Corporate Tax

[really]

Google's Eric Schmidt 'perplexed' over UK tax debate

Google's executive chairman Eric Schmidt has said he is "perplexed" by the ongoing debate over the company's tax contributions in the UK.

Mr Schmidt told the BBC that the company did what was "legally required" to pay the right amount of taxes.

Google paid £10m in UK corporate taxes on revenues of £11.9bn - less than 0.1% - between 2006 and 2011.

Mr Schmidt said it was up to the government to change its tax system if it wanted companies to pay more taxes.

I'm not sure if the good burghers of CFC have been following the populist focus on the tax paid on the profits of multinationals.

In the UK Google was brought before the Public Accounts Committee essentially accused of recording British sales outside of the UK and thus avoiding British corporate income taxes.

In the US Apple was brought before a Senate committee to answer questions on their taxes.
http://www.nytimes.com/2013/05/22/technology/ceo-denies-that-apple-is-avoiding-taxes.html?ref=business

The mechanics of each case are a bit different but it boils down to profits from non US operations being recorded in Ireland and then transferred via the Netherlands to Bermuda or the Bahamas.

The income was not subject to US corporate income tax as it was not repatriated to the US. It was not subject to UK corporate income tax as the sale was judged to be in Ireland. Much of the income was not subject to Irish income tax as the management and control was outside of Ireland.

So what say you CFC?

Should the US and the EU reform tax rules to force companies to pay more tax?
Should these companies voluntarily declare income in the UK or the US for example?

Personally I think it is within the power of each country to collect more tax if it so wishes. Companies acting within the law should not be dragged over the coals for complying with the law.

The UK is being hypocritical demanding on the one hand that Google declare income in the UK on sales to UK residents while on the other hand opposing proposals (along with Ireland and the Netherlands) at a European level to create a common consolidated tax base which would achieve the same.

 

[Cutlass]

In one sense what the companies are saying is right. The law, as written, doesn't actually require them to pay more in taxes.

That said, the debate needs to be about how much we actually want companies to pay. And who pays the difference if they don't. Some people make the argument that less corporate tax will mean more business investment, and so will pay for itself. But they are actually not really paying much of any tax now, and it is not resulting in extra business investment.

Now tax simplification is definitely an idea with merit. The complexity of the system is a dead weight loss to everyone. But, that aside, you can't lower taxes on one group without raising them on another group.

 

[Traitorfish]

It's hypocritical if you think the British government's aim is actually to collect the taxes in question, and not just make a lot of base-pleasing noise about "national sovereignty". If the latter, their position makes perfect sense, because they're standing up to (or, more reasonably, giving the appearance of standing up to) both the rootless cosmopolitans in California and the Asiatic socialists in Brussels.

 

[Quackers]

This whole thing does seem to be dragging on a bit.
Unfortunately as long as there is one jurisdiction in the world which offers a tax rate which is so far under that of the developed world; tax avoidance will happen. You need international cooperation to create a uniform tax rate or the lesser option of a minimum rate, but if 50% of your tax revenues derive from these multinationals declaring their profits in your country you are not going to change.

 

[El_Machinae]

Haven't the externalities of Google brought way, way more than 10m to the UK?

 

[Silurian]

Haven't the externalities of Google brought way, way more than 10m to the UK?

So multinationals should pay less tax than national companies.

 

[El_Machinae]

So multinationals should pay less tax than national companies.

Golly, no. It's just a question of how to tax transactions that leave the UK shores, I guess.

 

[really]

http://ec.europa.eu/taxation_customs/taxation/company_tax/common_tax_base/#ccctb

The Common Consolidated Corporate Tax Base is a single set of rules that companies operating within the EU could use to calculate their taxable profits. In other words, a company or qualifying group of companies would have to comply with just one EU system for computing its taxable income, rather than different rules in each Member State in which they operate.
In addition, under the CCCTB, groups using the CCCTB would be able to file a single consolidated tax return for the whole of their activity in the EU. The consolidated taxable profits of the group would be shared out to the individual companies by a simple formula so that each Member State can then tax the profits of the companies in its State at the tax rate that they - each Member State - chooses, (just like today.)

http://en.wikipedia.org/wiki/Common_Consolidated_Corporate_Tax_Base
Reading into the CCCTB further taxable profits would be calculated using a formula considering labour, sales and capital.

The problem of profits ending up in islands that get more sunshine than here would remain however.

 

[Tahuti]

Corporate Income Taxes are increasingly difficult to levy really. Since publicly traded corporations come very close to the hypothetical homo economicus, as shareholders will pressure companies to be as profitable as possible, it might be much better to scrap the corporate income tax and increase taxes on investors instead. Unlike corporations, investors actually are people (sorry Mitt) who have a number of irrational reasons to stay in the country (i.e. culture, family, lifestyle). Corporations don't.

 

[Silurian]

Golly, no. It's just a question of how to tax transactions that leave the UK shores, I guess.

Or US shores. The UK also provides tax advantages to relocate functions to the UK as well so it is an international problem. It is an international problem and needs to be sorted internationally.


From The Houses of Parliament

8. Starbucks told us that it has made a loss for 14 of the 15 years it has been operating in the UK, but in 2006 it made a small profit.[19] We found it difficult to believe that a commercial company with a 31% market share by turnover, with a responsibility to its shareholders and investors to make a decent return, was trading with apparent losses for nearly every year of its operation in the UK.[20] This was inconsistent with claims the company was making in briefings to its shareholders that the UK business was successful and it was making 15% profits in the UK.[21] Starbucks was not prepared to breakdown the 4.7% payment for intellectual property (which was 6% until recently) that the UK company pays to the Netherlands based company.[22] The Committee was sceptical that the 20% mark-up that the Netherlands based company pays to the Swiss based company on its coffee buying operations, with a further mark up before it sells to the UK, is reasonable .[23] Starbucks agreed that it had a special tax arrangement with the Netherlands that made it attractive to locate business there, which the Dutch authorities asked Starbucks to hold in confidence, and that Switzerland offers a very competitive tax rate.[24] In addition, there is an inter-company loan between the US Starbucks business and the UK Starbucks business over a period of time with the interest rate set at higher rate than any similar loan we have seen.[25] We suspect that all these arrangements are devices to remove profits from the UK to these areas with lower tax.[26]

http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/716/71605.htm

The charges of unethical behaviour are damaging the Starbucks, Amazon, Google etc brands but it remains to be seen how that will affect their market share long term.

As Margaret Hodge MP said "I'm not going to buy Starbucks tomorrow, I think everybody should go and buy Costa,"

Costa bosses have sought to play down suggestions that its recent success in Britain had much to do with enduring outrage at the UK tax arrangements of Starbucks, exposed by Reuters last year.

Nevertheless, the latest brand preference survey data from YouGov – released to the Guardian – show a sharp drop Starbucks' standing among coffee drinkers. The data suggest the US firm's reputation took a heavy hit, despite an unprecedented move to pledge £20m in "voluntary" tax payments.

http://www.guardian.co.uk/business/2013/apr/30/costa-coffee-sales-tax-starbucks

 

[Terxpahseyton]

Another example is Starbucks. Coffee shops pay a "license fee" to the company which reduces their profits and hence effective tax rates, while the fees end up in a place where there are small tax rates to begin with.
I severely lack knowledge on the subject to have a really informed stance, but yes, something ideally should be done to change the various methods of tax avoidance and yes, it is a sort of hot topic in Germany as well (though there is none of "Justify yourself in front of the parliament"-stuff going on you mention, for the reason you mention - that laws are not actually broken, "merely" bend in their intend).
The principle seems easy - profits have to be taxed where they were created. The practice seems sort of complicated.

 

[warpus]

Could we make companies adhere to the spirit of the law rather than the letter of the law? Seems like that would make it harder for their lawyers to find loopholes, and loopholes seems to be the reason why they pay so litt.e

 

[Birdjaguar]

The Hollywood movie industry has been operating at a loss for years:

Due to Hollywood accounting, it has been estimated[citation needed] that only about 5% of movies officially show a net profit, and the "losers" include such blockbuster films as Rain Man, Forrest Gump, Who Framed Roger Rabbit, and Batman, which all took in huge amounts in box office and video sales.

Examples

Winston Groom's price for the screenplay rights to his novel Forrest Gump included a share of the profits; however, due to Hollywood accounting, the film's commercial success was converted into a net loss, and Groom received nothing.[7] That being so, he has refused to sell the screenplay rights to the novel's sequel, stating that he "cannot in good conscience allow money to be wasted on a failure".

Stan Lee, co-creator of the character Spider-Man, filed and won a lawsuit after the producers of the movie Spider-Man (2002) did not give him a portion of the gross revenue.[8]

The estate of Jim Garrison sued Warner Bros. for their share of the profits from the movie JFK, which was based on Garrison's book On the Trail of the Assassins.[9]

Art Buchwald received a settlement after his lawsuit Buchwald v. Paramount over Paramount's use of Hollywood accounting. The court found Paramount's actions "unconscionable", noting that it was impossible to believe that a movie (1988's Eddie Murphy comedy Coming to America) which grossed US$350 million failed to make a profit, especially since the actual production costs were less than a tenth of that. Paramount settled for an undisclosed sum, rather than have its accounting methods closely scrutinized.

The film My Big Fat Greek Wedding was considered hugely successful for an independent film, yet according to the studio, the film lost money. Accordingly, the cast (with the exception of Nia Vardalos who had a separate deal) sued the studio for their part of the profits. The original producers of the film have sued Gold Circle Films due to Hollywood accounting practices because the studio has claimed the film, which cost less than $6 million dollars to make and made over $350 million at the box office, lost $20 million.[10]

Hollywood accounting is not limited to movies. An example is the Warner Bros. television series Babylon 5 created by J. Michael Straczynski. Straczynski, who wrote 90% of the episodes in addition to producing the show, would receive a generous cut of profits if not for Hollywood accounting.[citation needed] The series, which was profitable in each of its five seasons from 1993–1998, has garnered more than US$1 billion for Warner Bros., most recently US$500 million in DVD sales alone. But in the last profit statement given to Straczynski, Warner Bros. claimed the property was $80 million in debt. "Basically," says Straczynski, "by the terms of my contract, if a set on a WB movie burns down in Botswana, they can charge it against B5's profits."[11]

Peter Jackson, director of The Lord of the Rings, and his studio Wingnut Films, brought a lawsuit against New Line Cinema after "an audit... on part of the income of The Fellowship of the Ring." Jackson stated this is regarding "certain accounting practices," which may be a reference to Hollywood accounting. In response, New Line stated that their rights to a film of The Hobbit were time-limited, and since Jackson would not work with them again until the suit was settled, he would not be asked to direct The Hobbit, as had been anticipated.[12] Fifteen actors are suing New Line Cinema, claiming that they have never received their 5% of revenue from merchandise sold in relation to the movie, which contains their likeness.[13] Similarly, the Tolkien estate sued New Line, claiming that their contract entitled them to 7.5% of the gross receipts of the $6 billion hit.[14] Overall according to New Lines accounts the trilogy made "horrendous losses" and no profit at all.[15]

According to Lucasfilm, Return of the Jedi despite having earned $475 million at the box-office against a budget of $32.5 million, "has never gone into profit".[16]

A WB receipt was leaked online, showing that the hugely successful movie Harry Potter and the Order of the Phoenix ended up with a $167 million loss on paper.[17]

Michael Moore is suing Bob and Harvey Weinstein for creative accounting to deprive him of his share of profits for the film Fahrenheit 9/11. [18]

The famous and critically acclaimed educational TV show Bill Nye the Science Guy was ended because the producers hadn't "shown a profit" in twenty years due to this practice.[19]

Actress Lynda Carter was also upset with some of the marketing of her image that involved Hollywood accounting. Warner Bros. worked out a deal with the toy company Mego to create a Wonder Woman doll while the series was still on the air. In 1987, on The Late Show with Joan Rivers,[20] Carter commented: "I think that you're probably familiar with a problem in Hollywood, and that is that they market you, and they use you. They did a mask of my face and put it on the doll, and they put my name on for the first run of it. And then they took my name off and said they didn't have to pay me anymore. So it's the kind of thing that you can be used so much in this industry. I make nothing. I don't even make anything from the reruns. Don't ever settle for net profits. It's called creative accounting."

http://en.wikipedia.org/wiki/Hollywood_accounting

 

[JollyRoger]

I guess Hollywood Acconting explains why that former Hollywood union thug that became President was considered a fiscal conservative.

 

[Mise]

Google should be paying more than 0.1% tax. They should voluntarily pay the tax they owe, because doing otherwise would be immoral. However, we can't rely on corporations to act morally (duh); therefore, the UK government should change its laws to stop this loophole. Ideally it would be done EU-wide.

It's strange that people accept the notion that companies act immorally as if it were perfectly natural, even right. Companies are run by people and people should act morally.

 

[El_Machinae]

Well, I don't know if "morally" is the right word, but the corporation should only be allowed to exist if it provides people a net benefit. The entire system is supposed to benefit us, not vis versa

 

[JollyRoger]

Corporations are welfare queens too, my friend.

 

[Lord Baal]

The film My Big Fat Greek Wedding was considered hugely successful for an independent film, yet according to the studio, the film lost money. Accordingly, the cast (with the exception of Nia Vardalos who had a separate deal) sued the studio for their part of the profits. The original producers of the film have sued Gold Circle Films due to Hollywood accounting practices because the studio has claimed the film, which cost less than $6 million dollars to make and made over $350 million at the box office, lost $20 million.[

Just thought that one deserved some special mention. Wow. how do you lose $20 million on a film that cost less than one-third of that? It's not like they mortgaged it.

 

[Birdjaguar]

Creative accounting at its best.

 

[Lord Baal]

Creative accounting at its best.

Is there any chance we could hire these people to do our taxes? The government alerady owes me some money, I feel I should somehow inflate that to several million.