Prem Sikka targets the top dodgers whose unpaid tax exposes government hypocrisy
Since the 2010 election, the Public Accounts Committee (PAC), led by Labour MP Margaret Hodge, has played a leading role in exposing organised tax avoidance. A major reason for the PAC’s scrutiny of tax avoidance is that the revenues lost through tax avoidance/evasion are large enough to make a significant difference to government finances and austerity programmes. HMRC has failed to collect around £35 billion of tax revenues each year due to avoidance, evasion or failure to chase arrears. A report published by the Public and Commercial Services Union (PCS) puts the amounts lost at £120 billion a year. However, despite the lead provided by the PAC, the coalition government has failed to investigate multinational corporations or the tax avoidance industry. It has failed to eradicate loopholes. Unsurprisingly, the UK tax system is exploited by those with the resources and know-how.
Here are some of the major beneficiaries of the government inertia.
Google uses complex corporate structures in Ireland and Bermuda, and royalty payments to shift profits away from UK. A large part of sales to UK customers are funnelled through Ireland. In 2013, the company’s US filings showed that its UK operations generated revenues of $5.6 billion (£3.7bn), but all of it is not necessarily booked in the UK. The UK accounts showed a turnover of £642 million and a tax a bill of £21.6 million.
Amazon and Apple also excel in tax trickery. A UK citizen making a purchase from Amazon often unknowingly enters into a contract with a Luxembourg entity even though the items are mailed from the UK. Apple funnels sales to non-US customers through Ireland. Due to accounting trickery, it is hard to know their true profits. In 2014, Amazon had UK sales of £4.3 billion and the company paid only £4.2 million tax. In 2014, Apple reported that its non-US profits were $33.6 billion. However, the company was liable for only $2.15 billion of corporation tax.
In 2013, Facebook’s London operations are thought to have generated revenues of £371 million. Had they all been booked in the UK, the company could have probably reported profit of £310 million and paid corporation tax of £65 million. Facebook has a complex corporate structure and a large volume of sales are booked in Ireland instead. So its UK operations reported sales of £50 million and a loss of £11.6 million, with no corporation tax. It actually reclaimed £182,000 of corporate taxes paid in the three previous years.
US coffee giant Starbucks has been probed by the PAC and is the subject to an EU Commission investigation of its tax practices. Its worldwide purchase of coffee beans is booked in Switzerland even though most have no physical contact with Switzerland. A 20% mark-up is added and that coffee is sold to other countries, including the UK. The result is that most European operations of Starbucks show little profit. In 2012, the PAC noted that Starbucks paid £8.6 million of UK corporation tax over 15 years on sales of over £3.5 billion. Under pressure, it now claims to have voluntarily paid £20 million.
Another coffee chain Cafe Nero had UK sales of £185 million in 2012 and £204 million in 2013. The company generated pre-tax profits of £19 million and £21 million respectively for 2012 and 2013. But no corporation tax was payable. A key reason for this is the tax relief on payment of interest on intragroup borrowing to entities in Luxembourg and the Isle of Man.
In 2013, Thames Water, owned by Australia’s Macquarie Bank, reported pre-tax profit of £145 million but paid no corporation tax. In 2014, profits rose to £259 million, but still no corporation tax. Between 2010 and 2013, nine major water companies, including seven owned outside the UK, reported profits of £10 billion. Their total tax bill reached only £541 million, an effective rate of 5.3%. The key to low tax is loading the UK operations with excessive debt from related entities, often located in offshore tax havens. The interest payments reduce taxable profits and have probably deprived the Chancellor of about £1 billion.
Boots, the chemist, makes about 40% of its revenues from NHS prescriptions. In 2007, it was bought through a leveraged buyout by a private equity group and its headquarters shifted from Nottingham to Zug in Switzerland. The new owners loaded £9 billion of debt to Boots even though all of this was not used in the UK. The interest payments to other members of the private equity entity are tax deductible and reduced its UK taxable profits. A report by War on Want and UNITE noted that debt loading enabled Boots to lower its UK profits by £4.2 billion from 2007 to 2013 and reduce tax payments by nearly £1 billion.
Kellogg’s, the cereal and snack conglomerate, has three factories in the UK and its products fill supermarket shelves. It has complex corporate structures and plays the classic transfer pricing games by shifting profits through royalty payments and intragroup pricing. In 2013, it reported UK sales of £622million and a profit of £50 million. On this the company paid corporation tax of £8.4 million. Its Luxembourg registered companies reported profit of £57 million and paid tax of £210,000.
Virgin Care, Spire Healthcare and General Health Group all enjoy public funded NHS contracts. These companies are ultimately owned via tax havens and unlikely to pay UK corporate taxes for the foreseeable future. Virgin Care has recently been awarded £500 million contracts to provide 30 primary care services. A report from UNITE states that its UK operations are financed by loans from its parent company in the British Virgin Islands. The interest payments on this loan will drastically reduce its taxable profits in the UK.
In 2014 HSBC, Britain’s biggest bank, reported profits of £12.2 billion and its chief executive collected a pay packet of £7.6 million. The annual audited accounts revealed nothing about the quality of profits but thousands of pages leaked by a whistleblower showed that HSBC helped 106,000 wealthy clients in 203 countries to dodge taxes. This included some 7,000 clients based in the UK. HMRC had the leaked documents since 2010 and identified 1,100 people as tax avoiders/evaders, but only one person has ever been prosecuted.
Veneer of social responsibility
The big four accounting firms are the epicentre of global tax avoidance. Their veneer of social responsibility was blown away by a 28,000 page leak by a former PricewaterhouseCoopers (PwC) employee from Luxembourg. The publicly available documents (http://www.icij.org/project/luxembourg-leaks) show that PwC designed tax avoidance schemes for major corporations, including Abbott Laboratories, Accenture, Amazon, Aviva, Axa, Burberry, Citigroup, Deutsche Bank, Dyson, Disney, Eon, Heinz, HSBC, IKEA, Koch, Pepsi, Procter and Gamble, Shire, Skype, Taylor Wimpey, Vodafone, Wolseley, and many more. The essence of the schemes is to shift profits to low/no tax jurisdictions through complex corporate structures and a variety of intergroup royalties, prices and loans. No action has been taken against PwC.
It is hard to think of a major business which is not into tax avoidance. Complex structures, offshore entities, intragroup royalty payments and interest payments are all designed to spirit profits away from the UK. No government will be able to tackle the fiscal crisis or make social investment mandated through the ballot-box without tackling organised tax avoidance.
This article appeared in issue #274 of CHARTIST
Prem Sikka is professor of accounting at the University of Sheffield and emeritus professor of accounting at the University of Essex