Monday, 10 December 2012

Doing the right thing

As it says here - I like to try and do the right thing.

This starbucks things has led to a lot of debate. I am confident that if what they are doing is legal, then they are doing what is expected. I feel the reaction to this is all wrong. We don't see people campaigning outside the other high street shops that do the same. Lots of companies do what starbucks do, and they do it because they are quite rightly trying to maximise profit for their shareholders.

So I was trying to work out what is in fact wrong here (morally, as it seems that this is legal). After much debate it seems that people feel it is wrong that money earned in the UK results in tax paid to another country.

I agree that this seems wrong. But what do you do about it? The issue is with the government, and not starbucks. Should the government do something?

My first issue is understanding why it is wrong and how far that principle goes. After all, tax is paid at many many levels. From the very front end like VAT on sales (which goes to the UK); direct costs like employers NI; more indirect things like fuel duty on delivery trucks fuelled in the UK; and finally corporation tax, which multinationals can move. But there is more. Ultimately those shareholders have personal tax on dividends and then get taxed when they spend their money with things like VAT and fuel duty and stamp duty, and the whole things goes full circle.

Even forgetting the tax, where does the money go? Imagine I ran a small business selling coffee in Bracknell, but as shareholder I lived in Slough, and that is where I spend my money. That would mean hard earning people in Bracknell paying for my coffee see profits diverted to benefit all those shopkeepers in Slough. That can't be right? Or is it fair to say "it is my money, I can spend it where I like". Can a corporation say the same?

Anyway, so what should the government do? I am not a politician or macro economist, but I can see two obvious fixes...

(a) They can make laws meaning that corporations are less able to move profits out of the UK (and presumably to move profits in to the UK either). Outcome - UK becomes a worse place to do business, and less multinationals operate here meaning less tax. Remember, a lot of the tax starbucks pay does go to the UK.

(b) They could reduce corporation tax making UK more appealing so companies start moving profits to the UK. Would that work? Of course, sadly, UK companies with UK shareholders end up paying just as much tax as it is all down to personal tax on the shareholders dividends. But the UK would get tax from other countries. Of course, if this whole thing is morally wrong, it is just as morally wrong when we (the UK) are the benefactor, surely? Or would the campaigners morals suddenly change then?

I suspect the answer is much more subtle, and one has to understand international economics to work it out.

Ultimately, we live in a global economy and governments have to operates a competitive set of laws and tax regimes that encourage businesses to trade in their country. Starbucks paying tax elsewhere is not really "wrong", it is more of a "lost sale" for the UK. So maybe we just need to make the UK more attractive, and be more competitive.


  1. 100% bang on. There working within the tax legislation if the legislation is wrong it is not their fault !!

  2. It's not that they were using a loophole in the law, or exploiting a grey area in the tax code - they were using their non-UK subsidiaries to generate invoices from outside the UK, which conveniently added up to the same amount as their UK profits - such as bills for royalties for the Starbucks logo, or purchases of coffee beans at greatly inflated prices. In doing so, they were able to show their UK operations as making massive losses (and being able to avoid paying corporation tax) while at the same time actually being hugely profitable.

    They absolutely instituted a program in order to avoid paying their UK tax obligation, but obviously it's not possible to make the way they went about it illegal - it would mean shutting down any business that deals with companies outside of the UK.

    Lowering the tax wouldn't be enough, as as long as there exists a rule that lets large companies pay no tax - they'll do everything they can to abuse it.

    The only real way this could be fixed would be to eliminate the law that allows failing companies to avoid corporation tax; and that's going to hurt a lot of people.

  3. Most of the stuff Starbucks have done is okay and just what other multinationals do on a regular basis. The only thing that really winds me up is their buying coffee beans for delivery into the UK via their Swiss company then invoicing the UK operation at a markup and then paying (lower) Swiss corporation tax on those profits (having various expenses deducted first).

    If you really analyse it then there are several ways you could make multinationals "pay their fair share" or level the playing field:

    - global taxation and redistribution scheme on their global profits but the country that currently benefits would object
    - forget about corporation tax as it stands and replace it with a General Sales Tax i.e. you sell £1 million worth of stuff you pay £50,000 in tax
    - move away from the idea of direct taxation on companies for their profits but instead increase capital gains tax (or merge it with a more generalised 'all income' tax)
    - Forget about all other taxes and move to a Georgism based system with LVT and other resource based taxes

    No matter what happens the nett effect would be an increase in prices for the end consumer if the the corporations charges increase but there are potential ways for the redistribution of tax into ways that are "farer"

  4. There's a difference between leaving a window unlocked, and having someone come through it and take your stuff.

    Should the Government bring in long overdue legislative change (lock the window) sure.

    But ultimately, it was still wrong for soemone to come through it and take our stuff (tax revenues).

    1. Not a good analogy - both are stealing, window open or not, and so illegal.
      Tax law that allows international companies to decide in what country to declare profits is legal.
      If we need to change the law, then fine, but the issue, if there is one, is with the law, not the actions of the company which is doing what is expected of companies and done by many many companies.