Sunday, 9 December 2012

This Starbucks thing

This is winding me up now. I am relieved to see a few people who are seeing my point but lots of people that do not. I am seeing lots of emotive arguments which, when looked at in detail, fall apart.

Companies are meant to be selfish - do not be surprised when they do what they should do!
If you don't like what the law allows, get the law changed!

The latest was that starbucks are "robbing the UK taxpayer". Well, it is not robbing if you just pay less! To rob someone you have to take. The word "steal" was used as well, which is equally wrong. Also, both robbing and stealing imply illegality, not simply something people find morally wrong somehow. If the moral wrong is simply reducing the tax paid then anyone making use of an ISA is "robbing the UK taxpayer", and even McVitie's are because they argued the VAT decision on jaffa cakes, and had they not then more tax would get to the UK tax system. They are daft examples, but if reducing the tax you pay (by legal, common and expected means) is morally wrong, then all of those things fall in to the same category.

As I raised here in another blog - some times it is hard to step back and work out why something is right or wrong. I agree, it somehow seems wrong that starbucks have paid no corporation tax in the UK. As a simple and shallow consideration of that fact it feels wrong. But can you articulate a "principle" here - can any of the protestors pin down why it is wrong, and what aspect of what they did is wrong exactly. Every attempt I see has wider reach and covers things that people do themselves and don't think wrong. The issue seems to be "big bad corporation stealing from us" and that is hard to pin down.

People really have to understand (and should already understand) that companies are selfish. The whole idea of a company is to do what is best for its members (shareholders). That means the company is selfish. It has to be. It does have to act within the law, and what is "best" can be swayed by what is needed to ensure customers buy products, which could mean not using pesticides on crops, or not charging too much, or ensuring high quality in a product, even though those things cost. But when it comes to financial practices that are legal ways to reduce tax bills, it seems obvious that any company should (and arguably, is legally required to) use whatever means it can to do that.

Lots of companies of all sizes do a variety of things that help reduce taxes. Some are "clever" and involve things that are not obviously legal.  SOme things lead to changes in the law to stop them, but until the law charges are quite legal and valid. For some reason starbucks have been attacked for doing this while loads of other companies have not been. Their old mistake is being "found out" and somehow failing to explain how "normal" this is.

It is also worth remembering that a multi national company will pay a lot of in-country taxes by lots of means, whether rates, VAT, fuel duty, employer NI, or whatever. In my businesses these are way more than corporation tax. The fact they can move some part of that taxation, the corporation tax, to the country with the best rates, is an obvious move and not a surprise. At the end of the day, if we had lower corp tax in the UK we would get that in the UK (depriving some other countries of tax?). Bear in mind the dividends are then going to be taxed personally by the shareholders, and that will happen in whatever country they are based, even if the profits are made from sales in another country and even if the corp tax is paid there too. So even if they picked UK for all their corp tax, there would be plenty of tax that the UK loses out on compared to a purely UK company operating in the UK with UK shareholders.

So, I am puzzled at the reaction of so many on this. I wonder if starbucks were to give the organisers some shares, what would happen then?

In my company, as it happens, having spent well over half a million on R&D and probably a hell of a lot more, we are finally trying to reclaim some R&D tax relief. Sadly it is only two years we can claim (we have been doing R&D for 15 years), and not even the full rate for those years. It will be handy though, and help justify more R&D in future. But this is something that many companies do not claim (through ignorance and bad advice, as we had). Doing it "robs the UK taxpayer" as it reduces our tax. It is valid, legal, and even encouraged, but will we have people campaigning against A&A because of that? A&A are a bit unusual as acting in best interests of shareholders is a lot easier when there are only two of us. It allows me as director to do things on principle (like joining ORG, and fighting new snooping laws and so on) because they are in my interests. But even so, if we can do legal things to reduce our tax bill, of course we will. If we did not we would have to charge customers more money for the services.

Maybe more people need to have a few shares. Indirectly many do via their pension schemes and savings. Yet somehow people forget that they are themselves the "fat cat shareholders" when getting annoyed at big nasty corporations.

Another way of looking at this is that there are local taxes (VAT, rates, emp NI, fuel tax, etc) which even starbucks pay in the UK. There are some taxes which end up at the other end - e.g. where the shareholders spend their money and pay VAT. Somewhere between the two there is a line. Some things are in the country that the earnings are logically made. Some are where the company and shareholders are and decide. That line is drawn in law. It allows corp tax and shareholders personal tax and so on, to move away from the original earnings. If the line is in the wrong place then the law needs changing, so target anger at the law, not starbucks!

More: Somehow this is still not getting through to some people.

OK, imagine you are MD of starbucks. Your CFO comes in and says "we have a choice". He says you can choose in which country to declare profits. He explains that doing so is completely normal established practice, common in multinational companies, and completely legal. Picking country A rather than country B will mean lowest tax paid and hence highest dividend for shareholders.

Which do you pick any why?

Remembering your legal obligation to act in best interests of shareholders and that noy doing so could lead to you committing a criminal offence and being locked up...

16 comments:

  1. Mcvities do not have to levy VAT on Jaffa cakes because they are cakes, and cakes are zero rated. So are biscuits, unless they are chocolate covered ones and then the full 20% is levied.

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    1. Correct, but all I am saying is that this was McVitie's choice. HMRC decided they were something that should have VAT and McVitie's decided to argue and it went to court. They could have just accepted HMRCs claim that they counted as biscuits and had VAT apply. Their choice caused less VAT to go to HMRC. That was a choice they made that "robber the UK tax payer". It was, of course, a sensible and legal choice that they made, just as starbucks are doing, but the end result was that it reduced money going to HMRC. I use it as an example because the claim being made was, it seems, that choosing actions that reduce money going to HMRC is "robbing the UK tax payer", and jaffa cakes are an example of such a choice.

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  2. I think Starbucks have been picked because they are easy to boycott by going to the Costa Coffee nextdoor. Other companies that have also been mentioned are less so. Google for instance is a hard one to leave; where are you going to go? Bing? I saw recently that Microsoft choose to pay their corporation tax in Luxembourg.

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  3. You miss that Starbucks have been dishonest on one count, and outright evading on another.

    They are being outright dishonest in claiming they have never made a profit in the UK. 735 branches and they've not made a penny? It's a lie; the company as a whole would be much poorer without the UK and they tell their investors how well the UK is doing. So what they're actually doing is _disguising_ the profits they make from the UK.

    Where they're evading (as Mark on uknot pointed out) is that the UK is paying for intra-group loans and invoices at well above "arms length" prices, and (likely) illegally writing down their profit - see http://www.reuters.com/article/2012/10/15/us-britain-starbucks-tax-idUSBRE89E0EX20121015 for more details on this.

    You shore up the faulty argument that of course multinationals have to pay VAT (*cough*, their customers do), payroll taxes and so on, and we're lucky to have them here avoiding all our other taxes. I don't agree with that - if they weren't here, local competitors like Costa would step in and give us the same products while paying the right amount of tax.

    I've never heard of any case anywhere in the world where shareholders of a successful got their directors jailed for not paying the bare minimum in taxes - I don't know how that argument keeps popping up from either.

    What most people think of as "robbing the UK taxpayer" isn't taking advantage of ISAs, allowances and straightfoward tax incentives that HMRC make available, and document well. It's rewriting something ordinary on a balance sheet as something that it isn't, where the "Ramsay Principle" is a useful smell test (http://en.wikipedia.org/wiki/The_Ramsay_Principle), and something that most people understand instinctively.

    These kinds of avoidance schemes are impossible to police internationally because of countries that compete on both corporate secrecy and low tax rates - e.g. the Netherlands, Ireland, Switzerland and various UK havens with special arrangements. The only way the UK can work around that is to insist on multinationals submitting country-by-country reporting for every jurisdiction in which they trade, otherwise multinationals can continue to hide their real profits.

    Well done on starting to claim R&D credits, we only did that recently too after a tip from an friend at Deloitte.

    If you really don't see any difference between that and elaborate profit rewrite schemes, please do check out root2tax.com who presented to me a few months ago, and whose scheme I wrote up in as much detail as I could understand at http://matthewblo.ch/462/how-to-cheat-at-tax/ You'll be able to siphon profits out of AA much more efficiently that way, and their service looked very slick, very hands-off.

    I think there's probably reasons you wouldn't want to use their service, and I'd be interested in knowing what those would be.

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    1. If they are legally allowed to move the profit that means they are declaring zero profit in the UK. That is not a lie, it is a choice as to where they declare the profit, which is a choice lots of multinationals make. They made profit from the UK sales, obviously, as a multinational, but moved where it was made by legal means.

      Also, the idea consumers pay the VAT is just wrong. Tax at the point of sale does not work like that. If you add a tax then the price will find a new market rate which is possibly higher than without the tax but not simply the previous price plus the tax. Jaffa cakes are a good example as their price competes with chocolate covered biscuits - if VAT was added that would almost all fall on McVitie's not the customer as the price could not easily go up a lot. Prices are not set based on "cost", they are set based on market value and utility functions and so on. So a tax on the point of sale, like VAT, is a tax that hits the customer and the supplier in various degrees. However, regardless of who pays the VAT, the VAT does got to HMRC. After all the coffee buying customer pays for the profits and pays for the corp tax as well, it is money they pay that ends up in tax, so saying VAT is paid by the consumer is missing the point, sorry.

      It is a fact directors have to act in the best interests of shareholders - it is almost unheard of for them to be done for not doing so, and typically a director would have to resign rather than criminal case. It is hard to prove that a director is not acting in best interests of shareholders in most cases. The main reason they do not get done is that they do in fact do their job and act in the best interests of shareholders, often being a shareholder themselves. My point is that the law is such that we expect and require companies to be selfish so should not be surprised when they are not.

      It is not that I don't see the difference, it is that I am trying to distil a clear principle. If taking an action that reduces tax going to HMRC is immoral, then so is using an ISA. So clearly the principle is not simply "taking an action that reduces tax going to HRMC". So what is the actual principle that is immoral here? Personally I think the issue here is "someone else is managing to save on their tax and I am not, whaaaaaaa whaaaaaa!" but I may be wrong - there may be a clearer principle here.

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    2. I don't think most people in this country even think about a tax bill, let alone envy Starbucks over theirs.

      But they might have benefits that are being slashed, and reasonably feel aggrieved at HMRC's soft touch compared to ATOS' brutal benefit assessments.

      The principle is that Starbucks are making profit from the UK market, yet not paying tax here. The legal means by which they shift that profit is widely seen as immoral, because it's only available to the very largest companies, and even then not all of them choose to do it (e.g. Costa). Starbucks's scheme is also, as I said, likely _not_ legal due to the high prices charged for intra-company transfers.

      You might want to check out e.g. http://www.taxresearch.org.uk/Blog/2010/07/07/tax-avoidance-evasion-compliance-and-planning/ to see why using an ISA is different from unrealistic transfer pricing.

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  4. Large corporations have powerful lobbies that influence laws, including tax laws. Tax laws are too numerous and too convoluted precisely because vested interested have influenced them in this way, because it makes them ripe for loop-holes. Of course it's wrong that politicians are influence by powerful lobbies, but that is a fact of our political system, and in fact politicians are much less powerful than most people realise.

    Just because the law says it's ok doesn't mean it's morally ok. After all, it's not cool for somebody to cheat on his girlfriend, even though he's not breaking the law.

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  5. I thought that the issue was that they lied about how much profit was made in the UK and artificially inflated prices to ensure that they paid no UK profit.

    That would be bad and, quite rightly, the UK populace should burn them at the stake. (whilst sipping their coffee no doubt...)

    If they make no profit in the UK then their duty to their shareholders would be to pull out would it not?

    2c

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    1. It is not really lying - it is moving the profit to another country. They are making profit "from" the UK, but that profit is in another country as the corp tax there is lower. Someone said Microsoft pay tax in some obscure country - can we boycott all Windows machines please?

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  6. Good for Starbucks - Still getting many UK and non UK citizens buying their coffee - Seems protesting is fine so long as no one is thirsty. Agree totally with your blog post Rev.

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  7. I can see how it's in the best interests of the parent Starbucks corporation, but I have to wonder if the directors of the *UK* arm of Starbucks are really fulfilling their obligations. As I understand it, Starbucks UK are overpaying for services from other Starbucks owned companies (eg paying above market rates for their coffee beans, above market rate loans etc) which serves to make the UK company have a loss, and the parts of the business in low tax countries make the profit. Overall good for Starbucks. However, it's clearly a bum deal for Starbucks UK, who could be making a profit if they didn't have these above-market-rate deals. Shouldn't the directors be thinking in the best interests of the *UK* company and be sourcing things at market rates? (And hence making a profit here, on which they'd pay tax).

    Or is there some get-out in UK company law that lets the directors of a UK company be allowed to deliberately do things that are bad for their company, just because they happen to be good for one of their overseas shareholders?

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    1. I have not looked at the structure, but if the UK company is owned by the parent company, i.e. they are the shareholders, then that is who the directors have to consider. There is no requirement to act in the best interests of the UK tax system or the UK as a whole, but in the company members (i.e. the shareholders).

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    2. The UK company presumably publishes accounts as required by law.

      The UK company's accounts are presumably audited as required by law.

      Ditto the parent company.

      Howcome the auditors are happy (or even allowed) to sign off on accounts where the relationship between reality and the numbers in the accounts is somewhat farfetched (to put it politely)?

      Don't problems like this (and quite a few others) go away if audited accounts actually mean something?

      Looking at the slightly bigger picture, isn't it incumbent on a company's directors to see that if they upset their potential customers sufficiently, they will go out of business?

      Tax dodging does upset customers, and should therefore be factored into the directors actions, along with the other usual factors.

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    3. Well, yes and no. As I understand it the accounts declare no UK profit as the parent company charged it a lot of money leaving no profit. That is fact, albeit contrived to ensure profits go where they want them to. There is no set rule on what consultancy and name rights and so on cost or their market value or that companies have to pay market value for stuff anyway. So the audit will be perfectly fine.

      The upsetting customers one is a good point - and it is odd how lots of other high street names manage to do the same without customers campaigning outside their store. Now we have the disproportionate reaction to starbucks, they will have to do this differently I expect. Odd they are being picked on, and not the laws that allow then to do things they way they are.

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  8. RevK says: "There is no set rule on what consultancy and name rights and so on cost or their market value or that companies have to pay market value for stuff anyway. So the audit will be perfectly fine."

    An expert on US business rules says: "As a U.S. based publicly traded corporation, Starbucks is obliged to follow U.S. securities law and Generally Accepted Accounting Principles (GAAP) when speaking with our shareholders. U.S. accounting rules stipulate that our taxable income in regional markets, such as the UK, be calculated before accounting for the impact of intercompany license and interest payments." [1]

    So musrepresenting the intercompany licences and interest payments and such can't legally be used to hide the profits.

    And Starbucks themselves have said they will not in future claim tax deductions "for royalties or payments related to our intercompany charges."

    UK-only businesses don't have the opportunity to play this silly arbitrage game. Do you think multinationals like BT also play this game? Would smaller businesses prefer to be playing on a slightly fairer (and certainly simpler) playing field?

    [1] http://starbucks.co.uk/blog/setting-the-record-straight-on-starbucks-uk-taxes-and-profitability/1241

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    1. Interesting - bizzare if the UK company is not breaking the law doing this but the US company is breaking US law!
      if they are breaking laws, that changes the whole argument, of course.

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