Politicians on both sides of the pond have become exercised over the issue of tax avoidance this past 6 months or so, but this problem that has been around for quite some time.
Maybe it is the silver lining to the financial crash cloud because for far too long, certain businesses have been cocking a snoot at the electors and taxpayers. Business doesn’t have a (formal) vote at elections but uses all sorts of other pressure on governments.
Voters are now beginning to take notice and insisting that politicians do something about it or be defeated at the next election. Because politicians can do one thing that even the biggest business can’t unless they own the politicians – they can pass laws and (try to) make them stick.
We have Amazon trading in the EU from Luxembourg where they have ‘favourable’ arrangements, Starbucks (in the UK for 15 years and ‘failing’ to make a profit in all but one of these years) with similar arrangements in the Netherlands, Google feeling the heat because it appears that some of its London staff were ‘selling’ when that part of the operation was claimed to be carried out from Ireland and that country complaining of a Senate investigation into Apple which concluded that very favourable tax arrangements meant that Apple paid little US tax. Senator McCain estimated that Apple, with some $140bn cash reserves, had avoided some $9billion of tax to Uncle Sam last year alone. Total US offshore corporate profits were close to $2trillion last year, which if repatriated would lead to $700bn tax. Proportionately similar amounts are being lost in the UK – figures of £70 billion are claimed.
It is not only the ‘first’ world that is suffering. Similar games played by multinationals with the developing world countries are estimated to be worth some $70bn in lost revenue to those poor countries, which in many cases is far more than the aid given by first world taxpayers. So not only are companies avoiding paying tax, they are keeping countries and people in poverty. Shame on them.
These are big numbers. The truth is that none of these companies is doing anything illegal. So the answer must be to change the law but that raises a lot of problems in international negotiations.
What should be done?
The key is that to carry out this (at least) moral fraud, companies need to actually trade in the country in question. Amazon has to deliver goods from the UK, bill people from the UK, employ or contract people in the UK to do this work. They should not be able to claim that the goods delivered belong to Amazon Luxembourg and Amazon UK is just the delivery service. There are already EU rules in place for electronically delivered goods – they are deemed to be in the place where the purchase takes place – but they need better policing. In the US, the variety of sales taxes (which is not the same as VAT) makes it even more complex. We need similar rules for physical goods and a declaration that trading is being carried out.
However there is one thing that could – and should – be done and would be fairly simple to implement. Impose a Withholding Corporation Tax on larger companies that wish to trade in a country. This would be based either on the disclosed national sales volume, some sort of VAT or sales tax receipts, or an estimate by the authorities from the global past profits as declared to shareholders. It should be paid monthly or quarterly, as for example VAT is currently paid. We cannot have multinationals declaring one profit for shareholders and another for the tax man – that is lying. Profit is profit and while there are different rules applied in different countries, if a company is not profitable it will go out of business.
Against the WCT can be set the actual day-to-day money spent in the country – wages and direct costs etc. Special allowance could also be included to promote research or other activities. There will therefore be no incentive for companies to up-sticks and move to a lower tax regime if they can set all their office costs against the withholding tax. And tax paid up-front could attract a small interest rate benefit compared to tax paid in arrears – that is logical. In fact these may persuade companies to move to countries which have implemented the tax.
Now you will immediately realise that this will present companies not only with an organisational problem – although I am talking only about a small number of large (ie global) companies of course which should be able to handle such problems. In the first year they will have to pay tax in arrears on their previous year’s profits as well as the new tax ‘up front’.
This is an opportunity to introduce WCT over a period of a few years and at the same time, scale company tax back. A lot of the reason why tax avoidance is so profitable is that tax rates in some countries are quite high. The US has one of the highest company tax rates at 35% and in the EU, Bulgaria is lowest at 10%. The UK is currently 24% going down to 20% but the target should be to move to lower tax all round which will mean less of an incentive to avoid tax and enable domestic companies to grow. Only then can small companies become big companies.
But to companies which have hitherto used transfer pricing and other tricks to minimise their tax bill – even to zero – it will mean that they will have to prove to the tax man that they were not trading in the country which may be quite difficult if invoices and receipts can be produced. It is a question of possession being 9/10ths of the law.
So it really is over to the politicians. While international agreement is ideal, it is not essential. Anyone trading within a country should report and pay taxes on money genuinely earned in that country. There will still be some transfer pricing but this will need to be proved and agreed between the tax regimes of the different countries. There is no suggestion that WCT should be applied to small companies.
What do you think?
photo credit: <a href=”http://www.flickr.com/photos/pasukaru76/5812682124/”>pasukaru76</a> via <a href=”http://photopin.com”>photopin</a> <a href=”http://creativecommons.org/licenses/by/2.0/”>cc</a>
Many of you have probably guessed that even before I was interested in money I was very interested in literature; and the classics at that. Some of them are hopelessly out of fashion; about a year ago I left a comment on a blog mentioning Flaubert and it turned out that the author – a very intelligent but rather young person – had never heard of him but from what I said he thought he is ‘a clever dude’.
Well, Flaubert was a clever dude albeit a very pretentious one (he always insisted he found writing hard and edited a lot but George Sand outed him as a diva); Tolstoy was another clever dude (and also a morally repugnant human being according to even very generous standards). Why am I telling you about them?
Because, I have long been unable to decide which female character I find most annoying: Madame Bovary, Anna Karenina or one of Ibsen’s female leads.
While I am still undecided – and all these are really great candidates for TMP award for most annoying character – we recently saw A Doll’s House by Henrik Ibsen. Which reminded me why I find Ibsen’s female leads annoying and led to a discussion with John, who could not understand: he was rather content with accepting that Nora is a victim and hence cannot be annoying. But let’s take this a bit slower.
For my readers who have not read or seen A Doll’s House, let me recap the story.
A Doll’s House: the story
It is Christmas and Nora, a middle class Swedish young woman, has been shopping: presents for her three children and her husband. Getting back home, she meets her husband (Torvald) and they start chatting about:
- his promotion;
- the plenty of money this is going to bring;
- and that they still need to be careful.
What Ibsen puts out immediately is that these people have:
- different attitude to money: he is completely averse to any borrowing and she is not;
- relationship where he is in a paternal position and she is not even the child, she is a play thing;
- money is a major issue between them and he sees her as a wasteful child prone to whims.
Where the reader/spectator is supposed to get suspicious is that when asked what does she want as a Christmas present, Nora wants cash.
Why, becomes apparent a bit later. When visited by an old friend, Nora is desperate to be taken seriously and shares that she borrowed a lot of money to take her family to the South (remember, the action is in Sweden): she was told that her beloved husband will die is she fails to do so. Only problem is, that to borrow she would have needed her husband with her (or a signature of a responsible man) and he didn’t know about it.
She had asked someone else to help her!
So trouble begins; the guy who helped Nora borrow is known to have forged signatures. This is in the past but Nora’s husband decides that he will sack him. As can be expected the guy is not having it and goes to see Nora. During their conversation we learn that she has forged the signature of her dead father on the promissory note; which is obviously a crime.
The rest of the play is about the tricks and humiliation Nora goes through to keep her husband from opening the letter box and learning about this. But he does and reacts as the self-centred, controlling man that he is.
Well, this was finally the crisis that Nora needed; she saw through him (after almost a decade of marriage, no less) and left him; he was heartbroken. Oh, and she left her children.
Nora: why I find her very annoying
I find Nora incredibly annoying because she:
- was playing her husband’s game;
- allowed him to treat her like his play thing: victimisation always has two sides;
- didn’t have the courage to tell him about the loan she took (to save him);
- cheated to get the loan because it was easier than facing Torvald;
- I think, she thought that if she doesn’t play the empty-headed beauty, her husband won’t love her (which is dumb because this is not love anyway);
- spent her life in fear;
- thought only inside the box society had build around her (getting money from a rich man) rather than trying to break out of the box.
There is more but you get the picture. And yes, there was a lot of Northern European drama, psychological angst and suffering.
Annoying but still a masterpiece that makes one think and examines control through the relationship of the main characters with money, morals, love and silliness.
What is the take away?
For me, the take away is simple:
Never be a victim; have the courage to discuss difficult matters with your partner and don’t wait till there is a crisis.
Have you been in a situation when a partner has tried to control you through money?
There was a time when the sequence of events during the first part of the year was clear: tax returns (January), top up ISAs (March), switch off central heating (April). Ok, sometimes we have had the heating on for some of the time in May. But I don’t remember having [...] Continue Reading…
Although it is sometimes difficult to believe, the needs of financial institutions and their customers can often be served by the same innovations. In the case of online credit cards, these needs—for reduced operating costs and convenience and speed, respectively—are all met by a single product type. [...] Continue Reading…
Have you read a book called ‘Wolf Brother’ by Michelle Paver? Ok, I know that it passes as a book for pre-teens but it was the one I couldn’t put down; I also eagerly awaited each next volume. On the surface, it is one of the ‘magic’ stories about a [...] Continue Reading…
I have always thought of myself as a fairly conventional and ordinary person. OK, probably not entirely ‘ordinary’ and even not entirely ‘conventional’ – there has been too much evidence to the contrary over the years – but I have never thought of myself as someone who achieves [...] Continue Reading…
Last week I wrote about the way in which foreign exchange speculation sets the relative values of currencies. The value of ‘things’ can also be a mystery. Every day items like a bottle of milk or a loaf of bread are pretty easy to value. It’s how much you need [...] Continue Reading…