Having devoted most of the past nine years to researching the taxation of multi-national enterprises (MNEs), I naturally tuned into last night’s BBC programme ‘The Town That Took On The Taxman’ with some considerable interest. While it was a great pleasure to see the lovely and talented Jolyon Maugham QC on the television, on the whole the programme displayed all of the typical fallacies and hysteria that surrounds the oft-debated but seldom-understood taxation of MNEs.
I feel I should preface my remarks with a reminder that, contrary to what some might think, my pointing out the flaws in purportedly left-wing rhetoric doesn’t automatically make me a raging neo-con (I’m most definitely not). There are serious flaws in the way we tax MNEs. However, such flaws will never be addressed by making flawed arguments or fixating upon the irrelevant or fallacious.
- At the outset, the programme did what so many who have jumped on the “tax dodge” bandwagon do which is to present sales figures as though they are profits. The example cited was Amazon (lifted almost word-for-word from the Guardian, which isn’t exactly a saint when it comes to taxes either) who obviously has massive UK sales. But sales do not necessarily equate to profits. Amazon has never paid a dividend in the history of the company’s existence. Amazon sells itself to investors as expansion stock, and anyone with even the slightest knowledge of business can tell you that companies that are in expansion mode do not make any serious profit.
- Much was made of “deals” that were made between large companies and HMRC. Such complaints are predicated upon a belief that HMRC’s calculation of someone’s tax liability is irrefutably correct – which is nonsense. It is analogous to the police deciding not only whether or not someone is guilty, but also handing down sentence. HMRC has every bit as much interest in maximising a taxpayer’s liability as the taxpayer has in minimising it. The reality is that, for a small business, the calculation of profit and loss is a relatively straightforward exercise – with little scope for disagreement (although as the son of a small business owner, I can attest that that doesn’t stop the more pernicious revenue inspectors from having a go). For a large multinational enterprise however, the calculation of profits is a huge exercise involving sometimes hundreds of highly trained accountants. The scope for divergence is massive, which is why it is necessary for HMRC and large MNEs to negotiate to reach a common position. If HMRC were to litigate every time a taxpayer produced an estimate that differed from their own calculations, the courts in most instances would probably arrive at a result not entirely dissimilar to the outcome of a negotiated settlement and hundreds of thousands of pounds would have been wasted on lawyers. As a tax lawyer myself I say trebles all round!
- The scheme which the town (entirely unprompted by TV producers, I’m sure) came up with was designed to copy one of the most common means of diverting profits offshore, which is to hold beneficial ownership of intellectual property (logos, branding, patents, inventions, trade secrets, know-how, etc.) in a low-tax jurisdiction and license it to where you trade. Conceptual questions do exist about the nature of intellectual property and its location, and I do not think the way we locate intellectual property at the moment is conceptually sound. However, you can’t just create some intellectual property and then just say that it’s valuable. In 2012 HMRC forced Starbucks to substantially reduce the value it attributed to its brand identity. But the reason it nonetheless works reasonably well for large MNEs is because their intellectual property is valuable. Usually, IP is amongst the most valuable assets in large MNEs (if the way to persuade people that beans and hot water are worth paying four quid for isn’t valuable, I don’t know what is). If you have any doubts as to how valuable the brand is, imagine you’re a franchisee opening a coffee shop, and the difference between opening up under your own brand and opening up under Starbucks’ name. If the history of coffee shops in my hometown is anything to go by, the Starbucks brand clearly adds huge value. Crickhowell may well locate their recently invented brand in the Netherlands, but it’s worthless – so won’t be any use in reducing their profits.
- The business owners of Crickhowell appeared to salivate over the prospect of money looping around between the Netherlands and the Isle of Man in a seemingly endless tax-free cycle. However, they didn’t give even the slightest consideration as to what would happen if they, the owners, ever wanted to spend the money. If the business owners wanted to use the money from that cycle to buy themselves a new house or a Porsche or a boat, they have two options: either pay themselves a salary from the company, on which they will pay UK income tax; or else pay themselves a dividend, which will also be subject to UK income tax, albeit at a somewhat reduced rate (one of the gravest but seldom discussed inequities in the UK tax system).
- Finally, on a point of optics, if you’re going tax dodge, you don’t tell people you’re tax dodging. How can a town claim to be a ‘Fair Tax Town’ when they’re systematically engaging in tax avoidance? Surely, given that (save for a Boots) it’s a town composed entirely of small businesses, they were a ‘Fair Tax Town’ before they started tax dodging.