I am going to break off from the EU exit series for a couple of days to deal with taxation, as there is an ill informed topical debate underway about it. I am publishing this blog for tomorrow early this week-end as some Sunday journalists may find it helpful.
There are two major judgements involved with reaching a fair tax settlement for successful multinationals. The first is where was the profit made, given that they incur costs and earn revenues in various countries. Some of them, for example, chose to establish their headquarters – and therefore incur substantial costs – in Ireland as Google has. They go there partly because Ireland has a much lower rate of Corporation Tax than other European countries. The UK cannot complain about that, as the UK’s own company tax strategy is to cut our rate so we attract headquarters and other cost bases from higher tax countries. We want the employment and investment, and would like companies to export from the UK around the rest of their group. When the company earns revenue in the UK it can of course offset the UK costs against the revenue, but it can also claim that some part of the costs it incurs elsewehere, as in Ireland with its headquarters, can also properly be taken off its UK revenues before striking a profit. The amount is a judgement which its own accountants, managers, auditors and the competing tax authorities all have to consider.
The second related issue is transfer pricing. Where a good or service produced by a multinational incurs production costs in more than one country the company is allowed to set transfer prices for the semi finished good or contribution to the service from country A into country B where the good or service is finished or delivered. Again a judgement is involved, as these are often just internal prices. In my simple model where just two countries are involved both countries tax authorities have an interest. Each will want the highest possible transfer price for their part of the work and the lowest for the other country’s, to maximise their part of the total profit so they can tax it. A company would like the profit to be highest in the lowest tax country, but all reputable companies will want to strike a fair price as they understand the morality of doing so. They also understand that to be able to persuade the tax inspectors in both countries concerned the fairest price should have the most chance of meeting with approval. In practice many countries may be involved where activity happens in plenty of places and contributes to the final good or service.
Google’s view of these issues – and its other judgements on where profit was made – led to a very low tax assessment in the UK from 2005 onwards which the then Inland Revenue accepted. In 2009 HMRC initiated an enquiry to see if it could challenge the way the UK profit was calculated. This enquiry was clearly a complex one, as it has only just resulted in the Revenue making a new determination of Google’s tax and Goggle having to pay considerably more as a result. This was not some political fix between a Conservative Chancellor and his big business pals. Ministers do not get involved in individual company tax calculations, do not see the details of a company’s tax submission or the Revenue response and are not allowed to interfere in an enquiry. Ministers do have to debate celebrated cases if the media and opposition pick up on them, but not on a basis of study of the individual tax account. Ministers do have to form tax policy, uphold or amend the law as necessary and be prepared to defend the results of tax law. The Revenue advises Ministers in general terms on what change is needed or how to defend against criticisms in the light of their detailed experience of the current law in individual cases.
What conclusions do I draw from this saga? Firstly, I support tax competition between countries and do not blame Ireland for setting a lower rate and for attracting headquarters and other costs as a result. Our taxation of a multinational that does have an Irish headquarters has to allow for the legitimate activity that such a location decision requires. It will mean some of the tax we would like to place on profits from UK revenue will pass to the Irish authorities or is not a profit at all. The Chancellor is right to respond to this part of the problem by lowering our rate so we can attract more taxable activity from other higher tax jurisdictions.
Secondly various loopholes in rules over where revenue and profits can be booked needed to be closed. This Chancellor has closed 40 such loopholes which allowed companies legitimately to avoid tax in the last decade which they cannot do now. The Chancellor has sought to deal with the overall problem through his attack on the diversion of profits by multinationals. He was right to take action to tackle profit diversion and if he needs to take further action I am sure he will next budget. Each budget sees the Revenue put forward proposals to deal with the latest legal schemes to divert profits to lower tax jurisdictions or to reduce reported profits by taking advantage of legal tax abatements.
Some on the left seem to think large multinationals are the super rich and all we have to do is to demand more money from them. We live under a rule of law in a competitive world. Those who want multinationals to pay more tax need to come forward with thought through amendments to our tax law which would achieve their aim without losing us the jobs and business. This argument is mainly about where profits are booked and which country therefore gets the tax, so where we seek change it is to repatriate profits from neighbours. In part it is also about tax taking a larger share of revenues. In some cases that may be a good idea, but we need to remember that company revenues are also needed to reward employees and to invest in the future. Multinationals, like many individuals, wish to minimise their tax bills by all legal means.
Let me conclude by dealing with conspiracy theories before they are written. I have no personal financial interests in Google or any of the other majors under scrutiny for paying too little tax. I have not even met the management of Google. Before writing this article and before appearing on Any Questions where I thought the issue might emerge I contacted Google so I could understand in general terms the way their tax bills since 2005 were first agreed and then subject to revision. I do have an interest in more healthy business and jobs in the UK, and understand that striking the right tax balance is not easy. This Chancellor has succeeded in getting more tax out of these companies than his Labour predecessors without so far losing business and profit to other countries as a result of his corporate tax policy. That is a win.
January 30, 2016
The books can be cooked in many ways. One is subsidiaries here paying a licence cost to another part of the business in another country for use of a trademark, and that fee pushes the UK part into marginal profit and cutting the UK tax bill. Another trick is to have a company in the hierarchy registered in a country which does not require accounts to be filed making it hard for tax authorities anywhere to figure out what they are up to. Another is mass use of intra company transfer visas as there is no national insurance payable for 12 months which they use and repeat.
January 30, 2016
Indeed but Osborne has now decided just to thieve off landlords by not allowing all their legitimate interest deductions. Thus even taxing losses in some cases. Perhaps with Google they need to change their tax laws to make sure they cannot escape a fair tax..
Google will, very sensible, pay as little tax as they can legally (also bearing in mind any adverse PR). After all Google will spend the funds far better than Osborne. He will probably piss it away on the absurdly run NHS, HS2, green crap subsidies, corrupt and misguided overseas aid, happiness indexes or endless other damaging dross.
January 31, 2016
If Google and other companies do not minimise their taxes as far as they legally can then they will just loose out to competitors who do and become uncompetitive.
January 31, 2016
Before going after Google for the modern equivalent of Ship Money and Forced Loans, I’d like to see more effort made to collect unpaid taxes from the millions of ordinary people – shopkeepers, small tradesmen and so on – whose cumulative fiddles are as vast as they are shameless. When Mr Corbyn claims there’s one law for the multi-nationals and one for the ordinary worker, he’s absolutely right: multinationals like Google pay tax they don’t owe, and ordinary workers evade tax they do owe.
February 2, 2016
You really are a donkey if you believe this. Plumbers and other tradesman are being taken down the nick in the dead of night whilst large tax fiddlers are being given chance after chance, Its well documented.
February 3, 2016
Eeyore, Have a look at “Treasure Islands” by N.Shaxson or a similar title by R.Brooks, and try to think whether shopkeepers and small tradesmen are really the problem. Think of orders of magnitude.
January 31, 2016
According to Christopher Booker today call me David is trying to reduce the campaigning time for the EU referendum to perhaps as little as just four weeks.
I never expected him to deliver a fair referendum but this is surely a total outrage. It is however exactly the sort if behaviour we have come to expect from the man alas. Let us hope he does not get away with this shabby little deal to distort the referendum result.
http://www.telegraph.co.uk/news/newstopics/eureferendum/12130566/Mr-Cameron-wont-get-away-with-his-shabby-little-EU-deal.html
February 2, 2016
The rental sector in this country is the most subsidised and least regulated in the world. You are just being given a bit less. Every threat to your business results in threats to increase rents. Can any other business just increase prices? Successive government policies to build less houses mean pay rises ever year for no more and in some cases less work. try and argue against that one.
I own my house outright so am not one of your disgruntled tenants. Am I missing out on this ‘flexibility’ Maybe I should rent an have a zero hours contract job too to maximise my potential in the housing and jobs market?
January 30, 2016
We certainly do need to attract more business and instead of sending everything offshore it would be better for business to be sent to us due to lower taxes . I am not sure whether multinationals do have the same rates of taxes for transferring and finishing the complete products , but your Irish example suggests that it is perception of business ethics rather than law.
January 30, 2016
It’s up to governments to ensure that companies like Google find it desirable to keep their profits in this country and invest in expanding their operations and the number of people they employ here.
They already pay business rates on sites that they run here, for which they get nothing – not even their rubbish taken away.
They already pay employers NI for which they get nothing…
I see it as just jealousy from the tax and waste brigade…
January 30, 2016
Surely all companies pay employers’ NI for the benefit of their employees. Thus the multinationals receive the same benefits as any other company
January 30, 2016
behindthefrogs
“Surely all companies pay employers’ NI for the benefit of their employees”
No not at all employees pay their own NI, employers NI at 13% is just another business tax that goes straight to govt, a govt the has just introduced another pension tax with the new auto enrolment scheme which does go to employees
February 2, 2016
The problem is libtard to quote Russia and Russians “For my friends everything, for my enemies the law” You have heard this one and understand I take it?! A real reply is expected on this simple idea. Thick nonsense will not wash.
January 30, 2016
Not true
Companies with a significant proportion of their workforce here on work visas get them with no liability for employer or employee national insurance for the first 12 months any are in the country. And they can go home for a while and come back and get another 12 months NI free. Many companies cycle their workforce in pairs so one is here and the other is abroad and they swap every 12 months… A permanent NI free workforce for the multinational.
January 30, 2016
Get nothing? They get access to a workforce whose education, skills, expertise and experience allows them to deliver revenue and make profits, and they get access to the infrastructure to support that workforce in being able to do so (like being able to travel to and meet with customers).
Do you seriously believe that a company should be able to use the people, infrastructure and resources of this country to make money while contributing nothing in return?
January 30, 2016
Business rates and NI are not nothing.
I guess they also pay their staff something…tax regime should be such that it encourages investment here rather than in any other country.
January 30, 2016
Peter Parsons
I guess you have no idea about how a business works.
I think you”ll find the investment companies make in wages ( from which tax and NI are deducted)
I think you’ll find the investment companies make in training and developing their staff
I think the levying and collection of VAT
I think you’ll find the payment of employers NI
I think you’ll find the payment of mandatory workplace pensions
I think you’ll find that business rates , stamp duty
I think you’ll find income tax on dividends
I think you’ll find the taxes and duties levied on vehicles, fuel and energy
ALL contribute ALL of the government income that enables the government to purchase infrastructure
The general ignorance of what constitutes a profit and why its necessary is also very scary
January 31, 2016
Libertarian, I think you’ll find that NI and income tax are paid by the employees, not the company. Companies make that investment because they then return a greater income back to the company than the wages cost (thus the company profits from the employee). The same reason is true for training and development (where it is done, which is not everywhere). A better trained employee typically delivers higher profit to the company – this investment is not altruistic.
Most businesses don’t pay VAT, they are exempt and claim it all back. VAT is typically only paid by end consumers.
Workplace pensions are an appropriate salary cost (unless you want the taxpayer to pick up the entire cost of everyone’s retirement). They are not a tax and do not go to the government (although they do serve to reduce the government’s potential liabilities in future years).
And yes, I do understand how businesses work. I also understand how society works and that there are certain things which need to be paid for, despite Know-Dice’s original assertion implying that a business should not have to contribute anything to the society they extract profit from.
January 31, 2016
Employers NI is paid wholly by the employer.
VAT is paid by all in the supply chain calculated as 20% of the difference between your input costs and your ouput costs
Pensions are a cost to the company, they pay the majority with the employee paying a smaller percentage.
You say you know about business but these things show you have a number of gaps.
January 31, 2016
NI is paid by both employer and employee except for some cases as detailed by Ian Gill.
My assertion was that it’s much better that companies have a presences in this country and employ staff in this country rather than elsewhere, and its the government’s responsibility to make the tax regime such that companies keep their profits in this country and invest here.
Google could put itself anywhere in the world it doesn’t have to be physically located here, but it is and its investing heavily here.
Peter Parsons where does that come from?
If you are not VAT registered you can’t claim back input VAT.
January 31, 2016
Mr Parsons–Our host would not give his imprimatur to what I really think of the piffle you talk, epitomised by your use of the word “extract” in front of the word profit at the end.
January 30, 2016
Rubbish.
Fuel taxes cover more than the cost of roads and travel.
Skilled workforce? It is in employees’ interests to get themselves trained and educated as an investment for themselves. Why should employers pay for that then the wage which follows too? Employers are anyway paying the cost of apprenticeships and training for an often barely literate workforce.
January 31, 2016
The UK government does not provide the skills, epxertise and experience of employees. Nor does it provide critical parts of the infrastructure for business, that mostly comes from the telecoms operators, banks and companies like Google.
To rephrase – Do you seriously believe that a government should be able to use the people, infrastructure and resources of a company to make money while contributing nothing in return?
January 30, 2016
If the govt stopped squandering taxpayers cash like there was no tomorrow, they would be able to reduce the tax burden to a reasonable level that individuals and businesses would be happy to pay. You can’t blame people from trying to prevent their hard earned money being funneled to dodgy politicians in the third world and Kid’s Company, or being used to pay ambulance chasing lawyers who persecute our soldiers for doing their job.
January 30, 2016
This is the trouble as you say, the political class we are daft enough to keep elected , as typified by Emily Thornberry and the lady who thinks it OK to keep a car waiting at our expense whilst she attends an opera. This government squanders our taxes here and abroad ,people just shrug, when Cameron uses plain English to describe a “bunch of migrants” we have uproar.
January 31, 2016
You should see the cars shuttling Scottish government ministers around.
January 31, 2016
Exactly. Indeed you can sensibly argue that it is people’s and companies moral duty and indeed legal duty to shareholders to legally minimise their tax bills as far as possible. Especially as they can see how much Osborne wastes. They would after all spend or invest it far more wisely than he does. Indeed almost anyone would.
February 2, 2016
The would spend it on infrastructure and defence would they? Or in your case massive subsidy to landlords living on islands?
January 30, 2016
“I do have an interest in more healthy business and jobs in the UK, and understand that striking the right tax balance is not easy”. And you got a piece on RT yesterday.
Easings:
The EU tax/rising tax (others in the lunch rooms)
Corporation Tax
VAT (& Duties)
Income Tax
Inheritance Tax and others (Insurance/Road Tax/Fuel/Energy…la, la, la)
The 1st two shouldn’t exist
The 2nd two need simplification
The 3rd (5th in list) is a result of stupidity in the past and can only get worse.
Then there is the spending question that doesn’t ever get solved. The system lumbers on with nobody strong enough at the helm for long enough to achieve much.
The wrong rich have become rich…far too rich and it shows. Known as VI’s.
Best of luck sir.
January 30, 2016
“Some of them, for example, chose to establish their headquarters – and therefore incur substantial costs – in Ireland as Google has.”
Is that really relevant to multinationals (that is non EU) who is expanding beyond the country were their HQ is located, there would have been must the same costs had they chosen Ireland, London, Paris or Frankfurt. Oh the other hand if, say, a German company was to relocate to Ireland because of the saving in Corporation Tax then you do have a point but then the costs are of set by the savings surely?
“The second related issue is transfer pricing.”
Indeed but is that relevant to those companies (such as Google) whose products are basically electronic data, not even transmitted via their own physical networks, the only cost might be in ‘off-shore’ server rooms and their maintenance but as they would still need this extra server capacity (almost certainly in locations away from their main IT) are their actually any extra production costs incurred. Should electronic data coms companies, or those parts of multifaceted companies, be able to claim such relief – many of these tax laws were written when goods were a physical and real costs were involved in transfers, that is not always the case now.
Reply It includes the cost of staff time and where the staff are based.
January 30, 2016
Jerry
I won’t make the obvious comment
You seem oblivious to what actually constitutes the operating costs of a business. Wages, buildings, vehicles, energy costs as well as equipment . etc etc
Yes of course electronic data just springs out of thin air, it doesn’t need programmers , data centres, research and development, storage or anything.
You like a lot of the rest of the business ignorant in this country also have no idea what Google do. You do know that Google actually manufacture products? You do know that don’t you Jerry? You do know they design and manufacture their own servers, you do know they manufacture android tablets and smartphones? You do know Google are building cars?
Oh and for all those Google knockers in general it may interest you to know that more than 2 million companies made more than $7 billion in revenues from publishing Google Adsense last year.
Interesting you mention Germany as German Corporation Tax is calculated differently to here. Some German profit is allowed to be reinvested in a business to fund growth BEFORE CT is applied to profit, the opposite is the case in the UK
We need a vastly simpler tax system ( currently 21,000 pages) and we need a completely revamped tax regime that is built specifically for business in the 21st century and beyond.
January 30, 2016
Totally agree
January 31, 2016
libertarian; “You seem oblivious to what actually constitutes the operating costs of a business.”
The costs would be costs were ever, I was talking about the product. Once again you read into what I said many things I have not said, nor even eluded to, no doubt to try and pick another silly argument.
As for your point regarding servers, so what if they do assemble [1] their own servers and data centres, they would still need them were ever they set up or expand, they could set up on the Moon and still have the same IT costs.
Oh and regarding your other comments about manufacturing, I think you will find that they merely outsource, like so many so called “manufactures” these days. Google is a big data company, they have very few real product costs. As for the Google Phone, they merely created the Android OS and/or ‘chat’ software used by the actual hardware manufactured by others, so again just ‘big data’…
[1] do they really make their own motherboards, memory and CPU chips, do they really make their own routers and switches etc.
January 31, 2016
Apart from spending hundreds of millions each year in the UK Google employ thousands of staff just in the UK
Are you suggesting they all do nothing Jerry?
January 31, 2016
@Edward2; No, I am saying that they would be doing that anyway, try actually reading the thread! My comments, in reply to our host, were on two very narrow points of tax relief.
Anyway (on your much wider points), I doubt they are creating anything like the deficit to their taxable profits that you appear to be inferring, after all they are also earning hundreds of millions each year in UK business too – hence why they have agreed to pay ÂŁ130m in back taxes.
January 31, 2016
Sorry Jerry I didn’t realise your point were narrow and mine were wider.
Whatever that means.
January 31, 2016
Google maintain data centres across the planet so they incur costs in many countries, the nearest to us is Dublin so there is a legitimate cost in being there. Since any on-line service you use may be anywhere and uses non-Google carriers there is a cost to both youu and Google and the service provider. You don’t pay differently for a transatlantic query to one to Ireland but there is a cost difference for the infrastructure usage.
Servers and components in the data carrier network wear out owing to moving parts, thermal degradation etc. There is a need for continual capital and operation expenditure on plant as well as R&D to maintain and implement services.
In a sense they are no different to a transcontinental railway – you don’t think a railway operator’s costs stop with just laying the track and buying the first train set, do you?
January 30, 2016
One of the best explanations of the Google et al tax liabilities/situation comes from Douglas Carswell on his blog. A simple, stark analysis of the true causes of the problem, which no one in government apparently cares to make. Yes, the EU is apparently key to allowing, even encouraging, Google and others to behave as they do. Corporate businesses are favoured by the EU, working with economies of scale across the different “regions” of the EU bloc. The concept of the EU as one entity/”country”, with Member States as merely regions, is key to this.
January 30, 2016
Thanks for that very clear and logical explanation, JR.
However, on one point, you say:
“This argument is mainly about where profits are booked and which country therefore gets the tax”
But have there not been cases where by financial jiggery-pokery a highly profitable company has contrived to pay little or no tax in any country?
Reply Yes, and I cover that point as well
January 31, 2016
The media on Google have been puerile.
The rhinoceros in the room is Transfer Pricing (and the like, such as Licence Fees and intra-group lending). The much-heard-about 100 international subs are, with little if any limitation. free to charge each other what they like, especially on intra-group Sales, meaning easy profit transfer to low tax regimes. This is a complex, possibly insuperable, subject, at least till we have some kind of World Union (thankfully some time off), but I deprecate attempts at pretending the subject doesn’t even exist–it is arguably the only subject on this issue. The good stuff about “3%” cannot bear the light of day and Lawson’s so-called idea (as if nobody had thought of it before) of taxation based on Sales is barking.
January 30, 2016
I noted with approval Lord Lawson’s comments that Corporation Tax has had it’s day and should be replaced with a turnover tax. I have previously proposed here having a turnover tax set as a minimum threshold for corporation tax.
It is wrong that it takes an 83 year old former Chancellor, however distinguished, to provide the Conservatives with some hint of incisive and radical thinking. Mr. Osborne is a left wing New Labour tinkerer without any clear vision except to milk the country to keep the State fed. Is there no one to take up the radical conservative agenda from Lord Lawson?
http://www.telegraph.co.uk/technology/google/12130414/Lord-Lawson-Google-tax-row-shows-that-corporation-tax-has-had-its-day.html
January 30, 2016
Couldn’t that lead to companies being bankrupted by their tax bills if for a time they had a high turnover but were making little profit or even a loss on those sales?
January 30, 2016
Denis
“Couldn’t that lead to Companies being bankrupted by their tax bills”
Exactly.
Imagine the situation if you actually made a loss, or broke even for a couple of years, all the reserves could disappear, as well as the Company and all Jobs with it.
January 30, 2016
Profit is a very flexible accounting number as we are seeing. The only real reason to want to declare one is to be able to pay dividends from it – otherwise given it gets taxed it makes sense to minimise it.
Whereas turnover is a cash number that can’t be hidden. I would envisage a low rate of tax on it of up to 2%. Companies in my proposal would pay the higher of this charge or the existing corporation tax calculation. Yes it would be worse for startups in the early days. You could imagine exemptions for the first few years of a business life below a certain turnover number. I would prefer to avoid making opportunities for creative accounting and keep it as simple as possible.
January 30, 2016
So my proposal would as an example work as follows.
For companies that have been in business for more than three years or which have a turnover of more than ÂŁ1m per annum:
They will pay corporation tax at the greater of 2% of turnover or their corporation tax liability as assessed currently.
January 30, 2016
It would ruin manufacturing companies using high value ingredients.
Sales value does not equate to nett profits
Ask someone who sells gold or diamonds.
January 31, 2016
And if you allowed companies to choose between a tax on sales or the current method of tax on profits then only those who would benefit would elect to pay your tax.
The result would be even less tax collected than there is now.
January 31, 2016
“I would envisage a low rate of tax on it of up to 2%.”
Neither you nor Lord Lawson know what they are talking about otherwise they would understand that there is very considerable variation in the proportion of turnover taken in profit depending on business category such that some profitable companies would find all their profits and more being taken by such a tax.
The problem with Google has been caused by the EU; the EU sometimes pretends the EU is one country, operating one-size-fits all schemes such as for the payment of corporation tax and sometimes pretends it consists of individual countries such as with the rate of corporation tax, enabling small countries which don’t have much indigenous industry to offer very low rates to attract businesses that would have very little other reason to locate there other than for tax purposes, e.g Ireland, Luxembourg.
January 30, 2016
One of the few things Lawson has got correct, Corporation Tax has been an anomaly, and basically voluntary, since it was invented. It would make sense to do away with it and let the income and gains “pass through” to the shareholders/ owners, as individual taxpayers, where they live. The same way that limited liability partnerships are taxed. It is up to the shareholders to decide how the earnings in the company come out of it, as income or capital gains. The current turnover tax, VAT, is big enough IMO.
January 30, 2016
JJE
Lord Lawson does NOT make a case for a turnover tax , he recommends a tax on sales. Turnover and sales are NOT the same thing. You can have a very high turnover and no sales , as Denis Cooper says a t/o tax would bankrupt huge numbers of businesses
January 31, 2016
Sales and turnover are concepts that are similar to one another and are often used interchangeably on a company’s income statement. Sales refer to the total gross value of goods and services sold by a business. Turnover is the income that a firm generates through trading its goods and services.
“You can have a very high turnover and no sales”. I have no idea what sort of company structure, such an entity would have? But then I am not a business man like Libby.
January 31, 2016
Just repeat business you have not had to sell.
January 31, 2016
Eh?–As I remember (I am, or at least was, an admittedly not particuarly distinguished FCA) the Companies Acts used to demand that Turnover be disclosed and by that they meant Sales, else I am getting too old. Against that possibility I just looked it up in the Business Dictionary on Google and so shall plan on keeping on getting up in the morning.
January 30, 2016
As you say “Mr. Osborne is a left wing New Labour tinkerer without any clear vision except to milk the country to keep the State fed.” But worse still his absurd tax and regulation complexity is (in effect) a tax on top of the tax itself, He is also still running a huge deficit -just further deferred tax – on top.
It is not as if he is spending it on anything of much of quality or providing much real value to tax payers either.
January 31, 2016
Verily, and it did seem so obvious, Osborne should have done what was necessary six years ago. Maybe the Liberals were the reason he didn’t and maybe that’s one of the reasons why they were annihilated.
January 30, 2016
This is a case of using emotion and not letting facts or truth get in the way of gaining popularity for one groups version of how things aught to be or what they wish to achieve. The left have been doing it for decades and the Europhiles have jumped onto that particular bandwagon and are having considerable success with it.
Vilifying the innocent law abider to bring people on your side is a nasty trick that has been practised since time immemorial. The Nazis used it with their persecution of the Jews is an infamous example. They had considerable success with that too but what started out as simple persecution turned into wholesale genocide. A reminder that once vilification starts it can turn into something much worse.
When lawful tax avoidance is applied that some believe disadvantages society as a whole then it is not the appliers who are at fault but those legislators who designed and built the tax system in the first place. Assuming that a fault actually exists and that can only be established by objective and rational examination. If on examination the tax laws as they stand are found wanting then those laws have to be changed. Not changed because some people feel aggrieved because their subjective non evidence based beliefs tell them they should be.
Unfortunately even recognising that how we approach making others listen let alone address concerns, beliefs and dissatisfactions we may have should be done honestly and objectively. We know that the other way works whereas the right way does not. No wonder humans act so inhumanly to one another.
January 30, 2016
The reality is that anybody who is notably successful becomes a potential target for criticism from people who could not themselves achieve anything of value, and who in many cases live a parasitical existence battening upon others.
January 30, 2016
@Dennis
Surely those who are living a parasitical existence are also notably successful.
It is those in the middle who can not dodge the tax nor reap the payments who are the least successful.
January 31, 2016
Dear Ben–Denis so spells himself and Dennis is someone different
January 30, 2016
Let me start by dealing with conspiracy theories before they are written. I DO HAVE personal interest in Google and perhaps other majors which may come under scrutiny for paying too little tax.You see: as I type, I use a Google browser.It would take a full length book to explain the wealth of information, the paradisical interactions and possibilities this brings to me at the mere press of my computer mouse. Knowing this, proves I am more bright than the collective wisdom of Labour lefties.
Believe me, Google it is earth shattering in its scope. I get this service absolutely free. It is non-taxable under UK law and under many jurisdictions though I believe there are administrative liabilities in North Korea.
Similarly I have a personal interest in all the other browsers as I can flick from one to the other without charge. Through my Google browser I can access Twitter, which provides me with an astronomic view of all the world’s media, on every topic imaginable and some which are unimaginable. Can you believe it…I actually watched LIVE the Rosetta spacecraft land millions of miles away on a comet. FREE!!
Now, after declaring my interest… which quite frankly is not relevant unless you wish to play the man instead of the ball, I have to say the lefties of the Labour Party and green people in general should, if they are using Google facilities or Twitter and other companies, ..though they are not liable to pay them fees in any way whatsoever, could perhaps delve deep into their consciences and if they earn average or above average wages send a charitable contribution to Google. So, how to assess your personal liability to Google? …
## If you are paid at a rate of say ÂŁ10 per hour and you spend one hour on a Google browser then perhaps a ÂŁ10 donation to Google would be acceptable though I’m sure if you watched Rosetta land on a comet ÂŁ10 would be like a speck of cosmic dust.
In general, governments do have an awful and painful time in taxing companies. Most people just have tax taken directly out of their earnings before they are paid them. Companies, there is one in the USA which I have commented on before but its name was edited out, uses the mass of what would be taxable profits for “growth”. It never and will never pay those taxes. It is possible for an individual in the UK to say take on a mortgage and pay less tax and other schemes.
However, it is a bit hard or they would do it, for most individuals not to pay tax but instead use the tax money for “growth”. This opportunity to use all ones tax liability, all ones possible tax-payable, should be given to all.We should all, like many companies, instead of paying the Inland Revenue tax , rather rent an old wooden shed in the garden of one of our friends, just to potter around in and think up strategies and synergies for further “growth” into sheds in other back gardens of our mates. It would be nice, even if not making a profit by renting these sheds we could offset the loss in rent to our friends by the Inland Revenue perhaps giving us a refund on past paid taxes.
Of course there is one law…in fact may laws.. for the rich and other laws for the poor.
Simplification of tax laws and international agreement on company behaviour is required. Also daft left-wing ideologists should be taxed for using Google as they are making political capital out of people who are barely computer-literate. Mean.
January 30, 2016
For once I not only understand your comment but agree with it.
The value of google and other such free services to the world at large far outweighs the value of any tax which may have been lost in a particular country.
I recall that the EU belatedly decided it needed to develop its own search engine to compete with google and the others, why?
And how did that turn out?
https://en.wikipedia.org/wiki/Quaero
“Writing in IEEE Spectrum, Nick Tredennick commented that “Going head-to-head with Google with a project involving well-funded, energetic entrepreneurs would be foolish. Attempting the same with a multigovernment collaboration is beyond description.”
January 30, 2016
An excellent article.
Im dismayed by the lack of understanding by many politicians and media comments on this issue.
For example when they use the 3% figure to try to show some pay too little profits tax, saying corporation tax is approx 20%.
Failing to realise tax is paid on profits not on a percentage of sales.
You can have companies that have sales of many millions but make little profits.
All companies can designate a country for their HQ for accounting purposes.
It can be no surprise that many will choose a country which has favourable policies on taxing their profits..
If you traded in 100 different nations can you imagine the complexities of trying to file 100 different accounts each year.
January 30, 2016
Edward2, a multi-national trading on 100 countries will be filing 100 different sets of accounts. Having a designated HQ does not absolve the requirements to file accounts, it just allows transfer of profits in a manner which can be used to minimise tax bills.
Multi-national companies are not one single company, but a complex network of holding companies and operating companies (since a single individual company is an entity of a particular country). Google has registered companies in the UK. However, often these individual companies are just wholly owned subsidiaries of holding companies registered in other countries, with internal transfer pricing set between them in order to minimise declared profits in the operating company countries and repatriate maximum profits to the holding company countries.
January 30, 2016
I don’t see UK companies such as JLR or BA publishing different accounts in every nation they trade in.
January 30, 2016
Peter Parsons
Once again you show your ignorance .
Tax regimes around the world have very different rules and regulations. Google are a US corporation , US tax law has certain provisions on earnings.
Whilst some businesses can use transfer pricing to offset tax liabilities, transfer pricing is also a very legitimate activity.
You fail to appreciate as most people do that this works both ways.
Do you want BP or BT or BA or Vodaphone to pay its holding company CT in the countries they operate in or in their HQ country (in those cases UK )?
A company such as Google could operate exclusively from US and contribute virtually nothing to the UK economy.
You do realise that tax is paid on the profit wherever its eventually declared?
Your first statement whilst in general being the case there is no reason for it to be so. I operate my businesses in many countries and only have one set of accounts and one set of CT all in the UK
January 30, 2016
Thanks Lib
I knew I was right as usual!
January 31, 2016
Actually, yes I do consider it appropriate for a BP or a BT or a BA or a Vodafone to declare their profits where they are actually made before repatriating them. If an organisation is extracting profit in a given jurisidiction it should be contributing in that jurisdiction. You are entitled to disagree, but you will not convince me to agree with your position on this.
I do realise that tax is eventually made on profits, but often not in the location where it is actually generated and thus the society where that profit is extracted from does not share fairly in its creation. HQs are simply a designation of convenience for tax purposes, they are typically not a reflection of where decisions are made, senior management are located or where intellectual capital is actually created within the business.
I have read Lord Lawson’s comments on this. I see the logic in what he is arguing.
January 31, 2016
So BA or JLR would file accounts in every nation they sell into every year.
Have you any idea how difficult and expensive that would be?
And think through the effect on the UK as all our big companies split their tax liabiliy into 100 countries with the UK getting just a tiny percentage of what they do now.
Would we be better off
I have great doubts.
January 30, 2016
There are well known places with no requirement for companies registered there to file accounts.
January 30, 2016
Another very interesting and excellent presentation John.
So much so, that one is forced to ask the question of why the present Government choose not to use your extensive talents, for the benefit of government and us all.
The simple answer I believe is that they fear you would show them up, and embarrass them with your knowledge and grasp of the commercial World.
So better perhaps not to include you.
Much of what you write today is well known knowledge by anyone who runs even a simple business, or is self employed in a big way.
The complainers I find are usually those who have spent their whole life on a salary, and in a safe job, with little or no commercial responsibility, add into the mix envy, and then the thought that everyone else but me should pay, and you have the answer.
Yes our tax system is far from perfect, certainly it needs simplification and clarity of purpose, but its far better here than in many parts of the World if you want your citizens to have some sort of safety net with regards to benefits, education, healthcare, etc etc.
January 30, 2016
Splendid article JR. Not many people understand these things but you explained the concepts beautifully.
I have no financial interest in Google’s welfare but I will state that I’ve historically paid them a sum into 7 figures. I’ve been lunched by them in London, but all practical day-to-day communications were with Ireland. I can therefore say that in my experience at least, the control of their services was provided from that country and I fully understand how they should be taxed there, unfortunately.
On a more general note, I worry that HMRC are too lenient with major corporations – possibly and in part due to resource issues. I have no direct evidence of this, but my feeling is that they could take a more commercially-tough stance. Maybe they should be set a specific target by the Treasury for tax collection from corporations over a certain size. If this already exists, double the target and incentivise the staff.
This should of course stop well short of an anti-business approach a la Labour Party, which would result in reduced international investment here. All things in proportion…
Final point : I expect our Conservative Chancellor to start behaving like one. Maybe I’m just a dinosaur in expecting the Government policies to reflect low-tax, low-intervention, low-spend thinking.
Thank God there are still a few real Tories like you around.
January 30, 2016
It is Amazon and Starbucks which are the more problematic companies, they are in direct competition with local small businesses like book and coffee shops.
The tax situation created by their ability to play the international system creates a huge disadvantage for the local shops.
Competition is good, but you can’t have it completely skewed in favor of the multinationals at the direct cost to jobs and high street diversity.
January 30, 2016
No its the big outsourcing multi nationals, not brand names the public would recognise.
January 30, 2016
This is one area completely missing from our host’s analysis-supposing a Google competitor wished to start up in the UK today – on an emotional level you would need to question their sanity, but if they did, they would immediately be into higher costs than Google or similar competitors setting up in most countries- property prices, business rates, salaries, NI, NEST, ÂŁ5 per plug PAT tested annually, etc. etc., then what was left taxed at 20%.
That is what the government should be thinking about.
January 30, 2016
There are lots of ways google charge for using their site SEO,CPC,PPC,Adds,Apps and
more, also they take a bit from your payment to the company you uses to connect to the internet, they like you to think that it is free service but it not, that why they earn more money that any one else apart from rip off apple.
Company tax should go to a system like vat, tax on sales not profits and pay the tax were the sale is made, profits are to easy to hide with debts and other things.
January 30, 2016
Ian
They also have more than 2 million companies who earned revenues of ÂŁ7billion last year publishing Adsense.
I agree with you and Lord Lawson CT is now well passed its sell by date and should be replaced by a small tax on sales
January 30, 2016
It would not put the price of things you up because the government only take in 40 billion in company tax now and if you divide that up for the trillion of items sold each year it would be like a click on google and you would be sure to collet your tax.
January 30, 2016
but all reputable companies will want to strike a fair price as they understand the morality of doing so
I think that statement is delivered through rose tinted specs Mr Redwood.
We all wish government would get out of the way more and leave us alone but in this case we do require some form of draconian intervention and legislation.
You can not use the “EU must trade with us line” as a mitigation against leaving the EU tool and then claim that these big multinationals will leave if we tax them properly. They will stay because it is in their interests just as the EU will continue to trade with us after Brexit. They just will not make so much cash and will not have such a great competitive advantage over domestic competitors.
I do think there is a case for companies of this sort to base taxation on an algorithm that takes into account turnover and industry margins. The chaps at Google can design an algorithm that finds what you are looking for among several billion items on the web, I think HMRC can do something similar for taxation.
To write the above and then finish by saying we should all be treated equally by the taxman (including those serfs milked on PAYE) may seem strange but sometimes you do need different treatments for an equal outcome.
January 30, 2016
This article should be stapled to the foreheads of most Labour MPs, a few dense Tory MPs, and virtually all journalists and commentators.
January 30, 2016
I thought the contribution from Nigel Lawson in today’s press was valid and worthy of further serious consideration . Taxing profits is open to a wide area of variation whereas taxing sales is not . I have always contended that our wearisome and extensive tax laws are a great burden to the individual and to the corporate entity alike ; putting a tax on sales for the company and taxing individuals on purchases is a much more straightforward approach.
It is particularly unfair to the smaller company to tax them under the present system and to let off Google at 3% . I agree that getting Google to cough up something now is better than allowing them to “escape” the way they have done in the past , nevertheless , now is the time to apply a fairness for all method . Simplifying the taxable method is the right way to go .
January 31, 2016
Dear Bert–In the nicest possible way, platitudes about simplification and fairness do not do the job. As I have commented above, the rhinoceros in the room, which few dip their toes in to (Sorry!), or even mention, is what’s called Transfer Pricing on intra-group Sales ie Sales from eg the Italian sub to eg the French sub. There is very little control on how such Sales are priced, which makes it easy to transfer profits to low tax regimes. There are essentially an infinite number of jurisdictions, all with their own ideas, it is fearfully complex at best, and I see little chance of a solution till a World Union comes along. One could at least in theory abolish multinationals or forbid them in the UK but I hardly see that happening either anytime soon. As I say above, the coverage in the popular press on this has so far been even more puerile than usual. The “3%” stuff has been without content.
January 30, 2016
I have not even met the management of Google.
>
As someone who spent big money with Google I was invited to visit to them only to be confronted with a huge banner which said “we do no evil”.
I found this rather spooky at the time. Google is a massive online monopoly that should be broken up and should never have been allowed to buy Youtube.
January 30, 2016
Google have something 80% of all search engine traffic, thousands of UK online businesses rely on their organic listings. Google can manipulate its algorithm at anytime to force companies who were getting free organic traffic into being forced to buy Google paid for traffic. The only reason governments love huge companies with monopolies like this is because they agree to give the ‘intelligence’ services back doors to spy on us. Google have wrecked Youtube with their adverts everywhere.
January 30, 2016
Uber paid les tax than 5 London cabbies last year (according to the Mail today.) And most of their drivers will be on income support too.
January 30, 2016
I do have an issue where multi-nationals advocate the importation of cheap labour into Britain and then demand that the taxpayer tops up the wages. If they want this then they should pay towards it.
January 31, 2016
I also have issue with the multi-nationals which advocate our continued membership with the EU.
To have this sort of influence over our country they should at least be polite enough to pay us more tax than they need to rather than less.
There isn’t actually an upper limit on the tax a person or corporation pays. All the lefties and corporations can give as much tax to the Treasury that they want – I’m sure it would be gratefully accepted.
January 30, 2016
Google are responsible for ruining more online businesses than grains of sands. Every Time they have an algo change tens of thousands of people go out of business and their adwords revenue increases. Also, lately they give just authority to big established brands, they never used to do that.
January 31, 2016
The only way to fix this problem is to calculate the % profit every company makes worldwide on its turnover. Then work out their tax bill for the UK using their UK turnover figures and the % profit made worldwide.
It sounds simple but no doubt someone will come up with way for companies to get around this too.
If this is the case then we might as well forget about taxing companies on their profits and just tax them on their turnover.
January 31, 2016
You would have to have many different rates for a tax on sales to work.
Small diamond dealer equals very high sales but perhaps very low actual profits.
Large packaging company selling cardboard boxes equals low sales value but perhaps higher profits.
It could be ruinous if the percentage was set wrong as you could end up paying more than your total profit.
January 31, 2016
I agree. Ideally we should be able to trust companies to present a set of accurate accounts to the taxman so that taxation is imposed fairly on all companies.
But if we we can’t trust them to do this, the options are to not tax them at all or to tax them on what is an unfair basis.
Not taxing them at all is unfair on everyone else who pays taxes. So what is the fair solution? Is there a fair solution?
January 31, 2016
Yes a low tax small State economy.
Low tax rate that is.
It has be fair both sides.
All the arguments are about taxes on profits
It avoids mentioning or calculating the benefits to a nation of having a company like Google in it spending hundreds of millions and employing thousands.
We should try to encourage such companies.
But the cultural marxists are campaignin to shoo them away.
February 1, 2016
“Yes a low tax small State economy. Low tax rate that is.”
Like 3% ? Or would that just be for Google and other multinationals? The rest of us might have to pay a little more?
February 2, 2016
Ah the 3% propaganda figure again.
This is gained by comparing Google sales with the corporation tax they pay
What relevance that is I fail to see
Some companies make less that 3% nett profits in turnover especially when expanding and investing.
Some make losses.
One thing even the hard left is slowly beginning to realise is that nations have to encourage multi nationals to operate in their country and that ever higher percentage rates often leave them with lower revenues..
As for individuals..yes we are very highly taxed
This is why we need a smaller less grasping State that concentrates on the necessities and stops wasting our hard earned money on pet schemes to make politicians feel popular.
February 2, 2016
How limited can you be, “Ever-right Edward2”, to call anyone not agreeing with your views “cultural Marxist”? Have you ever considered that there might be a very wide spectrum of thoughts, not your simplistic bipolar view?
February 2, 2016
Bit touchy hefner.
I did not call anyone in particular a cultural marxist nor did I mean to.
I am correct to say there is a political campaign by the left wing of UK politics against big business and against multi nationals in particular.
Have you not noticed it?
February 2, 2016
And hefner, as I know you are a stickler for accuracy, your quote about me is wrong.
I said “thanks lib, I knew I was right, as usual ! ”
It was a lighthearted comment, hence the exclamation mark and was not meant to be taken literally.
As you have.
February 2, 2016
Communism for the wealthy seems by observation the way as it is now edward2. What benefits is the average person seeing of this apologist position other than austerity and ever climbing accommodation costs. Like lielogic you cannot answer and this is the problem. Lying thick fantasy. Promoted by John redwood on this site too in the interests of the mega rich in some deluded fantasy that somehow all our interests are the same. They are not.
February 3, 2016
I don’t understand the question is Bazman
What is it you want me to reply to you about.?
Do I think that “ordinary ” people are being exploited by over high taxes?
Yes I do
Do I think house prises and rents are too high?
Yes I do
Do I think smaller companies are working under a high tax burden compared to big companies?
Yes I do.
As an “ordinary ” person who has spent a life working in a small company in manufacturing
industry I know at first hand how the EU and UK Govt are obsessed with helping only PLCs and multi nationals.
Your beloved EU is not helping us ordinary people it is helping big business.
Yet strangely those on the left are even more in love with the EU than those on the right.
If you can come up with a new way of taxing multi nationals and Internet trading companies in this new global trading environment then I’m keen to hear it.
Telling them to go away doesn’t count.
January 31, 2016
Correction ” a more difficult problem than the general public might appreciate.”
January 31, 2016
“A company would like the profit to be highest in the lowest tax country, but all reputable companies will want to strike a fair price as they understand the morality of doing so.”
This seems incredibly naive. (and also cuts across the traditional point that companies are supposed to follow the letter of the law and have no further obligations to pay more tax than would otherwise be due).
The guardian are reporting that on Monday google will announce that they have made $30bn of profit from non-US sales in Bermuda. I’m sceptical the Bermuda-based market is that large.
If this is within the rules- then the rules need to be changed. And changed in such a way that anticipates future swindles… If it’s not within the rules- then people need to be prosecuted.
No doubt Labour are fully implicated in all this also.
January 31, 2016
Well, here goes:
Maybe they are just a bit smarter than we give credit.
(all figures are in billions and are 2014)
Income tax ÂŁ156
National Insurance ÂŁ107
Vat ÂŁ104
Corporation tax ÂŁ39
Maybe transparency is not such a good thing when trying to negotiate a sweetheart deal and your EU friends (the ones that seem intent on destroying the UK economy) are peering over your shoulder to see that you are obeying all the rules pertaining to this sort of activity.
I never thought I would be blown away by something the devious Westminster crowd had hatched but this could be the time.
January 31, 2016
Taxation is a necessary evil needed to fund activities of governments, sometimes for good, sometimes not. Governments need to be subject to the rule of law, more so than everyone else. If tax laws are broken, fix them but governments should not be allowed to confiscate.
January 31, 2016
Google paid €28.6m in Irish corporation tax (@12.5%) last year. Apparently then their profit was €240M. On sales of of €18.3bn.
It is not credible their margins are so tight; obviously they have stuck even their Irish books with all sorts of dreamt up costs.
February 1, 2016
Both the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes and the 15/01/2015 report from the Congressional Research Service: Tax Havens: International Tax Avoidance and Evasion appear to have very different views on the problem discussed today from the majority of the contributors to this blog.
February 2, 2016
It would be interesting if you could write a similar defence of Duncan Smiths plans to further harass the bedroom tax payers through the appeal courts at a cost of more than it saves John. No chance there though. The Quiet Man wasn’t so much quiet as completely silent. As no doubt you will be.
Basically what we are seeing is the Tories harassing the disabled via bureaucracy. If they do not work they are said to be playing the system so need benefits cut but when they do are not seen as disabled and also need benefits cut. ie kicking the ball both ways.
This is linked to the Google tax saga as it show how the Tories think, fighting against the public for idealogical reasons. Google are building a billion pound headquarters here employ thousands, make billions in profit using UK infrastructure, but are head quartered in Ireland or the cayman isand that the Tories as we have found out so defend their dodgy tax practices. Get real that is what the public are telling the government and apologist nonsense from any source is the rub. (unproven allegation removed ed). Not that I have much sympathy for black cab drivers. Progress innnit Gov! Like the miners huh!? Oh! Its now not.. Interesting if they somehow undermine rip off landlords spending billions on cheap housing. Then there will be real trouble.
February 3, 2016
Not that unproven John.
http://www.theguardian.com/commentisfree/2016/jan/31/cheap-cab-ride-uber-true-cost-google-wealth-taxation
I suggest you read this weeks Observer too.
http://www.theguardian.com/technology/2016/jan/30/google-tory-battle-protect-30bn-tax-haven-bermuda
For the rest of you ding bat shooting of the messenger will not help.
Try to learn something for a change. I know it hurts as it contradicts you religious right wing views.
February 2, 2016
When you have The Guardian and the Daily Mail agreeing. You have a common problem. reply expected. John! No reply? Doh!