UK Parliament Lambasts Corporations Over Tax Avoidance: Are Treasurers The New Bankers?
Senior executives from Google, Amazon and Starbucks, including the latter’s chief financial officer (CFO) Troy Alstead, have been lambasted by Members of Parliament (MPs) in the UK over the issue of tax avoidance. The coffee chain attracted widespread derision, in particular, for only reporting a taxable profit once during its very successful 15 years of operation in the UK. The intensity of the Parliamentary grilling, with consumer boycotts against all three firms called for, has not been seen since the height of the banking crisis and subsequent ‘banker bashing’. It raises the prospect of cash-rich treasuries and their cross-border tax practices becoming the next targets of abuse and central to the public debate about the wisdom or otherwise of ‘austerity’ measures, which the UK has pursued in recent years in common with many of its European neighbours.
The corporations’ top managers, including Amazon’s director of public policy, Andrew Cecil and Matt Brittin, who runs Google’s northern European businesses, were aggressively grilled by Parliament’s Public Accounts Committee (PAC) on 12 November. The chair, Margaret Hodge, attracted particular attention, when in response to Brittin’s denial of any wrong-doing she said: “We’re not accusing you of being illegal, we’re accusing you of being immoral.”
Hodge added that she thought it was justifiable for UK consumers to boycott all three companies. “One of our concerns is the ability of global companies to choose where they put their costs,” she said after the hearing. “Their profits give them an unfair tax advantage that damages UK-based businesses.” Renowned British retailer, John Lewis, whose popularity with consumers is due largely to the fact that it operates as a partnership that shares its profits with employees, subsequently waded into the debate. It claimed that the sharp tax practices of multinational corporations (MNCs) could threaten the future health of high street shops in the country.
UK business secretary, Vince Cable, said after the hearing that the government should “beef up” its ability to deal with such tax avoidance and told ‘BBC TV’ that there was “appalling abuse of company taxation in the UK” citing multinationals in particular and internal accounting procedures that cut domestic tax liabilities. The Mayor of London, Boris Johnson, called on Starbucks, Google and Amazon to give jobs to unemployed British youngsters in recompense.
Payroll Taxes No Defence
Starbucks, Google and Amazon all pointed out that they pay hundreds of millions of pounds every year in the UK on their large operations in the country, but this did not abate the fierce attack with it being correctly pointed out by MPs on the PAC that most of this was in payroll tax, not corporation tax.
Amazon generated sales of more than £3.3bn in the UK last year but paid no corporation tax at all on any of the profits, and is presently under investigation by the UK tax authorities for this. Cecil also confirmed to MPs that the MNC had received a EUR200m payment demand from French tax authorities. In addition, Cecil divulged that the Dutch government had granted a special tax deal on Amazon’s European headquarters, which receives royalty payments from its UK business. Amazon’s UK business employs 15,000 people to manage deliveries, warehousing and other aspects of its business, but the UK firm operates as a service provider to the European company, which is ‘brass plated’ in Luxembourg for tax reasons, employing only 500 people.
Similarly, Google also operates its European business out of a favourable tax jurisdiction – the Republic of Ireland in its case – with Brittin, candidly admitting to MPs that this was due to Ireland’s favourable 12.5% corporation tax rate. Google UK only paid £6m to the British Treasury in 2011 on UK turnover of £395m, according to ‘The Daily Telegraph’ newspaper, yet it derives a large percentage of its European business from the UK and employs 700 marketing consultants there, although they do refer clients to an Ireland-based sales team of 3,000 people.
The combative Brittin presented a stern defence of Google’s tax policies, painting them as normal for any MNC. However, under questioning by the MPs on the PAC he did admit that the rights to the company’s non-US intellectual property rights were owned in the tax haven of Bermuda, because “the company has a duty to shareholders to minimise its costs”. He further freely accepted that until recently, the Irish company was paying a fee to a separate Dutch company within Google, purely for the purpose of reducing its taxes.
Starbucks’ Reputation Most Damaged
Starbucks, perhaps the US-based MNC to have come out worst after the MPs committee hearing, has reportedly paid just £8.6m in corporation tax in the UK over the last 14 years, according to a four-month investigation by ‘Reuters’. Damagingly, this includes a report of losses when it was actually profitable and telling investors it was making money. It is this admission that is likely to bring further public anger down upon the coffee chain, with the contrast between its public and its private statements laid bare for all to see. The taxable profits of its UK business are calculated net of a royalty paid to its Netherlands regional headquarters. Placards have already been seen outside many Starbucks shops across the country, while activist group UK Uncut announced a ‘day of action’ on 8 December with plans to use the shops as refuges for women and children’s crèches. The argument being that all these services face cuts due to the non-payment of tax.
The dichotomy between the corporation’s public and investor statements was exacerbated by Starbucks CFO, Troy Alstead, telling the committee: “We’re not at all pleased about our financial performance here [in the UK]. The most competitive coffee and espresso market we face is here in the UK.”
This prompted the PAC chair Hodge to question why the company continued to do business in the UK at all, if it was making such constant losses and it was such a difficult market to succeed in? A pertinent question that captured the public’s imagination considering the firm’s outlets can now be seen all across the country.
The genuine public anger about MNC tax avoidance, channelled and strengthened by the PAC in the UK, is easy to dismiss as inevitable in an austerity world where governments are forced to cut public spending and raise taxes to alleviate high sovereign debt levels, However, to adopt such a ‘wait and let it blow over’ position would be a mistake for the offending companies. It is a stance that many banks adopted after the great 2008 crash when taxpayer bailouts saved many financial institutions from going bankrupt. The banks’ response was to claim that the rescues were necessary and that they were only maximising returns within the laws of the lands where they operated, and that they should be allowed to get on with their business as usual.
All this is perfectly true of course – in the main, no laws were broken, barring a few obvious exceptions where large compensation claims have been paid. Collateralised debt obligations (CDOs), mortgage backed securities and lending and securitisation practices of all stripes were all supposedly legal, but as Hodge noted that does not make them moral. Confidentiality clauses surrounding some of the post-crash compensation clauses also open up the debate about legality.
The thing to remember is that the basis of all business since time immemorial is trust. Trust that goods will be delivered, money paid will clear, the counterparty will live up to its word and so forth, and while hedges are taken out against all these things defaulting by treasurers around the world, the public still believes in such fundamentals. If public anger is sustained for long enough it will have business consequences. Just look at the raft of new regulations and increased capital adequacy requirements, such as Basel III and Solvency II, facing financial institutions post-crash – this has been driven by public anger, feeding into political action. New MNC tax rules and a greater focus on public ‘naming and shaming’ may result if MNC treasuries continue to push the tax laws to their limit.
Corporates Fight Back
The counter argument of course is that MNCs provide jobs, money and investment, and that if the UK wants to attract MNCs to base themselves in the country it should reduce its corporate tax rate further.
The tax affairs of mobile internet trading companies – and franchisee operations such as Starbucks UK – are also notoriously difficult to tax due to a lack of international cooperation and rules covering tax havens and agreed standards. If governments truly want to do something therefore, rather than just grandstand to the gallery, then obtaining global standards in this field would be a good place to start. Until then blaming corporations, and their CFOs and treasurers, for maximising profits as is their duty seems like a pointless activity. International co-operation is required if the practice is ever to stop and that takes a lot of hard work and global negotiation to establish an agreed global standard that everyone can follow.