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Posted December 2012

On the trifle matter of corporate taxation - Call me a conspiracy theorist, but it does strike me as highly odd that campaigns to whip up a public storm over companies’ financial engineerings always get launched right before Christmas. Stranger still, there are apparently plenty of members of the public who will volunteer to stand outside in some draughty street, holding up placards with cold fingers, rather than sit at home and warm their hands on a glass of hot mulled wine.
Actually, when in late 2010 the multinational brewer SABMiller was accused by the UK charity ActionAid of tax dodging, thus depriving several developing countries of desperately needed government revenues, the protesters freezing their butts off outside SABMiller’s UK headquarters were predominantly ActionAid’s own.

But this year, when Starbucks, Google and Amazon were given a highly public roasting for alleged tax avoidance in the UK, large numbers of concerned citizens turned up for all-freeze protests at dozens of British Starbucks stores.

Could it be that a multinational brewer like SABMiller, whose beer brands are not exactly household names in the UK, was the wrong sort of target to whip the public into a frenzy?

In this respect, Starbucks, Google and Amazon are certainly better suited to become public enemies. Who has not fallen for their corporate spin that they are really nice hippy companies, out to make the world a better place? Weren’t they perceived of as the peacenik alternative to those corporate fascists that dominate the military industrial complex? Be honest: have you not bought Starbucks’ overpriced coffees because you believed they were made from gender-neutral, civil partnership coffee beans grown by an empowered and incredibly happy Colombian peasant (as the Sunday Times columnist Rod Liddle sneered)? Or ordered stuff from Amazon because it came wrapped in a recycled carton most likely made from processed Welsh sheep droppings?

I fear this is the reason why the public outcry is tens of decibels louder this time. Because, as consumers, we feel let down. As it turns out, Starbucks, Google and Amazon may have their radical chic down to a tee, but behind the scenes they still use the same tax avoidance schemes like all the other companies that don’t go out preaching that they mean well.

The tax dodging schemes currently under attack, are officially known as “aggressive tax planning” and come by the tongue-in-cheek names of “Dutch Sandwich” or “Double Irish”. Basically, they consist in taking advantage of the technicalities of a tax system or of mismatches between two or more tax systems for the purpose of reducing tax liability.

But make no mistake: these schemes are perfectly legal.

As the Economist newspaper reports, “since first opening its doors in Britain in 1998 Starbucks has paid only GBP 8.6 million (USD 14.0 million) in corporate income taxes there. […] Starbucks said this was because it had made a profit in only one year in Britain, though it also admitted that its British business had made large payments for coffee to a profitable Starbucks subsidiary in Switzerland and large royalty payments to another profitable subsidiary in the Netherlands for use of the brand and intellectual property.”

In the case of Google, The Economist says, “most of its revenues in Europe are booked in Dublin, then shifted via royalty payments to a Dutch subsidiary, before whatever is left is recognised as profits by a subsidiary in Bermuda, which levies no income tax.”

Same with Amazon. Its low British corporate-tax bill—GBP 1.8 million (USD 2.9 million) in 2011—is due to its British operations merely providing back-office services to its main Europe-wide business, which is based in low-tax Luxembourg, according to the Economist.

When ActionAid looked more closely at SABMiller’s books (April 2012) it found out that “the SABMiller group is made up of 465 subsidiary companies across 67 countries, along with a number of joint ventures and associates in others. Not all of these companies are involved with the production, marketing and distribution of beer. Some may be holding and financing companies set up to manage the group’s interests in its subsidiaries. Others own the group’s assets, for example its trademarks and other intellectual property. These structures allow the group to manage its complex network of operations efficiently. One observation is startling, however. SABMiller has more tax haven companies (65) than it does breweries and bottling plants in the whole of Africa (64). This includes 17 Dutch finance companies, 11 companies in Mauritius, eight in the British Virgin Islands, six in Switzerland and six in the British Crown Dependencies. There may be many reasons to locate a subsidiary company in such a jurisdiction, but as the examples demonstrate, the result of doing so is likely to be a reduction in SABMiller’s overall tax obligation.”

Incidentally, two years ago politicians were not exactly quick to take up ActionAid’s cause. Their lame excuse was that nothing can be done to stop global companies squirreling their profits into tax havens as it would require a global political effort in harmonising taxation.

This time, however, they seem to be falling over their feet to stop multinationals’ elaborate profit-shifting schemes. According to a recent press release by ActionAid, the UK Chancellor George Osborne and his German counterpart have called for international action to finally hunt for serious solutions. Mr Osborne’s opposition counterpart Ed Balls has responded in kind, saying that measures are needed so that “everyone pays and is seen to pay their fair share.”

Hello, could this be the same guys who for years have tried to make their countries’ tax systems more business-friendly? The UK has long been known for its benign corporate tax regime. The same is true for The Netherlands, Ireland, Switzerland, Malta, Cyprus … and all those funny island states mentioned above.

It’d be easy to call our politicians populist flip-floppers or turncoats, who only respond to the public’s demands if elections are near.

Yet, this time, there may be more at stake: politicians, facing even bigger deficits, may have to shift their focus from making taxes more business-friendly to bringing in more taxes.

Also, there is political action popping up in other quarters too. The European Commission on 6 December 2012 released an action plan against tax havens and tax dodging, which aims eventually to commit European countries to an armoury of “sticks” and “carrots” to eradicate tax haven abuse.

Moreover, as ActionAid reports, African tax authorities are about to finalise a new inter-African agreement that should enable them to investigate tax dodging companies operating across the African continent, and have pledged to review the corporate tax breaks that the Senegalese Finance Minister recently called a “budgetary cancer“, eating up as much as six percent of some African countries’ national income.   

ActionAid hopes that 2013 will become the year when the world’s wealthiest countries have an opportunity to show how seriously they are committed to cracking down on tax havens.

Already, in response to the furore over Starbucks, Google and Amazon, the UK’s Prime Minister David Cameron has promised to use the country’s imminent chairmanship of the G8 club of rich countries to wage war on tax havens.

Ultimately, should this concerted international effort come to nothing (as it might), there always remains the not so pious hope that with global warming sea levels will rise and threaten some of these tax haven islands with extinction.

 

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