Special Relationship and Taxes

 

The United States of America and England, or more broadly, The United Kingdom of Great Britain and Northern Ireland, have had a very successful long distance “Special Relationship.” War has been a factor in this relationship as we have fought against each other, and fought alongside each other. For the most part, the relationship has been positive and mutually beneficial. Trading and taxes play a significant role now, and have in the past, pushing the colonies towards independence.

Now, under the backdrop of modern globalization, out of date tax treaties have created some juicy situations for US-based corporations as they are able to move “intellectual capital” and some types of profits, legally paying as little tax as possible. It is the same behavior individuals employ when filling out their tax forms by taking deductions. Even so, there is a general feeling in Europe that some of the giant American corporations are enjoying outsized profits from their European subsidiaries at the expense of the European government treasuries.

At the heart of the issue is how the US-based corporations establish their footprint in foreign countries. Even lawmakers in the US have noticed this type of international franchising (boldness added by me):

“Starbucks, like other consumer goods businesses, has taken a leaf out of the book of tech companies such as Google and Microsoft. Such firms were identified by Senator Carl Levin, chairman of the U.S. Senate Permanent Subcommittee on Investigations, in a September hearing on how U.S. companies shield billions from tax authorities. He said they were engaged in “gimmickry” by housing intellectual property units in tax havens, and then charging their subsidiaries fat royalties for using it.

Like those tech firms, Starbucks makes its UK unit and other overseas operations pay a royalty fee – at Starbucks, of six percent of total sales – for the use of its ‘intellectual property’ such as its brand and business processes. These payments reduce taxable income in the UK.”[1]

As a result of these reduced tax payments, there have been successful efforts in the United Kingdom and Europe to “tax shame” American-based corporations into paying higher, negotiated taxes. Tax shaming is defined as the act or practice of attempting to embarrass a person or group by drawing attention to their perceived offence. In this sense, the “perceived offense” is legally avoiding taxes. Sometimes perception becomes reality. In 2012, Starbucks kicked things off and “settled” with the UK tax authorities after pressure from protesters, customer complaints and the media. Now Alphabet (Google), Amazon, Apple and others are all targets.

Granted some estimates put Google’s UK effective tax rate at 3% based on UK generated revenue and UK taxes paid, sparking additional outrage in Britain. “Tax shaming” is a short-term solution to the perceived problem. Instead of gathering public support to change tax laws, or close the legal loopholes, politicians are finding it much easier to employ this shaming tactic to strong arm corporations into settlements. It seems like it would be easy to gather public support to oppose a loophole with a name like “Double Irish-Dutch Sandwich.” [2]

There has been some rational discussion on this issue in the UK. Andrew Tyrie, Chairman of the House of Commons Treasury Committee was quoted in www.theguardian.com :

“The complexity of tax law is turning what should be a straightforward principle – that everybody should pay the correct amount of tax – into a piece of elastic. For corporation tax, for instance, the problem is exacerbated by the globalization of economic activity and any liability to tax that accompanies it.”

“A corporation’s duty to shareholders will be to minimize its tax liability. It should be the duty of those making tax policy to find better ways to limit the elasticity. Google may be the symptom, but it is not the cause.

“There is a lot the government could be doing. Tax policy must be made more practicable and the tax system more coherent. Tax needs to be fair. It needs to provide more certainty and stability. There is a lot to do and a lot for the committee to examine.”[3]

Welsh Flag

Welsh Flag

In addition to this type of levelheaded thinking, a small town in Wales decided to take matters into their own hands. In an effort to draw more attention to tax avoidance schemes, they have decided to employ them! The local salmon smoker, coffee shop, book shop, optician and bakery among others have decided to move their businesses “offshore” and have submitted such plans to HMRC (Her Majesty’s Revenue and Customs – a name much cooler than IRS).

When the local Welsh businesses met with HMRC, the proprietor of the salmon smoker, Jo Carthew said they had a “very good meeting” with HMRC. At the meeting they submitted their offshore tax plan for approval. “It’s a threat to the Government because if they don’t act this could be rolled out to every town. Everything we have proposed is legal.”

They even had a BBC crew follow their efforts to document and broadcast it to the nation and draw media attention to the issue.[4]

At the end of the day, countries and corporations need to have clearer edges around what is considered tax avoidance (which is legal) and tax evasion (which is illegal).

(The author has included a few of the various flags that make up the United Kingdom of Great Britain and Northern Ireland as well as the Unified Flag that technically represents the four inclusive “countries”. And you thought taxes were complicated.)


 

[1] http://uk.reuters.com/article/us-britain-starbucks-tax-idUKBRE89E0EX20121015

[2] Double Irish discussed: http://metro.co.uk/2015/10/12/heres-why-its-legal-for-facebook-to-pay-less-than-5000-in-british-tax-5434871

[3] www.theguardian.com

[4] http://www.independent.co.uk/news/uk/crickhowell-welsh-town-moves-offshore-to-avoid-tax-on-local-business-a6728971.html

 

About Matthew Kolesky

Matthew Kolesky is a Principal at ACM, Inc. and joined the firm in 2004. Matthew Kolesky was born and raised in Alaska and has served on many Anchorage area non-profit boards.