Monday, 7 January 2013

Starbucks, 'Fair Taxes' & a Morality Tale from Germany

We haven't really addressed the hot populist topic of 'fair taxes' here at C@W: I am guessing it is a non-issue for most of us.  The law is the law: no-one seriously suggests Starbucks et al are guilty of tax evasion, it's rather basic avoidance they are all up to (plus exploitation of folk's willingness to overpay for the product), and the politicians had better legislate if they don't like it

(In the case of a business-model based on a globally-traded and market-priced commodity like coffee ("the defining symbol of capitalism" - BQ), it should be pretty simple to clamp down on transfer-pricing tricks - oil taxation, for example, has long been based on market pricing to prevent the obvious transfer-pricing games that vertically-integrated oil companies might otherwise play.)

Bizarrely, however, Starbucks now proposes to pay 'tax' it doesn't owe to the Exchequer, as a sop to public opinion.  They must reckon the 'fair taxes' notion has some traction with the Man On The Clapham Omnishamble.  So I thought it might be interesting to look at the 'fairness' concept as it has existed in a country with a less capitalistic, more socially-oriented  public ethos in the business sphere, with a tale from Old Drew's Book of True Stories.  Draw up a sandbag, swing the lamp, and harken to Nick ...

Some years ago I worked for a large energy company (no, not the Crooked E this time) that had operations all over the place, including a very profitable one in Germany. The company's natural instinct was to remit substantial dividends, as it was legally entitled to do, but it had been solemnly advised that in socially cohesive Germany, where everyone had conveniently forgotten where the 'Saxon' comes from in 'Anglo-Saxon', there were 'social norms' as to how much dividend was appropriate for different types of business. Thus, for risky entrepreneurial concerns, high dividends were 'socially sanctioned': but for the energy business, catering for a basic human need, it was somehow 'understood' that only modest dividends were appropriate.  

A pretty tangible notion of 'fairness', one might say - just the kind of thing that presumably wins the approbation of woolly-minded Guardian writers. But we're not finished with the story. The same German advisers who counselled against a norm-busting dividend also pointed out that financial reporting standards in that country are a good deal less stringent than those of the despicable Anglo-Saxons (which remains true to this very day, see below), and that nothing could be easier than to spirit the earnings away unobserved.  By the expedient of establishing an affiliate in a convenient island location, the desired funds were channelled to said affiliate and thence to the ultimate parent's coffers.

How was this simple trick not picked up and reported upon consolidation of the German affiliate's books ?  I just told you:  German reporting standards are lax !

What, then, of the social norm on dividends ?  Why, it was ostensibly observed for the edification of the German public, of course, and flouted freely in practice.  Readers who may wish to deploy this tale as a metaphor on German morality in general are welcome to use the comments section, but as this is C@W I shall content myself by recalling that the first 2 European banks to go under in the present crisis were not feckless Spanish outfits or even Northern Crock: they were German Landesbanken,  supposedly models of provincial probity and conservatism, but in fact playing the mortgage derivatives markets for all they were worth (quite literally), via - yes, you guessed - under-reported (and uncontrolled) overseas affiliates ...

To hell with your 'fair taxes'.  Legislate, or shut up.

ND

19 comments:

dearieme said...

"Legislate, or shut up." A good point, well put. Mind you, it was an opportunity missed to put in a little dig at the Guardian's own long history of tax dodging.

Anonymous said...

Never forget that Germans are renowned business people, and that while todays generation of youngsters may be all touchy feely tree huggers, the generation that grew out of the post war German apocalypse were rather more hard headed.

CityUnslicker said...

man on the Clapham Omnishambles - love it wil have to work hard to top that!

Blue Eyes said...

I thought that a look at the transfer pricing and intellectual property licences showed that Starbucks wasn't even doing anything creative. They literally didn't make any money in the UK.

If one mainstream politician stood up and said "what we're going to do is slash the tax code to make is simpler and more effective" then they would win the argument hands-down.

Instead they make some empty comment to get the journalists off their backs for two minutes and wait for the next moral panic.

I think companies should operate with some morals, things like employing slaves or poisoning the environment and lying to customers are immoral... oh wait...

Roger said...

A good number of MPs are on the board(s) of pretty large companies - so must know perfectly well the usual tax avoidance techniques. So all the fuss is total hypocrisy.

As for changing the law - forgeddit, nation states must set out their stall like any other traders and operate a competitive tax regime. Sovereignty = humbug.

Nick Drew said...

remiss of me I admit, dearieme - thanks for remedying

oh indeed,anon@1:15 - tough as old boots: I just don't like the way they moralize against us Anglo-Saxons

I shall rush to copyright it, CU ...

literally didn't make any money in the UK? BE - they seem remarkably keen to carry on trading here !

Sovereignty = humbug? Roger - you old cynic

Demetrius said...

No taxes are "fair" but some are more unfair than others.

Anonymous said...

I really don't get why no party hasn't signed up to binning CT and implementing a Turnover Tax.

Simple enough to build into prices for a business, effectively acting as a pre-sale VAT, looks like the party is being hard on tax avoidance.

The only people likely to get fucked over would be the major accountancy firms.

*Thinks about who helps funds the main parties, those parties shindigs and those parties members lunches and days out*

Ahhh, I see now...

Ryan said...

I said it before but based on long experience I can tell you that German morality is all about being SEEN to do the right thing and not actually DOING the right thing. Only getting caught is frowned upon.

This is why there are a million prostitutes in Germany and not one single German man visiting them.

There is a US Hedge Fund that works by borrowing shares in companies and then making money out of those shares by exposing wrong-doing by them - thus forcing the price down. They would do well by examining the behaviour of German companies, especially those which show interesting price fluctuations just before the release of the annual report. Many a German businessman has made a tidy sum by a well-timed false rumour released to the German financial press.

Nick Drew said...

Ryan - yes, I've lived there too!

Blue Eyes said...

"binning CT and implementing a Turnover Tax.

Simple enough to build into prices for a business, effectively acting as a pre-sale VAT"

is this a competition for most bizarre comment of the year?

We already have a business turnover tax, coincidentally enough called VAT.

Blue Eyes said...

ND I reckon if you are an expanding business trying to get a good share of a bubbling market there might be a reasonably amount of capital investment and competitive activity going on which might easily use up all the operating profits.

Anonymous said...

I said it before but based on long experience I can tell you that German morality is all about being SEEN to do the right thing and not actually DOING the right thing. Only getting caught is frowned upon.

At the risk of sounding too racist, but that seems terribly ... Asian? The stereotype I've always heard is that Western (Christian) culture is guilt based whereas China, Japan, Korea, etc are shame based. So if a "Westerner" does something wrong it burns them up inside but to the Japanese it doesn't matter until they get caught and disgrace their family.

James Higham said...

I seriously don't see the issue with Starbucks - what were their accountants meant to do - maximize tax payable?

Nick Drew said...

could be, BE but in this case I doubt it

anon @ 8:48 - doesn't sound racist to me

I think it is a matter of degree: the East (of which personally I don't have much first-hand experience) is by repute extremely shame-driven (saving face etc)

Germany (where I have lived, and also done a lot of business over the years) is also as Ryan has characterised it

of course one could say a huge amount more abt the German character, good and bad: & one would need to mention Lutherism which is not quite the same as other shades of Protestantism

etc etc

"the point is to divide people into enough categories to do justice to them all, but not so many as to lose the benefit of useful generalisations"

Elby the Beserk said...

And, of course, Starbucks intend to account for this tax donation by freezing staff salaries and cutting benefits. All this the result if UK Uncut, and the Great Diva, herself, La Polly Toynbee, making their rage known.

Up the workers, eh, Polly, you total cretin.

Jer said...

"it should be pretty simple to clamp down on transfer-pricing tricks"

I'd have thought so, the Reuters report concentrates on the royalty, the other side is that the coffee beans are apparently bought centrally, and charged on at what seems to be an inflated margin.
So - how rubbish are HMRC?

rwendland said...

Elby: If Starbucks does it in a reasonable way it will cost them very little. They will just de-transfer price a bit so the £20m profit here will be matched by a reduced £20m profit in some other country. So it will cost them a few percent extra on the £20 million - perhaps as much as £1 million.

Nick Drew said...

how rubbish are HMRC?, Jer

let me count the ways ...