Google’s Eric Schmidt has been reported as being perplexed by the UK’s debate on tax avoidance.
I view that you should pay the taxes that are legally required. It’s not a debate. You pay the taxes.
If the British system changes the tax laws then we will comply. If the taxes go up we will pay more, if they go down we will pay less. That is a political decision for the democracy that is the United Kingdom
There’s a contrast here with the case of Starbucks, volunteering a little extra tax in a failed attempt to head off public anger. Given the outrage this voluntary payment generated, we shouldn’t expect it to happen again.
So when Schmidt was pressed on whether his company has a moral or social responsibility (what with not being evil) to pay “proper” amounts of tax, he referred to his fiduciary responsibility to shareholders. The implication is that it is illegal for a company to damage its profits by paying any more tax than it can get away with.
Fiduciary responsibility is there to require executives to act in the interests of shareholders. If it were abolished, a few shareholders would probably get defrauded by their executives, but I somehow doubt it would lead to a blossoming of corporate social responsibility. The profit motive doesn’t really need this kind of enforcement.
But on the narrow point Schmidt is correct. He is required by law to avoid as much tax as possible, and then to pay the rest. The responsibility for that lies with governments. Of course when corporate interests lobby governments and fund politicians to create tax loopholes, this is clearly highly corrupt – though I’m sure some would argue that fiduciary responsibility can require that too.
So we have an entrenched system of abuse and a challenging reform for voters and honest politicians to pursue. What is this challenging reform?
The answer appears to be unitary taxation whereby the profits of a multinational corporation are apportioned to different countries according to a formula that takes into account where sales occur, and perhaps where staff and assets are based too.
Unitary taxation is already widely used within the USA. It is difficult to reach global agreements on, but it could be brought in within the EU. Now because it would involve an agreement on what the apportionment formula should be, this would represent a pooling of powers over taxation, and that would be a little bit controversial here. It would trigger the (subtly different) Liberal Democrat and coalition policies on a referendum on the EU. But if the prize is much reduced corporate tax avoidance it could also be very popular, and may swing that referendum to a pro-EU result.
* Joe Otten was the candidate for Sheffield Heeley in June 2017 and Doncaster North in December 2019 and is a councillor in Sheffield.
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I’m not quite sure why Google are so perplexed; if its not legal to launder the proceeds of crime to try and evade tax erc, why is it any more acceptable to create artificial constructs to similarly launder the proceeds if legitimate activity.
IMHO multi nationals like Google are the new mafia, always making governments offers they can’t refuse
I don’t understand the current fashion for slagging off companies that only pay a certain amount of tax. As long as they are paying what they are legally obliged to, then where’s the problem? If politicians think they are paying too little tax then that is a problem that politicians can solve.
from the Economist:
Apple had “sought the Holy Grail of tax avoidance” by creating “offshore entities holding tens of billions of dollars while claiming to be tax resident nowhere”.
… Apple Operations International (AOI), which had not filed a tax return in Ireland, America or any other country for the past five years. Although it was incorporated in Ireland, AOI kept its bank accounts and other financial matters in America. Given the differing ways in which both countries assess whether a firm is liable for tax, this allowed Apple to avoid paying tax on AOI’s income of $30 billion between 2009 and 2012.”
You really have to admire the sheer ingenuity that goes into these schemes.
Of course when corporate interests lobby governments and fund politicians to create tax loopholes, this is clearly highly corrupt – though I’m sure some would argue that fiduciary responsibility can require that too.
But Google, Amazon, and Starbucks trade as they do not because of loopholes, but because of the EU Single Market and long-standing tax treaties. Reform the rules by all means but your hope of unitary taxation across 27 member states all competing for the same tax pot will never happen; the ones who stand to lose out will veto it and for all you know, that could include the UK.
Graham: The problem is that people say Tax Avoidance is legal; no, it is a legal technically, there is a difference.
If I knowingly set up a non-existent entity in a country which lacks the legal system to track my tax proceeds correctly in order to ‘avoid’ paying pay I would otherwise legally have to pay, then that is a massively grey area because the chances are that my actions do breach UK law, but the UK cannot touch the money which is by all-rights owed to them because I am acting outside the UK – this is why it is a legal technically (or host of them, should I say) that companies are using to escape paying Tax they actually owe.
As for his obligations to his shareholders – technically, if his actions are damaging the repetition of the company and its profits, then he is breaching his responsibility. An obligation to a company’s shareholders is a complex relationship which Mr Schmidt is erroneously simplifying in order to get out of answering certain questions.
On the whole, I see Google as one of the ‘less evil’ mega-corporations, but abusing Jurisdiction law and poorer nations to get out of paying Tax is wrong and damaging to the social cohesion of a host of different societies.
Blue, yes there will be winners and losers on day one, but that is true of every EU policy, and we have managed so far to have more than zero EU policies.
In the long run the whole union stands to benefit by allowing its domestic businesses, including SMEs, to compete on a level playing field with multinationals, by paying tax on the same basis.
Technically I suppose you can blame the existence of international trade (and therefore such things as the single market) for this problem, but if your answer is less trade, then the cure is worse than the disease. High taxes on a much smaller pot wouldn’t make anyone better off.
Why should a Company pay more tax than it needs to? If the UK government wants Google to pay more tax, it should pass laws to make them do it, not moan. If the EU did it together, Companies would have to leave the world’s largest market or pay up. Simples.
Could we please get away from thus “more tax than it legally needs to” argument.
If I run a burger van, buy burgers in the uk and sell burgers in the uk, then I don’t think HMRC will let me get away with not paying tax just because my receipt is labelled Dave Dodgy Burgers SA (Lichtenstein ), so as that’s exactly what Amazon does, the same laws should be applied regardless of any legal niceties
It’s about time common sense and fairness trumped shyster lawyers
@ LiberalAl
“Graham: The problem is that people say Tax Avoidance is legal; no, it is a legal technically, there is a difference. ”
Not true, most tax avoidance is making use of loopholes politicians created (or HMRC on their behalf following their guidance) intentionally to be used. I disagree with this as it is a re invention of “picking winners” but rather than using subsidy, using tax loopholes.
Much better to cut the loop holes and cut the tax rate.
@ RednDead
The politicians created the loop holes, they can close them.
The politicians should be criticised not the companies.
Fix the root cause, don’t winge about the symptoms.
Technically I suppose you can blame the existence of international trade (and therefore such things as the single market) for this problem, but if your answer is less trade, then the cure is worse than the disease.
Hi Joe – international trade is a good thing in my book and less trade and barriers to trade are not what we need. What I’m surprised about is that we have politicians, who signed us up to the Single Market, complaining about the Single Market working exactly as intended. I also think that it’s wrong to think about ripping up the tax rules because a handful of companies are not paying their “fair share”, whatever that may be. In Amazon’s example, the company globally is loss-making, so wouldn’t be paying any corporation tax however you apportioned it under a unitary regime.
And speaking of Amazon:
If I run a burger van, buy burgers in the uk and sell burgers in the uk, then I don’t think HMRC will let me get away with not paying tax just because my receipt is labelled Dave Dodgy Burgers SA (Lichtenstein ), so as that’s exactly what Amazon does, the same laws should be applied regardless of any legal niceties
Amazon Europe is a Luxembourg company, with Luxembourg being part of the Single Market the same as the UK. It does not have permanent establishment in the UK because of a double taxation treaty (see section 3 here – http://www.hmrc.gov.uk/manuals/dtmanual/dt12304.htm) dating back 45 years or so.
If Cameron is so upset with Google, why does he keep Schmidt in the Business Advisory Group?
Graham Martin-Royle
I don’t understand the current fashion for slagging off companies that only pay a certain amount of tax. As long as they are paying what they are legally obliged to, then where’s the problem?
It is possible to be a thoroughly unpleasant, nasty, greedy and selfish person without breaking the law, isn’t it? I hope we will never get to the stage where the laws we must obey are so tightly drawn that they FORCE us to be good people. I think it possible to have a sense of morality and fair play without that being something one is compelled to do because to think or act in any other way is illegal.
Why should it be any different with companies?
“@ LiberalAl
“Graham: The problem is that people say Tax Avoidance is legal; no, it is a legal technically, there is a difference. ”
Not true, most tax avoidance is making use of loopholes politicians created (or HMRC on their behalf following their guidance) intentionally to be used. I disagree with this as it is a re invention of “picking winners” but rather than using subsidy, using tax loopholes.
Much better to cut the loop holes and cut the tax rate.”
Not true, Tax law is constantly changing because businesses and governments are constantly trying to out maneuver each other – the companies often win because it is their mutli-million pound finance teams and whatever private accountancy firm they contracted verses the somewhat hapless HMCR and its ever uninspiring leader Ms Holmer. Furthermore, 90% of tax avoidance is done by processing money outside of the country it is made in, meaning that Politicians have no more control over it than the control they can exert over the countries where the avoidance is being enacted. The tax avoidance which occurs here is often actually uncaught tax evasion or enacted by really small companies, meaning they get away with it because HMRC have bigger fish to fry, well try and fry. Tax and Tax avoidance are two of the most complicated legal issues we have to face, and only the really simple think it is so simple as ‘just sort out the Law.’
” HMRC have bigger fish to fry, well try and fry”
No they spend their time going after small fry often making illegal demands because the small fry cannot afford expensive tax lawers.
BTW The notion that if you live abroad you don’t pay tax is false. In most countries you must pay local income tax which is covered by double taxation agreements.
Tax evasions is illegal. Tax avoidance isn’t.
@ Liberal Al
“90% of tax avoidance is done by processing money outside of the country it is made in”
Source?
@ Liberal Al
“The tax avoidance which occurs here is often actually uncaught tax evasion or enacted by really small companies, meaning they get away with it because HMRC have bigger fish to fry, well try and fry.”
So it is not tax avoidance it is tax evasion.
Don’t try and conflate the two. if one is following the laws it is avoidance if not it is not it is evasion. No one has a problem with governments attacking evasion and deamonising the criminals who practice it.
To those above whose attitude can be paraphrased as “tax avoidance is legal, get over it”, perhaps you might care to read Joseph Stiglitz’s article on the subject that has been published today in The Guardian. The last two paragraphs are particularly relevant and seem to me to summarize the strongest argument against such complacency.
http://www.guardian.co.uk/commentisfree/2013/may/27/globalisation-is-about-taxes-too
I applaud multinationals for their tax avoidance because I would have done the same.
Regarding “aggressive” tax avoidance: if people are willing to risk court fees, fines, interest and paying the tax they originally owed in order to push the boundaries of tax law then that is their choice. Because of these disincentives for “aggressive” tax avoidance it means that it is only undertaken by the few and not much of a problem in society.
What would help would be quicker court cases over these matters. We should focus on the law and nothing else, you can’t plaster over the law or say what is “aggressive” and what is not.
Here’s a prime example: the silly General Anti Avoidance Rule that the government are so proud of says that avoidance measures are wrong if they are used in ways that the government intended, but to get around this the government often simply don’t say what they intend.
I’ve got first hand experience of spotting tax “loopholes” – if the government say in some quiet lines in the budget that you can now do B, then I know I can do A and B together and get C, then did the government intend for people to be able to do both A and B? I don’t know because they have not said what they intend.
General Anti Abuse Rule sorry.
I am getting very tired of hearing variations on this story. Google are doing precisely what they are supposed to be doing under the tax system that is set up. It’s not even some complex plot to minimise tax, it’s just the same thing every multinational is effectively instructed to do.
They pay VAT in the UK on sales made in the UK. They pay corporation tax on profits – and what does that mean for a multinational? Profit is revenue minus expenditure. Google’s EU sales office is in Ireland. What’s the expenditure for the UK? What fraction of those employees in Ireland are UK-specific?
Probably none of them, because Google sells to everybody who clicks on their website, not to single countries. So there is no one number you can point to and say “this is the profit in the UK”. Every multinational has this problem – there’s no clear way to apportion head office costs. So we constructed a tax system that doesn’t require the problem to be solved. Google designates one country (Ireland) and pays all of their corporation tax in that country. They then inform HMRC that they’ve paid tax on those profits in Ireland, and they don’t get taxed twice on those profits.
Everybody does this because you have to. Not even out of some fiduciary duty – there is simply no scope in the tax system to do anything else. Even if they wanted to pay corporation tax in each EU country, they can’t, because there is no mechanism to apportion the Ireland office costs. And they’re certainly not going to replicate that office in every country and build a different sales portal for each one. (Fiduciary duty comes into it when deciding which country to put that office in: you pick the one with the best overall outcome for the business, and right now Ireland are offering low tax rates in exchange for people hiring their workers)
Don’t like it? Schmidt’s right: change the tax system. Google aren’t responsible for it.
Quote: “this would represent a pooling of powers over taxation,”
I don’t see it. The Unitary Tax system can be implemented by the UK without reference to other countries if it wished. It is simply a way of calculating our tax based on a percentage of global profit. However international agreement is clearly desirable to ensure that countries use the same formula and thus do not double tax anyone.
If any countries (e.g. Luxembourg) don’t agree, they can opt-out. It won’t effect the tax we collect one jot. As very little business by say Amazon is actually done in Luxembourg they will find their tax bill is higher there that it would be under the unitary system and would leave.
This thread has degenerated into the usual arguments around whether or not to condemn corporations. But whether we condemn them or not, the responsibility for the effectiveness of tax codes and tax treaties lies squarely with governments.
In the interests of a functioning market, taxation cannot be elective. No company, not even Starbucks, should feel they can choose to pay tax. This is point number 1.
The fiduciary interest of shareholders is protected by obeying the law, protecting the reputation of the company and innovating against your competitors. Instead, it seems to be innovating against the tax system, protecting those who disregard the law and regulators. The companies that are the focus of anti-cartel investigations are almost always the same companies facing succour for finding ways to pay tax. In my view, its time to join up the dots and not fail to be prepared to break up companies acting with all the traits of an unregulated and abusive monopoly in the markets they operate in.
Lastly, there is an active culture that needs to be tackled. If your competitors are wasting money seeking to secure false tax advantages- then why shouldn’t you. If your bankers and financial advisors have units to figure out new wheezes then why shouldn’t you listen to them. There is an amorality which can only be tackled through re-engineering norms. That means a new code of conduct, that means penal tax rates for evoision, that means a political backbone that has disappeared for too long.
Finally, the countries that act as the achilles heel of the tax system need to carefully reconsider whether the approach works or ultimately can be safeguarded as other countries bail them out. Pushing the efficient functioning of markets down the pecking order in terms of diplomatic relations only results in the displacement of economic activity. Its no strange coincidence that neighbouring regions like northern ireland have an anaemic corporate sector while ireland continues to boom.
Joe you are right, I jumped into the usual boring right or wrong debate, rather we should discuss your proposal of Unitary Taxation.
Regarding Unitary Taxation, if all my employees are based in the US, could I still sell as much as I like in the EU and not have to pay corporation tax there?
I think a better solution might be a pure sales tax system, but feel free to argue this point.
Paying tax is not charity. Off course companies will avoid paying tax if they legally can do so
Answer: Change the law
avoidance, evasion – you say tomato, I say tomato…
The point is that tax legally isn’t elective, but for multinationals registration in jurisdictions which have different standards of reporting transparency it becomes so – and they deliberately use it for this purpose, and therefore what legally isn’t, in reality is.
Put simply, the law doesn’t work properly because those with an excess of economic power can make it work to their unfair advantage.
It is legal, but it is wrong, and society suffers as a result.
The law must change, but to do so the public debate must remind us what tax IS.
Tax is not a bottomless pit for self-serving politicians to plunder as the means to fund pork-barrel projects by which to fatten their vested interests with bribes. Tax is the necessary balancing tool by which the invisible costs in the economy are paid for – the precise opposite to social redistribution.
Without taxation economic value becomes distorted as pricing inefficiency is created. But with disproportionate taxation economic value becomes overloaded and the balance of the economy is destabilised, leading to unsustainable policies and volatility.
What we are seeing currently is a mixture between the two as companies and those with the means or ability react to the failures of previous governments, while governments react to try to catch up.
The only successful response is tax simplification, which has traditionally translated into lower rates of taxation (see the 45p income tax rate debate).
I don’t necessarily agree with Unitary Taxation, as reaching agreement between 27 different EU countries is frankly far too big a task to complete within a reasonable timescale. The more general concept of common standards, particularly within a single market, does however remain sound.
Joe is right that it’s up to governments, not companies, to ensure that the rules are adequate in order to ensure that companies pay a fair an reasonable amount of tax in the right places.
However, there is no easy solution to this – including unitary taxation – unless there is some sort of international agreement. It would need at least the EU and US to agree some sort of framework to agree how to deal with the profits of companies which can claim to have generated profits anywhere – in particular, internet based companies.
The basis of any fair agreement would perhaps include:
1. Companies must pay tax somewhere. Simply, as Jenny Barnes points out in her quote from the Economist, some companies are claiming effectively to be based nowhere.
2. Tax should be due in the appropriate country based on a “reasonable” assessment of the split of risks and rewards and that for certain companies this should be based on sales, not location of HQ. Google claimed effectively that all of their EU sales were “made” in Ireland, except they weren’t. A more reasonable assessment would perhaps say that as x% of their sales were made in the UK, so x% of their profits are subject to UK tax, irrespective of where the company claims it is based. Not saying this assessment will be easy but it may be a way to ensure that each country gets its fair share of tax, including countries that really need the money.
Havent we just reduced our corporation tax rates to attract businesses to relocate here?
“Manfarang 28th May ’13 – 2:49am
” HMRC have bigger fish to fry, well try and fry”
No they spend their time going after small fry often making illegal demands because the small fry cannot afford expensive tax lawers.
BTW The notion that if you live abroad you don’t pay tax is false. In most countries you must pay local income tax which is covered by double taxation agreements.
Tax evasions is illegal. Tax avoidance isn’t.”
@Manfang: I feel you may be confusing income tax and corporation tax here. The way you and I pay tax is vastly different to how Google and Co will pay tax.
“Psi 28th May ’13 – 7:15am
@ Liberal Al
“90% of tax avoidance is done by processing money outside of the country it is made in”
Source?
Psi 28th May ’13 – 7:19am
@ Liberal Al
“The tax avoidance which occurs here is often actually uncaught tax evasion or enacted by really small companies, meaning they get away with it because HMRC have bigger fish to fry, well try and fry.”
So it is not tax avoidance it is tax evasion.
Don’t try and conflate the two. if one is following the laws it is avoidance if not it is not it is evasion. No one has a problem with governments attacking evasion and deamonising the criminals who practice it.”
With point one, if I was a guessing man, I would guess you are purposefully trying to get me to tell you how long a piece of string is, I shell try, but it will take time.
With point two: that is is my point, you cannot look at one without looking at the other, and often the lines between the two are so grey as to be conflated.
Fiduciary responsibility is there to require executives to act in the interests of shareholders.
Yes, but it doesn’t prescribe precisely how – specifically it doesn’t say that tax MUST be minimised. It has to be taken in the round. So tax is part of it but so is reputation as Starbucks et al have discovered. That said, executives who plead the ‘fiduciary responsibility’ defence are (mostly) guilty of humbug. It’s funny how they never cite it when it comes to awarding themselves grotesquely inflated pay and bonuses which are emphatically NOT in shareholders’ interests, not only because of the sums involved but even more because of the perverse incentive created. This harks right back to the Garden of Eden where the excuse for bad behaviour was the woman/the snake told me to do it. Human nature hasn’t changed much since.
However, Eric Schmidt also has a point. If the government wants companies to pay more tax they have to write the tax law accordingly and include a General Anti-Abuse rule with real teeth. I think the government’s actual belief is that it must participate in a race to the bottom on tax by making rates for mobile multinationals as low as possible. This isn’t politically popular so it talks tough to the public but quietly peppers the tax code with loopholes knowing the sophisticated companies understand the covert commitment to low tax for them. Of course, the government can’t win a race to the bottom so Osborne is on the wrong track here as in other things.
That would be an entirely reasonable approach for sales to individuals who can be said to be resident in a particular nation at the time of the purchase. If the tax system allowed it, which it currently doesn’t – this would require EU-level legislation to achieve (another reason why being in the EU is a good thing).
What about sales to other multinationals? How are those supposed to be apportioned? (There are lots of difficult cases, but this is probably the hardest one)
Good to see that some folks , i.e . LiberalAl , have a decent understanding of the Tax Evasion/ Avoidance issues ,
I have 20 years experience in the Tax industry, and the entire .. ‘oh Tax Avoidance is perfectly legal’ comments simply marks some-one as having no real grasp of the subject. Also the word ‘Loophole’ , clearly picked up by the user from the usual poorly informed and shallowly researched news articles is another give-away. Tax Avoidance is always based on a lie, the kind of Tony Blair lie , where each sentence taken in isolation may be true, but the overall message is a lie.
So Mark, what is your opinion on an investor who receives tax relief via the SEIS scheme and then makes a loss and claims 103% of their investment back, therefore turning the 100% loss into a 3% gain?
Should they not claim this money even though they are entitled to it? Although I am not sure what the position is now the General Anti Abuse Rule has muddled things up, which will probably lead to more court cases than simply getting rid of the loss relief.
I’ve not done much tax advice recently but I was completely mystified when the government brought this out.
By the way, I have simplified the above conditions for 103% tax relief to be possible and this should only apply to a few cases, but still, this was something that every major accountancy firm jumped on straight away, it was so obvious I assumed the government must have slid it in there on purpose.
So under Joe’s system, if I have small company basically printing money in the UK, and don’t want to pay UK corporation tax. I will be able to merge it with a larger but break-even company with lots of employees in Cyprus or Ireland with a higher turnover, and pay the bulk of my tax there instead, because that is where the bulk of my business will now be?
Yes this operates in the US but the differences in state corporation rates between different states are typically in the lower single figures.
@redndead “If I run a burger van, buy burgers in the uk and sell burgers in the uk, then I don’t think HMRC will let me get away with not paying tax just because my receipt is labelled Dave Dodgy Burgers SA (Lichtenstein ),”
No but you wouldn’t pay any corporation tax anywhere if you were just Dave (sole trader). Making it a public limited company anywhere would attract more tax. If you choose to tax companies on their structure rather than their activities it is hardly surprising that they choose the structure that attracts least tax.
“But whether we condemn them or not, the responsibility for the effectiveness of tax codes and tax treaties lies squarely with governments.”
Quite right, Joe.
The co founder of Apple agrees with me: sales tax system is the only solution. He calls it taxing income which sounds more marketable. Then they will be taxed just the same as individuals.
http://news.sky.com/story/1097464/steve-wozniak-apple-tax-criticism-warranted
Although I disagree that the criticism should go towards Apple rather than the system.