectual property" (IP) in some tax haven then levying a hefty transaction fee for use thereof, one which renders the business activity taking pace in a taxable jurisdiction (as it might be the UK) only marginally profitable or even loss-making. You'd see how it might be possible with software, where IP is all (how much does it cost to copy a disk?), but apparently a there's more intellectual property than coffee in Starbucks, for example :

"accounts filed for its UK, German and French units, which make up 90pc of European sales, showed an apparent loss of $60m, but Starbucks told investors its European business was profit-making...

Starbucks said that although it had paid no corporation tax in three of its “largest and most important markets” last year, it had paid value-added tax, social security costs and business rates...The coffee giant uses a range of measures to mitigate the impact of tax. For example, the European unit is required to pay a royalty rate of 6pc of sales to Starbucks for using its intellectual property. Starbucks, which has a complex financial structure..."

A paragraph back I mooted that IP was valuable stuff compared with the price of producing a CD. Well, yes and no - not if you're the biggest software company in the world.

 Steve Sailer on Microsoft :

"Microsoft has over 40,000 employees in the state of Washington in the United States. But they don't actually physically burn on to disks the software they develop. Instead, Microsoft, has a manufacturing plant in Puerto Rico employing 185 people that gets credited in Microsoft's books with a lion's share of Microsoft's Western hemisphere revenue and profits. It's making disks that's the really important thing that Microsoft does.

Despite all you've heard about Microsoft being a software company, they are actually a manufacturing company, at least for tax accounting purposes. To the IRS, Microsoft is basically a Puerto Rican, Irish and Singaporean industrial goliath with a money-losing R&D outpost in Redmond, WA."

Now call me naive, but I'm not sure how you can reasonably one day discover that all your intellectual property lives in an offshore haven. I thought Bill Gates set up shop in Washington State, and Steve Jobs worked out of a California garage. It's not as if they set up their firms in the Dutch Antilles or Caymans. I may be wrong, but I could have sworn that Facebook guy started at Harvard, not in Northern Cyprus.

Her Majesty's Revenue and Customs take a dim view of this sort of thing when done in the UK. I'm no tax lawyer (alas), but I understand the general rule is that if they consider a business arrangement to have been set up wholly or mainly as a tax avoidance measure, then they can knock it on the head, and Lord help you if you didn't put aside some of that money in case of an HMRC challenge.

Yet these rules don't seem to apply to multinationals. They seem able to extract the urine with impunity.

But wait ! What's this in the Telegraph ?

"New push on foreign firms’ tax"

"Political pressure to change the way foreign firms are taxed in Britain increased this weekend"

Lord Myners, the former City minister, and Margaret Hodge, the chairman of the PAC – which is carrying out its own inquiry into the issue – said the Government should look into a sales tax as a way of raising extra tax revenue from global companies.
Tomorrow the issue will again be in the public spotlight when Starbucks, Google and Amazon all give evidence on the issue to the PAC. The comments come in the wake of a string of disclosures surrounding the small amount of tax paid by large international companies.

The UK business of Starbucks, the coffee chain, reported sales of £398m and paid nothing in tax because it made a £32.9m loss. The online retailer Amazon paid no tax in the UK in 2010 despite generating sales of more than £3.3bn.

Lord Myners told The Sunday Telegraph that the current system for collecting corporation tax from multi-national companies (MNCs) is flawed. “Corporation tax for an MNC operating in the UK is close to being a voluntary payment,” he said. “The problem is that the tax environment many MNCs are interested in is a zero tax environment.”
Two points. First, is that this Margaret Hodge ?

"The Labour MP has been one of the fiercest critics of tax avoidance by companies such as Starbucks, Google and Amazon. However, she is likely to face questions over the limited tax paid by Stemcor, the steel trading company in which she owns shares and which was founded by her father and is run by her brother. Analysis of Stemcor’s latest accounts show that the business paid tax of just £163,000 on revenues of more than £2.1bn in 2011. However. it is not known whether the company – which made profits of £65m – used similar controversial tax avoidance measures criticised in the past by Mrs Hodge. Stemcor’s tax bill to the exchequer equates to just 0.01pc of the revenues it booked through its UK-based business. In accounts filed with Companies House, Stemcor revealed that despite generating about one third of its revenues in Britain, its UK tax contribution made up only 2.7pc of the tax the company paid globally. "

Now before Tim Worstall gets all cross, I know that taxes are levied on profits, not turnover, and that, for example, some capital investment or previous losses can be used to offset tax. But it doesn't look good. Be interesting to know how they do it.

The second point - if it's a sales/revenue tax they're proposing, how do they think they'll be able to impose it on Company A (notionally loss-making but remits vast sums to tax haven IP owner) but not on Company B (profitable although squeezed by Company A, pays its taxes) ?  Remember that Company A can probably hire brighter lawyers than HMRC.

I'd have thought the only long term solution was to stop the IP nonsense in its tracks i.e. for the law to adjust to todays business practices, treating IP more like a physical asset. If Microsoft made car parts at Redmond, then smuggled them out to a low-tax jurisdiction (as it might be Puerto Rico) to sell, senior guys would soon be doing eight-to-twenty-four stretches and everyone else doing the same would clean up their act.

The alternative is public and governmental pressure - a lot of it. Treat Amazon, Starbucks as if they were the late Jimmy Savile or the Medellin Cartel - or alternatively, the way the Obama administration treated BP and is about to treat HSBC and Barclays. Point out the Kobo as the ethical alternative to the Kindle, or that Amazon vouchers should be what South African sherry was in 1968. No cosy relationship with ministers, no invites to even a local Tory wine and cheese, let alone Chequers. Constant public reminders of what they're doing. No need to do a China (vis a vis Japan) and invite people to smash up their branches, just reiterate that they are not good corporate citizens - that, in short, they are Bad People. Most people want to be liked.

I'm not sure either party is capable of doing this, but you never know. Government has a lot of clout - if it wants to use it.

Last - I know it was originally published in 2010, but this was the strip on a colleagues Dilbert calendar on Wednesday.