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Opinion Piece – Amazon and Google and the prickly question of UK Corporation Tax


Luxembourg
Luxembourg (Photo credit: epha)

This week has seen the issue of corporation tax paid – or rather not paid – in the UK come to the boil, after simmering for several weeks with the articles of various MPs from various parties in various newspapers. It has now made the front page news and there has been an open harangue on three companies, Starbucks, Google and Amazon in the Public Accounts Committee by a group of British MPs headed up by Margaret Hodge.

The argument of the Committee is that these are companies who have made a good deal of turnover in the UK but they haven’t paid any tax. The way in which this has occurred is that they haven’t shown much by way of profits in the UK. They are now being told by Mrs Hodge that she doesn’t believe that they have not made profits in the UK given so much turnover, she thinks that profits are being salted away to other countries, like Luxembourg or Holland, using various techniques such as management charges, royalty fees, transfer prices, etc.

There are of course laws which are set up to determine whether profits in the UK are being assessed fairly – there is transfer pricing legislation and the Inland Revenue are able to investigate whether Transfer Pricing has been used. However, in the end what Mrs Hodge’s argument has boiled down to is the fallacious “argument from incredulity” – she cannot believe that the businesses have not made bigger profits (she seems to be oblivious to the fact that there is a recession going on out there and has been for some time, and that companies in all sectors and of all sized are bankrolling losses), and since she cannot believe it, it cannot be true.

In the case of Amazon a particular point was made – in addition to the insulting of Amazon’s spokesman Mr Andrew Cecil by accusing him of “gross ignorance” – namely when he pointed out that of course Amazon has paid taxes, only not corporation tax, they have paid VAT and employment taxes and created jobs – Hodge said that this argument was irrelevant because also the corner bookshops which would have sold those books would have created those jobs (fictional employment was always beloved by the left) and that Amazon, by making offshore structures involving Luxembourg, were making those little corner bookstores less competitive.

The fact is, however, that Amazon is not competing with little bookstores – it’s the Internet, new technology, which is competing with physical bookstores, but anyone with any kind of memory ought to be able to remember how a few large stores like WHSmiths and Waterstones already managed to put the corner shop bookstores out of business long before the Internet came along. Also if you look at markets like Poland or the Czech Republic, where they have online stores for books but not so much by way of the colossal physical bookstores the way the UK has, there the corner bookstore is alive and well. So Mrs Hodge has absolutely the wrong villain in her sights if she wishes to defend the corner store bookshop. But if she really was interested in championing them, then where was her voice railing against expansions by Waterstones and Smiths ten to fifteen years ago, which transformed that industry then just as much as the internet does now? Where is her voice against the Net Book Agreement, which makes it very hard in the UK for small businesses to deal in new books against larger companies? Tax is important, but it is only a thin layer of icing on that particular rather thick cake.

She admitted also that she wasn’t accusing Amazon of being illegal, only of being “immoral”. I am sorry, but is Luxembourg not another EU state in good standing? Is it now “immoral” to use the EU structures that were offered to us as the bait for getting us to sign up to the Single Market in the first place? Well, if there is any immorality in all of this, I can’t see it on the part of the private businesses. I see immorality and utter hypocrisy in the way these MPs, elected members of a government, blame business for their own failures. Failure in so many years of our being in the EU to sort out some kind of harmonisation in income taxes and corporate income taxes meaning that people are able to doing interesting kinds of arbitrage between EU legislations both in terms of their personal taxes and corporate profits taxes. They have had so many years and so many terms of office to sort this matter out.

In fact the answer in Amazon’s case is ridiculously simple – the UK has held a zero rate of VAT for books in order not to penalise reading, but bookselling companies paid the same profits taxes as any other kind of company. That means that book VAT in the UK isn’t even propely harmonised with the rest of the EU. VAT cannot easily be evaded, and even Margaret Hodge couldn’t deny that Amazon paid VAT, merely dismissed it as irrelevant. So what the government can do to produce a more level playing field is to put the general rate of VAT on books and reduce the profits tax for companies all of whose income comes from the sale of books. This would force booksellers who are in a lot of different businesses to be just in books in order to profit from the reduction, and it would mean that it would be of less worry who used corporate income tax reducing techniques, as they would be spending time and money reducing a smaller imposition anyway, and therefore would be less likely to do it.

Schools could be enabled to reclaim the input VAT, the students of university colleges also, therefore the impact on education would be minimised.

I wonder whether anyone in Government will consider this solution, or work towards the harmonisation of EU member state corporation taxes which we all believed back in 1993 was likely to happen before the turn of the Millennium, or whether they will continue, like Margaret Hodge, to blast other people in the private sector for doing their jobs properly while government continues to neglect its own job with impunity.

 

 

 

 

 

 

 

Why do Governments try to make competitive businesses follow the same kind of labour law that applies in their own offices?


Labour law concerns the inequality of bargaini...

I was reading on Linked In today a post by someone blaming Labour Law, and the risks associated with having employees, as one reason why Europe is having more difficulties getting out of the Crisis than maybe some other places.

I think his comments were quite true. There are now, in situations where employers even have any choice, serious reasons not to employ anyone whatsoever and just go for self-employed subcontractors. Reasons include:

1. What you said, the inability to sack anyone, and the huge potential claims if you bungle the sacking of an employee

2. Employees cost more because the social insurance regime in most EU countries is expensive on employment and the onus falls on the employer

3. Self-employed people are likely to be more entrpreneurial anyhow. They already showed themselves to be less supine than the chronic employee by dint of actually going on the self-employed subcontractor route.

The problem is, where does this leave people who cannot deal with the challenge of saying, “to hell with my social shield in employment law, I will put my self out as self employed and stand and fall on my daily performance, and not on the basis that I have accrued rights that make me unassailable even if I become useless”? Even those who genuinely intend to be conscientious and profitable parts of a boss’s team often can’t get their heads around the transition to self -employment, and simply remain unemployed. And where does this leave bosses in businesses in places or sectors where the tax office doesn’t smile on people being self-employed and calls it “crypto employment”?

The reform of labour law to be a little bit more business-friendly is long overdue in most of Europe. And it’s not just the EU. I did some work in the Ukraine a few years back and what I heard about the claims wrongly sacked people can bring about there I found simply astounding. I learned that if the employee who sacks a person – even in a disciplinary way which is fully justified, and fails to pay them all they owe by accident – if it is found even 5 or so years later that they did not pay them everything, even if they were under by a miniscule amount, they now owe that ex-employee their whole final monthly salary for each month of the intervening period as if they had been working!

Have people in Government who write these laws got some kind of grudge against business or what? Certainly they are welcome to have such luxurious laws to protect Government workers if they want to, but why do they insist on forcing them on private businesses? They don’t seem to understand, these Governments, that even though the government of the Czech Republic is not in competition with the government of China for the role of running this Central European country, the same is not true of Novak s.r.o., competing against China or anywhere else in the world with lower social leveraging, in order to make money which, if it is succesful, pays for the taxes that pay for the salaries of these Czech Government people. They certainly don’t create any wealth themselves – excpet for those politicians who have real business interests also, that is. And often the less there is said about that, the soonest mended.

The profit and loss account, and why it looks the way it does


All those of us who have studied double entry bookkeeping will remember their earliest lessons, in which we are told how the balances of the various accounts in the general ledger are taken to one of two statements at the end of the reporting period.  One of these is the balance sheet, which (we were told in lesson one) is like a family photo, a snapshot of your business at one particular point in time, and therefore is “na dzien”, and the other statement is the profit and loss account, which is a story of how the family developed and what happened to them between the last photo, and the current photo.  Put simply, a profit and loss account is the story of how you get from one balance sheet to another.  There are in fact other ways in which balance sheet items can change which don’t involve things passing through the profit and loss account, but international standards of accounting seem to prefer it when as much as possible going on between an opening and closing balance sheet for a reporting period (usually a year) is reflected to the maximum degree possible in the profit and loss account, or as it is now fashionably known, the statement of income and expenditure.

What I wanted to talk about in this article is to let us think I’m at about the order in which things appear in a typical profit and loss account.  This is worth doing as there are many different layouts for the balance sheet as you go around the world (the Americans have theirs, the British have theirs, the continental Europeans have theirs and each of the above look somewhat different) but there is a lot more uniformity as you go around the world in the order in which things are set out in the profit and loss account, or statement of income and expenditure.

Invariably the first thing that it deals with is the issue of turnover.  In most countries which have VAT, but by no means all, the turnover figure in published accounts is shown net of VAT.  That is how it is done in Poland and that is the way in which international standards would also have us do it.  Similarly the expenses, where VAT applies which can be reclaimed by the entity, are shown net.  (This of course is different to the balance sheet, where debtors and creditors are shown gross of VAT and the difference which you would have in the profit and loss account if those items were shown gross ends up in the VAT control account).

The first question that our profit and loss account seek to answer is whether the business is making a profit or loss regardless of how it is financed or tax.  It is also good to show items which are likely to be normal recurring items, and not one-off or extraordinary items in the first part of the profit and loss account.

Hence the top of most people’s profit and loss accounts as you go around the world deals with the question of ordinary sales income and the costs incurred to get to that sales income, giving a basic idea of profit.  Before you add in the cost of selling an administration, while you are still looking at a cost of goods sold or the cost of providing the services of is a service company, the profit figure achieved is known as gross profit.  Exactly what costs and what revenues make up that gross profit actually do differ quite significantly from one firm to another firm depending on the business, and the principles of management accounting have quite a lot to say in how we will classify the costs and revenues going into the gross profit line.

Once we’ve subtracted from the gross profit other operating costs such as the selling and administration costs, we come down to something called profit on ordinary operating activities.  After that it might be a good time to look at the extraordinary activities that happened which were still operational, or “other” activities which are not core, such as sales of fixed assets or unusual write downs, and this gives you the operating profit.

The next question that the profit and loss account will seek to answer is the cost of financing the business.  We are still well before the point at which tax is applied, as finance charges such as interest on business loans are usually tax allowable.  We look in this section of the profit and loss account at the interest received and take off the interest paid.  In Poland we have just about any foreign exchange differences also appearing in this section, where as in most western countries it would be considered correct to examine foreign exchange differences to see whether they really appeared on financing decisions or an operational decisions, and put them in the correct part of the profit and loss account depending on the answer to that question.  In Poland they are automatically considered to be part of the financing decision, which is not always true and therefore sometimes leads to misleading ratio analysis unless this is taken into account by the analyst.

At this point the profit and loss account will show us the profit on all the ordinary activities, and the next question that it starts to answer is what the tax is on that.  If a company is applying deferred tax, then the tax figure shown in the profit and loss account will be normalised tax on the profits to that point.  It takes account of timing differences between operational treatments of transactions and there tax treatments.  This means it probably won’t be the same as the figure on the tax return for the year.  The difference between the figure in the profit and loss account and the figure on the tax return for the year is usually going to be the amount added to or subtracted from the deferred tax assets and liabilities and the balance sheet.

In Poland that is usually the end of the line for the profit and loss account, however in some groups the profit and loss account goes on to answer the question ‘how about minority interest?’ which comes after the tax question because tax falls regardless of who the minorities are, and then questions about dividends are dealt with in the profit and loss account in many countries, but not generally so in Poland.

In order not to get confused the questions which the profit and loss account is trying to answer, it is important to observe the order of information, and also to consider whether an item is needed in order to help is to say the very important question of whether the underlying business is profitable or not, and the more the answer to that is yes, the higher up in the profit and loss account you should show it or expect to find it.

 

Quoracy.com supports the Unicef/Dulux “Own a Colour” campaign


"Quoracy Blue"

You may have noticed the change in background colour on this site from a Cambridge style light blue to a darker blue verging on regal purple – this is the colour with the hex code #260564 – my birthday in fact – and is now the property of quoracy, it is officially called “Quoracy Blue” and can be checked out by following this link to the Unicef/Dulux appeal “Own a Colour”, which is fighting malaria and other diseases affecting children in the poorer parts of the world.

We hope that other websites and wordpress places, youtube channels, etc, will buy their own colours and place them on their backgrounds, and support this cause. Get your favorite colour before someone else does!

What do you want out of business?


The picture shows the typical stakeholders of ...
Some stakeholders, yesterday

Governance and strategy are what this blog is all about, but governance and strategy themselves are actually all about making sure that business delivers its intended objectives.  Objectives, in their turn, derive or ought to derive, from the mission statement of the organisation.  The mission statement is supposed to say what the stakeholders want out of the business.  Therefore even though this may seem to be a post on a lighter note than some of the posts in this blog, nevertheless I believe that this question really gets into the heart of what strategy and governance are actually all about.  Strategy and governance are all about making sure that we want out of the business, we get.

Therefore the starting point needs to be to ask ourselves the question, what is it that we actually want from business? This is a question which I’d like to ask today to anybody who is a stakeholder, please note I didn’t say “shareholder” but “stakeholder” in any business.  Please consider the businesses in which you are a stakeholder, please identify the one which has the greatest importance to you of those businesses, and with regard to that particular business, please put into the poll below all of the answers which you see as being things that you want out of that business.  Things that you are looking for from your stake as a stakeholder in that business.

Hopefully this will show a nice cross-section of the different things which stakeholders are actually looking for from businesses, but if you can see in the list something which you are particularly looking for from your business please feel free to add it in the comments afterwards.

Many thanks for taking part in the poll.

UK Trade and Investment Initiatives to support business ventures to and from Poland


logo of UKTI
A message from UKTI

Martin Oxley sent this out for the Foreign and Commonwealth office and we are pleased to assist in its propagation.

Dear Quoracy.com subscribers,

Poland presents an attractive nearshore growth opportunity for Britain Plc. In line with the new UKTI strategy presented to government recently by Lord Green, Minister of State for Trade and Investment we are introducing a step change in the way UKTI supports British business growth.

We are taking a very proactive approach on behalf of government to provide a range of bespoke services to enable British SME’s to significantly enhance exports and also work with large corporations to win major overseas contracts and expedite their growth in market.

With our new Ambassador HMA Robin Barnett and the Embassy team we are engaging to support strong growth oriented business agenda in Poland.

With this in mind I am pleased to attach a brief outline of the services which UKTI has developed to support British business in Poland. I very much look forward to meeting you over the course of the coming weeks to discuss with you how we can assist you with your specific company needs.

I am very happy to visit you or alternatively you would be most welcome to visit us and I will provide you a tour of our excellent event facilities at the Embassy.

Kind regards

Martin Oxley

110715 EVR Expand your Business with UKTI Poland.pdf

Quoracy.com would also like to take this opportunity to congratulate our dear friend Martin Oxley on his recent new appointment to the FCO in Warsaw, and to wish him every success working with Her Majesty’s new Ambassador to Poland, His Excellency Robin Barnett. We wish you and your team many successes and a lot of fun.

Is your business in the “ivy league”?


variegated ivy leaves
'Hedera' of reference?

I was recently reminded of something my old gardener told me about ivy. I had been surprised at how slow some lovely variegated ivy that had been planted by my fence was coming on, and his words were as follows:

With ivy, the first year it is put in, it does nothing, it just sulks at having been put in a new place. The second year is starts to spread out horizontally along the ground by the bottom of the fence, and in the third year it starts to grow upward, like a curtain.

Wise words, from someone who knew his onions. And his ivy. It seems to me that this is a great analogy for many new businesses. Entrepreneurs obviously look for a rapid return on capital employed. They want their profits and the cash back to invest in the next thing. But nature takes its course with some businesses just like it does with the ivy, and you cannot rush it.

The first year, you have set up costs, people are getting used to each other in a new team with a new product, new identity. This is like the ivy “sulking” – just establishing a new root system and adapting to the chemistry of the soil and the direction of the light.

The second year you start to see sales pick up but the prices are not that good yet and also the volumes don’t allow the contribution to cover fixed costs. You get growth but you don’t get the profit. It is like the ivy growing along the ground by the bottom of the fence. It is obviously going somewhere, but you aren’t getting the effect of it yet.

The third year you reach a certain critical mass, you break even you start to nudge into profit, your cash flows turn the corner and you start paying back your seed finance. This is like the ivy making its curtain up the fence.

If the ivy survives at all, it will certainly produce the coverage in time. The same with these new businesses. They simply need to be nurtured and for nature to be allowed to take its course. If the soil is right, the light is there, and the water, the plant healthy, then it will do what it is programmed to do in its own time. Micro-managing it will not help. Restructuring the team which is only starting to gel will not help. it will be like transplanting the ivy at the end of the second year for failing to raise – it will only go through its sulking and creeping years all over again in the new position.