Google and Starbucks behave lawfully – tax transparency will achieve nothing

Beware the word "dodgers".

On today’s Daily Politics, Kiz Kendall offered her two cents on how to tackle tax avoidance by large multinationals. Her answer was the same stock answer that has been offered countless times before: “transparency”.

Transparency works as a means of forcing compliance with the rules – where a shroud of secrecy facilitates non-compliance with the rules. However, transparency won’t change anything where companies are behaving lawfully. The problem is the rules themselves, not lack of adherence to them.
Transparency and information sharing have been the primary focus of efforts to address the problem of tax avoidance for over five years. In particular, tax transparency has been the focus of agreements of both the G8 and G20 leaders, as well as between countries like the UK and its overseas territories.Despite such agreements, however, little appears to change.

Domestically, the accountants and tax advisors responsible for coming up with perfectly lawful tax avoidance schemes have been required to tell the revenue how they do it since the Finance Act 2004, under penalty of criminal conviction. This, it’s hoped, allows the treasury to shut down such schemes in the subsequent budget. However, such advisors have proved quite adept at coming up with new schemes faster than the revenue can shut them down.

The reality is that shedding light on companies’ tax arrangements will usually reveal that all is perfectly legal and above board. While it is the case that they may be forced to do in public what they formerly did in private, when it comes to a choice between pleasing tax campaigners and substantially lowering their tax bills, multinational corporations are going to elect to continue to do what they have been doing all along. Despite all of the adverse publicity that Starbucks suffered as a consequence of its tax affairs, its global profits grew by 22% in 2014-15. Clearly the benefits of their existing tax structures far outstrip any potential losses resulting from adverse publicity. Starbucks cafes continue to be stuffed with bearded, skinny jeans-wearing Guardianistas.

If you want to force Google and Starbucks to pay more tax in the UK then we need to change the substantive rules contained within Double Taxation Conventions. Tax transparency will achieve nothing.

Can we please drop the patriotic crap?

pss377337Recourse to patriotism betrays a poverty of ideas. Like the old Yes, Prime Minister scene where Hacker has nothing to say to the party conference so has to resort to “Britain’s place in the world”, “standing up for Britain” waving the flag, etc. It’s no surprise then that as the British left finds itself at its intellectual nadir so many see Labour’s lack of patriotism as the cause of much of its woe. What is somewhat surprising is that clever people like Tristram Hunt are amongst those advocating it.

Labour, nor indeed anyone on the left, can ever win a patriot game. That’s not to say that left wing people aren’t, or shouldn’t be, proud of their national identity (after I write this I’m going out to buy haggis for the Burns Supper I throw every year in Dublin). But patriotism is not a quality that wins the left any elections, nor is it a quality that the left should find remotely attractive in its leaders.

In Scotland, Jim Murphy believed that it was necessary for Scottish Labour to wrap itself in tartan in order to win back voters from the SNP – as though voters whose politics were defined by their Scottishness would ever look anywhere other than the nationalists. We all know how well that worked.

Does anyone seriously think that voters who make their choice on the basis of how patriotic they are will ever look to Labour? Beyond the cynicism of the fact that appeals to patriotism won’t win Labour any votes, there is a more fundamental point. The left should be fundamentally opposed to patriotism as a political virtue.

For individuals, patriotism is a good thing, or at the very least not a bad thing. There’s nothing wrong with a belief that the community to which a person belongs is something to be proud of. Emily Thornberry’s sneer at a house with a Flag of St George hanging from it was, arguably rightly, portrayed as the view of a condescending London liberal. There was certainly nothing wrong with that household’s patriotism. We should be respectful of people’s pride in their identity, whatever that may be.

However, at a political level, there is something that sits extremely uncomfortably with this lefty in the view that there’s something intrinsic in Scots or Britons that makes us “special”. How on earth does patriotism as a political position square with the belief that we’re all born fundamentally equal?

For all his failings, I don’t recall Tony Blair doing too much patriotic flag waving, while John Major was romanticising a Britain of “long shadows on cricket grounds, warm beer, invincible green suburbs, dog lovers and pools fillers.” We all know how well that went for John Major, too.

In Scotland, where nationalism is undoubtedly rampant, the left should be asking nationalists how on earth do we redistribute wealth from the world’s richest to the world’s poorest by erecting political barriers between them? For the left in the rest of the UK we should tell the political patriots to hang flags from their houses – then get on with something more important.

Five flaws with ‘The Town That Took On The Taxman’

the-town-that-took_3554717bHaving 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.

  1. 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.
  2. 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!
  3. 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.
  4. 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).
  5. 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.