Fresh controversy sheds light on corporate tax avoidance

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Francois Badenhorst
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The corporate tax controversy carousel keeps a-spinning, it seems. And now not even your Frosties are safe from the machinations of transatlantic tax avoidance schemes.

Kellogg’s, whose CEO John A. Bryant is a chartered accountant, was thrust into the spotlight this week when it transpired that its UK arm paid no corporation tax in 2016. The cereal giant’s UK subsidiaries did turn a profit - but after recognising numerous losses from elsewhere in the business, the profit quickly turned into a loss.

Kellogg’s reply was a typically terse corporate response on matters of taxation: “We pay all corporate tax according to the laws of the countries in which we operate.”

That’s only a few syllables more than AirBnB’s comment to The BBC: “We follow the rules and pay all the tax we owe.” Airbnb paid £188,000 in UK corporation tax last year despite collecting £657m of rental payments for property owners.

And now, eBay has joined the media circus, too. The UK arm of eBay paid only £1.6m in corporation tax last year. That’s because eBay’s UK arm made a pre-tax profit of £7.7m, according to the accounts, and it was on this figure that the UK corporation tax was levied.

The £7.7m figure was arrived at despite its US parent company’s account stating that the total revenues from its UK operations was £1bn. Again, the response was: they pay the tax they owe and comply with the laws in each jurisdiction they operate.

But this sort of response isn’t enough to satisfy their critics. “The response that they comply with the law in the jurisdictions that they operate is the answer to a different question,” says Jolyon Maugham, a tax barrister and director of the Good Law Project. “It’s not being contended that corporations are breaking the law, it’s that they are acting in a morally poor fashion. To say that it’s legal, doesn’t seem to be much of answer.”

According to Maugham, these companies are playing a dangerous game within a changing political environment. “There’s now a consensus that this sort of behaviour is highly undesirable. The political and pre-tax economic costs of engaging in it are rising,” says Maugham. “It’s absolutely right that government seek to reasonably regulate capital.

“Legally, the tide is turning: the EU is pushing on with its consolidated corporation tax proposals. We now have BEPS. We’re waiting to see what impact the Diverted Profits Tax has. But morally, certainly on this side of the Atlantic, the tide is turning, too, and companies need to understand that aggressive tax avoidance behaviour has consequences.”

About Francois Badenhorst

About Francois Badenhorst

I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter. 

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13th Oct 2017 10:51

https://www.gov.uk/government/news/beating-the-tax-cheats-hmrcs-criminal...

HMRC published list from 2016 of their ten "best" prosecutions, I think its time they set their sights a little higher up the food chain if they want to send a message of real consequence to the Corporate fat cats who routinely play ducks and drakes with the UK tax system.

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By mkowl
13th Oct 2017 11:25

There is clearly a need for the accountancy profession to take the lead and explain this to the media. In the AirBnb then the very simple response would be that most of the rent collected is passed to erm the property owners. the profit is their commission less costs.

However Facebook, for example it is very difficult to justify why historically the only sales it records in its UK accounts is intergroup sales.

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13th Oct 2017 11:35

Just a few general points...
I wasn't aware that UK taxation was based on a company's turnover...
I wasn't aware that a company's annual tax liability was calculted, using the "morall's basis"...
& I certainly was aware that Robin Hood had come back from the dead and had been appointed as the head of HM R&C...
If you must take issue over these large foreign companies paying (or not, as the case may be) less tax than you think they ought to, please base your comments on fact, not moralls.
HM R&C make the rules... these companies pay vast armies of professional advisors to ensure that they follow them... why is this "morally" wrong?
I think the off-side rule is a joke, but hey, it is what it is, and until some muppet at FIFA earns his inflated salary & does something about it, we're stuck with it...
& so it follows, stop harping on about Google & Apple & Ebay & get HMR&C to do its job better (I almost said properly, but that's taking it a tad too far).

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By Ammie
13th Oct 2017 12:39

Quite simple really, rather than the government deflecting attention from their own short comings in financial management by spotlighting "moral" wrong doings of others, change the tax laws to prevent or make the practice much more difficult.
I doubt very much whether that will happen any time soon as the culprits of "moral" wrong doings are often associated directly or otherwise with senior business officials and government ministers.
Highlighting these arrangements to gain sympathy and doing nothing about it is just hot air.
Add to that the complex off shore arrangements some of the same senior people are associated with and the subject becomes more of an embarrassment for HM government.

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13th Oct 2017 13:36

You are talking yourself down a slippery slope. Absolutely we want corporations to comply with the law. And mostly they do. We also want our tax system to be easy to follow, with certainty over the amounts, and a low cost of collection. What we actually have is an overly complicated mess of a system. The blame for which lies with Parliament.

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13th Oct 2017 13:46

This old story eh!

The government set the tax rules.
Businesses follow them
HMRC check this is happening.

Morality doesn't come into it.

However, one big problem is the influence of big business on policy. You only have to look at the multi-millionaire ex chancellor who was in place when the rules were set that enabled these ultra low tax receipts.

Its blatant corruption, but as it is "out in the open" these days with registers of interest etc, it seem it is no longer a problem if it's not secret that it goes on.

A certain PM and her husband who just happens to be a major shareholder in a company that enjoys a huge number of government contracts springs to mind too.

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to ireallyshouldknowthisbut
13th Oct 2017 13:52

so the question is - do politicians game the system. Got to be worth a six figure research grant.

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By DJKL
13th Oct 2017 18:35

This is of course not a UK problem , it is a worldwide problem and arises because governments have difficulties agreeing a recognised international framework re both tax and accountancy, the global activities of corporates making it more and more an issue which is not likely to shrink, the world is smaller re trade and this is the consequence.

Until there is a coalition of the willing at an international level amongst all major economies there is likely little that can really be done except inserting the odd digit in one hole just to see the leaks coming from somewhere else.

A coalition of the willing, with economic sanctions against those countries who stray, is probably the only solution; whether this is pie in the sky dreaming or something that it is possible to construct will no doubt be much discussed in textbooks in another 60-70 years.

I suspect we will eventually stop using profits as the measure re tax due and start using a different measure re country by country economic activity, but am not holding my breath it will happen soon.

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13th Oct 2017 23:06

Morals or not most large companies have a dedicated CRM at HMRC who works with the corporation to agree their tax position.
We should all pay the tax we owe by the letter if the law and if that isn't enough the law should be changed.
The press should never be policing the tax code - they don't understand it so anarchy will ensue.

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14th Oct 2017 19:00

With regard to Airbnb this is a witch hunt. The fact that they collected such a high value is irrelevant. Most of that belongs to the landlords.

The landlords would pay the tax due on that income.

All emotional and no logic or thought.

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By DJKL
to richardterhorst
15th Oct 2017 01:17

Who knows if it is or is not an witch hunt?

Looking on UK Companies House for some data:

AirBnB UK Limited had a turnover of £72.8m, nearly all of this was covered by admin costs, the biggest of which was exchange differences of £64.5 million, it appears these possibly arose due to interactions with AirBnB Ireland UC. And all turnover is attributable to Ireland

There is also AirBnB Payments UK Ltd, turnover of £194m, all attributable to Ireland. It has a very interesting creditors/debtors profile, the movement of these, relative to the operating profit being interesting, the cashflow and notes to same show a pretty decent cash balance of £1.12 bn (prior year £546.5million), pretty large changes given turnover was only £194m which may have something to do with the volume of transactions processed and the cash for bookings taken in advance (see increase in accruals)

Maybe there is more logic in some comments than you have credited.

Of course following the flow of inter company charges re groups with offshore parents is pretty tricky without really knowing what is happening, perhaps you ought to take a look yourself.

I suspect the problem some people might have is that this web based business is acting re the marketing for rent of UK property whilst most profits from said trade do not appear to be arising in the UK, perfectly in accordance with the law, no doubt, but does beg the question whether the taxation of profits, as a basis of taxing international business entities, is still appropriate in the 21st century.

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to DJKL
17th Oct 2017 13:04

lots of words, lots of nonsense. This is a site for accountants, not kindergarten students.

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By DJKL
to listerramjet
17th Oct 2017 14:39

You are certainly entitled to your opinion irrespective of the paucity of argument made.

Well aware what this site is for, discussion, I do quite a lot of it here,.

Accountants surely need to consider more than merely the legal position, they need to consider the longer term, business risk is certainly something that requires awareness and behaviour the public dislikes is a business risk.

If you can maybe widen your viewpoint away from the mere legal and look at embryonic cultural changes in society you might consider that the behaviour of some companies is somewhat rash, the public do have long memories, ask Gerald Ratner how easy it is to trash goodwill.

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16th Oct 2017 13:21

"To say that it’s legal, doesn’t seem to be much of answer."

Coming from a lawyer, that's ridiculous. But coming from Jolyon Maugham, it's to be expected.

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By DJKL
17th Oct 2017 12:44

As the piece says, depends on the question.

Nobody disputes this is the way the law works, nobody disputes directors etc need to act in the best interests of their companies, but the big question is, how long will all this be permitted to prevail?

This is basically akin to parents at odds so kids run amok, fine when it lasts, but eventually Mum and Dad decide to act in concert and the kids are brought into line, the old divide and rule regime no longer works.

Companies (and their advisers) need to seriously appreciate that they are, in some cases, frankly taking the [***], it may well be legal but eventually it will not be and maybe, just maybe, they ought to consider damage to their own brand.

None of the outrage is going away anytime soon and maybe companies ought to learn to more read the public's mood, if they push it too far and a younger generation decides to use social media to seriously punish them, even large companies could be badly hurt.

Anyone who spends much time around educated and articulate twenty something year olds (I have two, plus we see some of their friends) starts to realise that the old pathway of youth morphing into their parents values (house/mortgage/kids etc) is no longer as prevalent (See rise of Corbyn as a sign), we live in a more radical world and companies possibly ought to start appreciating that whilst governments maybe cannot control them, unless the governments act in concert, the public can, and its punishment, for a transgressing company, could be very harsh.

Caveat emptor

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to DJKL
17th Oct 2017 13:06

stop and think about what you are saying. Or to be a bit more blunt. Engage brain before ...

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By DJKL
to listerramjet
17th Oct 2017 14:48

I believe I do think, so, where do you disagree given the thrust of the original article.

We all know (or maybe ought to know) that the 21st century appears to have overtaken the historic system of taxation, do you really think the current systems of deciding residence etc re corporate entities,where they pay tax and the current ability of international groups to move profits to lower tax rate jurisdictions, can continue ad nauseam; the point is I believe I am thinking beyond the current to the future.

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to DJKL
17th Oct 2017 13:19

You can only expect corporations to act within, and according to, the law. If there is something wrong with the law, then change it. Therefore the test will always be, is it lawful?

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By DJKL
17th Oct 2017 14:30

Take the discussion beyond the law, which frankly was the point of the article, and consider the long game.

Moving profits through lower tax jurisdictions cannot really be prevented by single countries, they need to act in concert, a hard thing to put in place, a slow thing to put in place, my much earlier post above pointed this out.

My more recent post looked at reputational damage, given goodwill is an accounting concept things that damage that goodwill will, long term, have an impact upon its recognition and the value of the business.

I expect corporations to look to their own self interest and have a long range vision re their business, they may, over the next 10-15 years, find that short term tax gains start to become outweighed by long term business costs.

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By DJKL
17th Oct 2017 15:10

Just to say I am not totally alone re my misgivings, here is a link to another A Web blog post.

https://www.accountingweb.co.uk/community/blogs/the-imprudent-accountant...

Let your pounds do the talking.

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17th Oct 2017 15:24

Hmmm... I presumed, obviousy incorrectly, that Accounting Web was a forum where we're all allowed to partake & put forward our observations / points of view...
Apparently not, according to "listerramjet" who would appear to be taking things to a personal level.
I may not agree with some of the points raised, but I'm perfectly happy that they have been put forward... it lends itself to actually considering somebody else's opinion, other than your own...
DJKL makes a very interesting point in considering how our children may react differently to this situation... unfortunately we're stuck with what we have for now.

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