Tax Break

John Fisher, international tax consultant

Archive for the tag “Starbucks”

Populist leaders are ruled. OK?

G7 Summit Advanced Quiz. The chap from the EU makes it harder to spot the Italian

G7 Summit Advanced Quiz. The chap from the EU makes it harder to spot the Italian

Never one for crosswords or brain teasers, in my younger days I got my quiz kicks from lineups of leaders at  G7 Economic Summits. Always familiar were the Presidents of the US and France, the Chancellor of Germany and the Prime Minister of the UK. The Canadian premier would generally give himself away by the jutting jaw honed by evolution to fell a tree with one bite, while the Japanese PM was invariably, well, Japanese. That left the one  nobody recognized because he had never been in the job more than 3 weeks – the bloke from Italy.

It was nostalgic to view the line-up at the G8 last month – Russia has now come in from the cold – and, as in days of old, stare blankly at the Italian (I still don’t know his name).

Probably because the Summit was in one of the most God forsaken places on Earth (Northern Ireland) – the leaders turned their minds to taxation. A politician trying to deal with taxation is much like a bomb disposal expert trying to deal with unexploded ordnance – only without the expert bit. Those of us deemed by politicians (!!) to be of perverted mind and questionable morality proffer thanks therefore to the Great-Tax-Collector-in-the-Sky for ensuring the issue was kicked into the long grass of this months’s G20 Summit  in the utterly not forsaken St Petersburg (fka Leningrad fka Petrograd fka St Petersburg). Nothing, but nothing, will be achieved there other than strengthening the hand of the OECD. While the tax gurus at the OECD are impossibly slow in arriving at decisions, they do at least understand the intricacies of our ignoble craft and are the best bet the world has for getting things straight.

The communique issued at the end of the G8 Summit listed the three Ts: trade, tax and transparency. In the field of taxation the leaders plan automatic exchange of information between tax authorities as well as a central register of beneficial ownership of companies, both of which should help combat tax evasion – difficult for even the most hardened of tax hacks to argue with . Joining the populist revolt against Multinationals, the leaders declared that “On tax avoidance, we support the OECD’s work to tackle profit shifting and base erosion” – laudably reserved language given that the host of the event, David Cameron, had been quoted in the left-wing Guardian as saying: “Some forms of avoidance have become so aggressive that I think it is right to say these are ethical issues”, while urging multinationals to “wake up and smell the coffee”.

Starbucks HQ

Starbucks HQ

Other than the obviously crude reference to Starbucks who managed to turn the method for making a cup of coffee into low-taxed, high value, intellectual property, I fail to understand what was percolating through  the Prime Minister’s brain when he came up with that daft metaphor. But usage of the term “ethical” in the same sentence as “avoidance” makes my kettle boil.

Does Mr Cameron need reminding that, while he may be in a morganatic marriage with a bunch of toenail-picking lefties, his party is the standard-bearer of Capitalism? Emotive words like “ethical” and “moral”, let alone “avoidance”, do not cosy-up  with “Capitalism”. Capitalism is not an ideology, it is not weighed down with subjective value judgments. The only brakes on Capitalism should be laws passed by parliaments to curb its excesses. A good capitalist will always be looking for ways around restrictions to enhance the march of Capitalism because that is his job. He is naturally centrifugal rather than centripetal. He might throw in a bit of Social Conscience along the way out of the goodness of his throbbing heart – but it is the function of legislatures to rein him in.

While popular protest movements have every right to object to multinationals like Apple, Starbucks, Google and Amazon paying less tax worldwide than Warren Buffett’s secretary, populist leaders and legislatures would do well to take a break from their brown-nosing and reflect on who is really to blame rather than labeling companies”immoral”. If they came up long enough for air they might realize that, instead of  bellyaching with the protesters, it is their job to ensure that the right laws are in place.

If truth be told, the main problem with multinational non-taxation is what that bastion of bankrupt socialism the Guardian angrily identified as “the practice of transfer pricing”. Consistently applied rules across nations by multinationals based on the three pillars of: functions, assets and risk have indeed enhanced the mobility of profits to unlikely corners of the Globe. But who put those nutjob rules in place? Waitforit……the OECD – the darling of the G8 which is now being entrusted with the job of getting all these nasty companies back in line.

The arbiter of morality - the newspaper that supported Hitler and Mussolini in the 1930s

The arbiter of morality – the newspaper that supported Hitler and Mussolini in the 1930s

Accusing an inanimate corporate entity of immorality is beyond the realms of even my fertile imagination, but if the OECD is to get anywhere “before”, as Mr Cameron might have said, “the coffee goes cold”, all 34 member governments plus others with observer status are going to need to instruct their international tax teams to cooperate beyond their narrow interests to arrive at rules that are workable and fair in a multinational context. Experience to date does not  bode well for the future. In the meantime governments should accept that, in the interests of capitalism, the tax fraternity will continue to seek out loopholes as they seek to maximise market efficiency. Brains and pens at the ready. Let the battle begin.

What a wonderful world

Subtle

Subtle

Although we are a family of fairly avid readers, other than a few coffee-table staples, books do not  feature in our living room. Well-leafed and generally abused volumes are neatly filed on bookshelves in bedrooms and on our upstairs landing, or unceremoniously dumped in unlikely corners of the house (I stumbled on a haphazard pile on the staircase to the roof the other day). Some authors are more popular than others but we rarely sport a full set. We have all read the Complete Juvenile Works of JK Rowling (including The Tales of Beedle the Bard) but would be hard pressed to lay hands on more than two installments, both of which are by now missing critical narrative. Dickens, Austen, Le Carré and PD James are well represented in various fonts and sizes. But, perhaps our most preserved  set, neatly placed above our youngest son’s desk, is Terry Deary’s Horrible Histories.

Now, I am sure Mr Deary would not consider it  libelous were I to state that this is not great literature. In fact, I am not sure it passes as literature at all. With titles like “The Terrible Tudors” and “The Even More Terrible Tudors”, the illustration packed volumes  tell us, in graphically comic detail, just how horrible life was in the bad old days – pretty horribly.

Reading (or, to be more precise, leafing through)  the Horrible Histories, it is easy to be lulled into complacency about the present.

Heil Hitler!

Heil Hitler!

I am beginning to think that the world is not quite as nice a place as I would like to think it is. To be clear, when I say “world”, I do not mean the  majority of the 200 or so countries that constitute that  carbuncle on the face of modern civilization, the United Nations. One day, when those rogue nations are free-speech toting liberal democracies, Mr Deary will be able to make another fortune writing their Horrible Histories.  I am referring to cosy countries like yours and mine that think they are approaching the final synthesis in the Hegelian dialectic when all households will have at least one  TV in every toilet.

To be even clearer, I am also not referring to the horrendous actions of individuals and organized groups. There will always be outliers in every sphere of society. It is western governments that are the problem. They have become very good at repackaging old nasties in inoffensive euphemisms and glossy camouflage. And  if we, the silent majority, do not watch out – they will get away with it.

Take torture, for example. The activities at such sunny resorts as Guantanamo Bay are  regularly referred to as Enhanced Interrogation Techniques, which sounds like a project undertaken by a management consultancy firm. Even the mention of Waterboarding gets me humming Beach Boy tunes rather than thinking  of medieval Ducking Stools.

Even our own tax world has its fair share of practices cleaned and rebooted from yesteryear.

There was the 504 year sentence handed down last year to a Greek tax miscreant. Apart from the absurdity of a sentence that cannot possibly be served, what possesses any modern system to deprive a man of his freedom for all eternity for a crime that did not involve the taking of another life. We all (other than many of the members of that august institution, the  United Nations) are appalled by stories from more than 200 years back of young men being hanged for stealing sheep.  To all intents and purposes, there is not a colossal difference.

"Tell us the whereabouts of your father, boy, and we will give you $104 million"

“Tell us the whereabouts of your father, boy, and we will give you $104 million”

And what about the award  of $104 million that the IRS made last September  to a single Whistleblower in the UBS case? The first thing that came into my mind when I read the story was W F Yeames’s painting of a Parliamentarian’s  interrogation of two young children in the English Civil War, as he tries to establish  the whereabouts of their father. If there was one quality rammed into me by the British school system it was the Eleventh Commandment, “Thou shalt not sneak”. Honour among thieves was a real value and we would have rather faced the stick than split on our schoolmates. To be fair, teachers expected and respected that behaviour and often punished the snotrags that “told tales” (mind you, it didn’t stop the bloody sadists using the stick anyway). Waterboarding, at least has the possible justification that its use might save many lives. What is the IRS’s excuse?

Then, a few short weeks ago, none other than Her Majesty’s Revenue and Customs, for the second time in less than 6 months, published on Flickr mug shots of the 32 “Top Tax Criminals of 2012” .  When I was a kid, I used to pass a big blue plaque every day in our local high street that read “On this site stood the Parish Cage or Lock-up”. My (incorrect) assumption throughout my childhood was that this was the site of the local Stocks, where petty criminals would have their heads, hands and feet secured, allowing passers-by to take free aim with eggs and tomatoes from the nearby Tesco’s that had passed their sell-by dates. I actually had a taste of this as a young (innocent) adult. In charge of a children’s summer camp one rainy August, my team organized a Summer Fare. One of the star activities was throwing anything that went mushy on impact at yours truly tied helplessly to a chair.

Publishing the photos is the same concept of public humiliation that I thought had gone out with the Stocks and Public Executions outside Newgate in the 19th century. What is more, all but one of the wretched cons are behind bars already serving out their sentences and they are unlikely to be seen around town for some time to come. So what was achieved?

There is one thing, though, that can be said in favour of the British system. Publishing the photos HMRC announced that they were serving a collective 155 years and 10 months in prison. Had this been been Greece, that wouldn’t have even covered the third off for good behaviour of a single one of them.

I am not an anarchist. I passionately believe that people should not be allowed to break the law with impunity. However, the punishment should fit the crime. Furthermore, governments should think about the negative effects on society as a whole of efficient but, essentially unethical, laws and practices. There has been a lot of publicity recently about the outrage of the British Parliament over the tax practices of US multinationals. As I reported a few weeks back, Margaret Hodge – who led a Parliamentary investigation – told the representatives of Google, Amazon and Starbucks: “We are not accusing you of being illegal, we are accusing you of being immoral”. I suggest you get your own House in order first, dear.

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?

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