Reducing Tax Backfires
Starbucks and Facebook have been in the news this week because they used a system for reducing tax which has backfired, resulting in the paltry amount of tax that they have paid to HMRC despite huge revenues. They haven’t done anything illegal. They have used the system to its advantage. This is a classic case of “when reducing tax backfires” a PR disaster. However, one has got to question that ethics of the practice, known as transfer pricing. In general it would be fair to say that transfer pricing is the tax domain of international business – and really big international business at that. The principle is actually quite fair – being able to allow costs incurred for a company that is faced with operating costs in different countries. There is a sense that this starts in a place of wanting to avoid double counting or not counting. However there is a flaw in the system – one that enables big business to effectively pick and choose where the tax is paid. Naturally any half decent business analyst would suggest finding somewhere where tax rates are very small if they exist at all. This is essentially what Starbucks and Facebook – to name just two, international businesses have done.
System overloaded with loopholes
Yes “the system” is wrong, because it is open to significant “abuse”. However, the world of tax is complicated by all countries having completely different taxes and tax rates. Not helpful. The bright sparks (and they are) at some of the top Accountancy firms get paid significant sums to help businesses avoid tax. The principles are the same as any of us using our own Accountant to help reduce our own tax bill – legitimately. So be wary of throwing stones in glass houses. Yet clearly there is something unsettling when the sums seem to stack up in favour of big business having its cake (make mine a blueberry muffin) and eating it. Tax is a civic responsibility, we don’t dance with joy when paying it, frankly because we know that so much of it is wasted on really rather daft political measures. I still advocate a single rate of tax, irrespective of what the form of income or capital gain. This would, in my opinion, reduce the loopholes and stop people doing what they can to pay as little as they can. Tax needs to be fair to both payer and payee, at the moment it isn’t fair to either, but I see little chance of this changing in the near future. However, transfer pricing rules are being reconsidered. The UN has published its thoughts within a new transfer pricing manual. So there is some hope that a greater sense of fairness might be applied. However, as I have said before, Starbucks and Facebook did nothing wrong in law. However. if you find their actions objectionable you could always use your much under-rated consumer power.
Money, Values and Ethics
Financial planning when done properly should connect your values and ethics with your finances. This is what seems so “off message” with Starbucks. However most individuals are caught in the same trap of not thinking through the bigger picture – what it is that they want or indeed how much is enough. This is something that I help clients to think about and apply to their financial plan. There are two types of people, those that do and those that don’t, so give me a call.