Tax Break

John Fisher, international tax consultant

Archive for the tag “Britain”

Starbucks gets roasted

This is what the women remember

It is a tribute to the emotional power of poetry that, when I think of “Four Weddings and a Funeral”, I remember the single funeral rather than the multiple weddings. “He was my North, my South, my East and West” – Matthew’s rendition of  WH Auden’s Funeral Blues as he eulogized Gareth,  lent  pathos to one of the most memorable scenes of British cinema.

Dame Judi Dench, doyenne of the British stage, was somewhat less convincing quoting Tennyson towards the end of her inquisition at the hands of a Parliamentary Committee in the latest James Bond movie: “That which we are, we are”. But then, in fairness, Bond movies are never really remembered for their dialogue (this one even has the barmaid, at the start of a shot, shaking the vodka martini so Bond doesn’t  have to state the obvious). With names like M, Q and 007, far from poetic, the whole experience is not even prosaic  but, rather, algebraic.

On November 12th one of those Parliamentary Committees was in action again (this time for real) and its three hour session did not fall short of Skyfall for entertainment value (and, make no mistake, I loved Skyfall).

The Public Accounts Committee invited representatives of Starbucks, Amazon and Google to assist them in their understanding of the tax paid by multinationals in Britain – or, to be more precise, the lack of it.

“Don’t worry. I never used to pay any tax and the British forgave me”

Amazon and Google were, sensibly, represented by senior Brits who could, at least, bridge the culture gap. Starbucks, evidently thinking that an invitation to appear before the legislature meant tea and cucumber sandwiches with the Queen, sent their global CFO. Poor guy.

The meeting, expertly chaired by Lady Margaret Hodge, an MP  in her late sixties who (WARNING: SPOILER ALERT) would have been a far better replacement for M than Lord Voldemort, started with the usual British niceties – smilingly apologising for the poor layout of the room and thanking the three gentlemen for agreeing to come. As I watched the parliamentary broadcast and the three stooges sitting side by side, all I could think of was the upward crawl at the start of a roller-coaster ride with one kid in the cart who has never done this before. You want to warn him of what is coming next but you are so scared yourself that you can’t.

In age-old British tradition, Lady Hodge “suggested” that they start with specific questions to each company and then move to general issues; a bit like “suggesting” to the condemned man that they start the hanging.  And – surprise, surprise – she started with the American. Needless to say, it was all downhill and hairpin bends from there.

Hapless Mr Bean was not going to have a chance justifying losses in 14 out of the last 15 years when, a year after they made their only profit (2006) of £6 million on a £4 billion turnover, the UK CEO was promoted to a senior role in the US HQ due to his great performance. “We are not accusing you of being illegal, we are accusing you of being immoral.”  ” You are either running the business very badly or there is some sort of fiddle going on”.  Apart from trying to invoke the lunacy of accounting differences between the US and Britain, about the best the CFO could come up with was “profitability challenges” which is a beautiful term right up there with “transparent wall technician” as a euphemism for  window cleaner.

Google and Amazon, protected to varying degrees by the – impossible to fathom – internet aspects of their business and the fact that they were British and therefore knew how to handle sarcasm, fared somewhat better. However, when the Google CEO asked Lady Hodge to clarify that a series of quotes of senior politicians expressing disgust at the lack of tax paid were not aimed specifically at those around the table, she replied that, no, they were indeed aimed directly at them.

Meanwhile, a widespread populist movement to boycott Starbucks has got underway with some branches requiring police protection. An article in the Guardian, a centre-left quality newspaper, by the improbably named Jemima Kiss put it all down to a “practice known as Transfer Pricing” which sounds like some shady underworld trick. Are Transfer Pricing practitioners now to be sought out and lynched from the nearest palm tree?

The whole thing is a load of populist codswallop. Trying to pin legal and transparent transfer pricing practices (and in that, Ms Kiss was spot-on with  the root of the problem) on the question of morality defies belief. It is not that morality has no place in the tax world – it can be strongly argued that the technically legitimate planning of individuals and companies to avoid tax in their countries of residence, where they and their fellow residents and citizens benefit from public expenditure, has elements of  morality and conscience. But when it comes to international taxation, it simply has to be down to the legislatures of individual countries and international organizations like the OECD and UN to establish tax rules that ensure fairness as defined by them.

How is the Tax Director of a multinational supposed to decide his or her transfer pricing policy on the basis of morality? After completing an analysis of assets, functions and risks, even if he would send each Transfer Pricing Study to the local Priest, Rabbi, Imam or Witch Doctor for a blessing – who says that the moral authorities of the other countries affected would not take a different view. And what about wonky-minded States who could play their Joker and roll out Nietzsche’s Übermensch to justify steamrolling the rest?

In 2010 the OECD announced the commencement of a project on the transfer pricing aspects of intangibles. A scoping paper was published on the OECD website for public comment. In the interim, three public consultations have been held with interested parties. The writing on the wall suggests that R&D cost-plus operations in the future will require a much higher “plus” justifying the enormous human input and, also, that the parking of IP on desert islands will only be acceptable if a significant number of the IP company’s employees on said island are first sent to Harvard or Oxford to study for an MBA or PhD. Furthermore, individual countries need to ramp up their CFC legislation to make sure they are catching the right foreign income even when, as is the the case with the vast majority of OECD countries,  they have adopted a system of territorial taxation.

Pure Poetry

Poetry may not be Skyfall’s strongpoint but there is one scene that, for people of a particular generation (mine),  had all the immediate emotional force of a great poem (WARNING: SPOILER ALERT). Fleeing certain death with the aged M, Bond swaps her state-of-the-art Jaguar for the legendary Aston Martin DB5 used in Goldfinger almost 50 years ago. As aerial shots showed the car wending its way along country roads to the Bond ancestral home, for a brief moment sitting in the darkened cinema I found myself  watching the movie through the eyes of a youth (me)  dreaming of an exotic Bond-like future. The rest (of course) is boring beancounting history. But I wonder what my two teenage sons  sitting next to me were thinking?

God save the queen from taxes!

She is the one in the top right-hand corner

The Queen (there is only one “Queen”) was often lampooned in the  1980s TV series “Spitting Image” . It starred a bunch of incredibly elastic, outrageously exaggerated latex puppets. My favourite sketch had the Queen at her desk, surrounded by her totally dysfunctional latex family, writing Christmas cards to foreign countries. Completing the last card  she announced “Right, I’ll just put the stamps on” and proceeded to turn her latex head sideways and thwack it down onto a giant inkpad on the desk followed by a further wallop of the head onto an envelope, producing a passable impression of her profile.

Truth be told, there is nothing strange about this. The Royal Mail is Her Majesty’s postal service and it would be absurd for her to pay for delivery.  And before I get placed in the stocks by members of the loony left – sorry lads, this is not about “primus inter pares”; HER prime minister is “first among equals”. The Queen is not one of us. She is not part of our democratic tradition. She is  the Mothership. 

“She is driving home. They can’t book her”

Forget petty things like the Royal Mail – the Queen is even above the law. Put simply, the courts belong to her.  If she fancies, she can go through the Green Channel at Heathrow Airport carrying 2 bottles of whisky and 400 fags – and nobody can stop her. If she is wandering around Windsor Tescos and decides to pocket a  six-pack of Heineken and a packet of  smoky bacon crisps, the police officer called to the scene of the crime will just unctuously genuflect  while waiting for an unmarked car to whizz round from the castle and bundle her in. If she has one over the eight on Christmas Eve and takes the Landrover out for a drunken winding tour of Sandringham (Christmas might be Balmoral) the local constabulary sirens will remain impotently silent.

In fairness this all sounds extremely strange to 21st century western man (or woman). But, if it wasn’t that way she would not be the Queen but just another Reality TV star.  I imagine she does not even have a passport. Nowadays, we are all stuck with that ubiquitous burgundy creation of the EU, but the wording on the inside cover of the British version still reads: “Her Britannic Majesty’s Secretary of State  requests and requires in the name of Her Majesty…to allow the bearer… to pass freely without let or hindrance…” What would she have had on her passport? “Don’t mess with me. I’m the Queen”?

The British don’t like their queens third-hand (or with bulbous noses)

Of course, it is not quite as extreme as I have described. Suspension of the British (or previously English) Constitution has always been an option. When King Richard III got a bit too trigger happy (at least according to Shakespeare) he ended up wandering around a battlefield offering his kingdom for a horse before being conveniently slain by his successor. And then there was that poor chap Charles I (for the benefit of non-native English speakers the “I” is pronounced as it is spelt – “The First”)  who, on a cold day in January 1649 was left without a head upon which to wear his crown and replaced for a few years by a boring republic. Indeed, if Her Majesty was feeling a bit gung-ho she need only look at the fate of her grandfather’s first cousin (not to mention his poor family) who copped it good and proper in the Russian Revolution. Meanwhile, minor misdemeanours like sharing the royal prerogative with married women (for clarity, this one refers to kings) could be dealt with by the government proposing early retirement, as was the case with the Queen’s uncle Edward VIII (pronounced Duke of Windsor, spit, spit).

However, there is one gaping hole in the consistency of the system. Since 1993, the Queen has paid income tax and capital gains tax. The Queen cannot be liable to  tax. Taxes are collected by Her Majesty’s (that’s her folks!) Revenue and Customs. And before some bright spark mentions (I really wish people WOULD add comments below) that, as sleight of hand, she pays the tax and takes it back in government funding – let’s get the record straight.

Kings and Queens used to be self-financing. For historic reasons – normally murder, rape and pillage – successive generations of the monarchy have succeeded in accumulating vast fortunes. By the time James II fled England in the Glorious Revolution, Parliament had had enough and his successors (the husband and wife team of William and Mary) were the first monarchs to have the Crown’s peacetime revenue fixed by Parliament with a sum to defray the costs of running the Royal Family and Civil Government (civil service, judges, ambassadors etc.) – the Civil List.

Since 1789 America has had 44 presidents and Britain 9 monarchs. The Watergate break-in occurring a few weeks before Edward VIII’s death, there has been 1 abdication apiece

When George III (the one that lost America) came to the throne in 1760 it was decided that he should surrender the income from the Crown Estate (with the exception of the Duchies of Lancaster, Cornwall and other bits and pieces) for the period of his reign in return for an updated Civil List that no longer included responsibility for civil government. And that has been  the situation ever since. (As an aside, it is interesting to note that in the 252 years since Georgy-Porgy bit the bullet,  3 monarchs have covered almost 75% (George, Victoria and Elizabeth) of the period.)

But to celebrate 250 years of the glorious Civil List system, the government announced its abolition in 2010. With effect from 2013, in place of the Civil List and specific grants for certain expenditures – there will be a new single Sovereign Support Grant. While this sounds like a welfare payment (“We will give this old age pensioner an extra  million quid for Christmas to cover her heating costs”),  it is indeed a radical new system in that it is based on a percentage – initially 15% – of the revenue from the Crown Estate. Anti-monarchists should note that if the Monarchy was abolished peacefully the Queen would presumably get all her income back from the Crown Estate. So, apart from the loss of  tourist revenue that would accompany a republic, the Treasury would be down just based  on the simple arithmetic.

So, why on earth is she paying taxes? In 1993, following a major fire at Windsor Castle for which the government had to foot the bill,  the Queen “announced” that she would voluntarily pay tax on her private income (not the Crown Estate that , going forward, is going to be taxed at an effective rate of 85% – high even by Francois Hollande standards). This was, effectively, to silence the mob – ie the British public who could not comprehend why they should pay for the repairs.

The best way to describe this policy is populist and potty. The Queen cannot pay taxes for one simple reason – because the Queen cannot pay taxes. If they want to tap her for a few bob why not just reduce her new Support Grant by a percentage of her private income (which just happened to be at the current personal tax rate)? That would be a legitimate sleight of hand and the sort of creative accounting some accountants used to like in the good old days  before Arthur Andersen got its comeuppance.

Sixty years of devoted service

This weekend marks the official celebration of the Queen’s Diamond Jubilee. As a constitutional monarch she reigns but does not rule. Perhaps one of her most  endearing qualities is that she does not exploit her privilege. Here is a true story never told in print before. Several years ago an old acquaintance, turning a London corner in his Jaguar, was inadvertently caught up in a Royal Cavalcade. Worse, he rear-ended the Queen’s car. Now, in every civilised country when you rear-end somebody it is your fault and, if it happens to be the Head of State you are probably going to wish you were not born. In the event, an aide got out of the Rolls, strolled over to the Jag, presented the driver with a card and told him to bring the bill for his repairs to the tradesmen’s entrance at Buckingham Palace where he would be (and was)  fully reimbursed. End of story. That is class. God save the Queen!

Greatest Britain

"Call me mummy"

What makes Britain great?  There is, of course, no single answer (and the French would suggest there is no question), but the nation that gave the world its principal parliamentary system, its principal international language and (sorry, Yanks) its principal sport must have something in its national DNA that sets it apart from all the rest.

It seems to me that a major factor is Britain’s innate conservatism as described and promoted by the 18th century philosopher and politician, Edmund Burke. British society doesn’t change – it evolves. And evolution produces strength, step-by-step. There have, of course, been potholes in the road over the years – most notably the Civil War and Protectorate of Oliver Cromwell in the 17th century – but, let’s face it, after a few years of that miserable puritan they brought back Charles II whose head had fortunately not been cut off along with his father’s. When things went haywire again a quarter of a century later, the King (the last James we are likely to see) was booted across the water and  none other than John Locke, the very man who challenged the divine right of kings in his “Two Treatises of Government”, was charged with schlepping the new king and queen from Holland.

Even the buses evolve

There was a marvelous example of British evolution a few months back that, typically, went almost unnoticed. One Friday morning an announcement was made in Perth (the Aussie one) – which is just about as far as you can get from Buckingham Palace without jumping on a spaceship – that henceforth the first born of the monarch (etc) will be the heir to the throne irrespective of gender. In a stroke, countless centuries of common law and statute were set aside and Britain and its Commonwealth moved on (I am aware that political correctness dictates that I should be talking about the United Kingdom – but, frankly, I am a bit ambivalent towards Northern Ireland).  And what about Decimalization 40 years ago? After watching sterling evolve over centuries into the quaint system of pounds, shillings (20 in a pound) and pence (12 pence in a shilling) – instead of changing the currency they just dropped the shillings and recast the pence. To maintain an element of originality in the change, instead of using a normal date (like January 1 used for introduction of the Euro) they went for the totally obscure February 15 1971 – which could, at least, have been identified as the middle of the month – in any month other than February.

Which brings me to the central point. I have a hunch  (but not an ounce of evidence) that we may be heading for another of those evolutionary changes in the next few years.

Just enough room for a cucumber sandwich and a bottle of claret

Last week, in the month of March as from time immemorial,  Chancellor of the Exchequer George Osborne presented the Government’s budget for the coming fiscal year.  The Government’s fiscal year starts April 1 but, for the purpose of income tax the year starts on April 6. Why April 6? The story is simply wonderful.

New Years Day used to be recognised in Britain as March 25. That date represents Lady Day when, according to Christian tradition, the Archangel Gabriel informed the Virgin Mary she was going to conceive (count nine months and you get to Christmas Day). The Treasury understandably collected its taxes based on the year commencing March 25.  When, in 1582, Pope Gregory XIII  instituted his calendar replacing the old Julian version European countries gradually adopted it. The Protestant English, however, gave him the two finger salute and hung on until 1752 when, in addition to adopting the Gregorian calendar New Year’s Day was moved to January 1. The tax year was left untouched but for one small point. Adoption of the Gregorian calendar required an eleven day leap forward in the date (there were riots reported at the time of people claiming they had been robbed of part of their lives). Not prepared to give up on tax revenue, the Treasury moved the collection period forward by the said eleven days – meaning that the new tax year would start on April 5. As part of the calendar change leap years are generally skipped at the turn of the century – in 1800 another day was added bringing the start to April 6; in 1900, the Treasury was magnanimous and left the date alone; 2000 was a leap year, so we will never know what Gordon Brown might have done.

April Fool! Alternative view of British evolution

It is hard to see how this system can go on forever. I recently had to do some foreign tax credit calculations for a client invested in real estate in the UK – I felt like getting out an abacus (and hitting someone over the head with it). I would assume that one of these years when the economy is doing well and a government is in the middle of its term there will be a quiet announcement from somewhere like the Isle of Skye (if it is still part of Britain) that the next tax year will start on April 1 – but then everyone will probably assume it’s an April Fools joke. Happy New Year.

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