IS YOUR business guilty of “false delocalisation”? That’s the fancy EU jargon for the creative tax avoidance schemes engineered by multinational companies such as Google and Amazon.
The current generation of highly profitable internet companies have taken (legitimate) transfer pricing to extraordinary new limits. Google manages to operate almost tax-free in the UK, France and Germany, despite generating more than £35 billion in revenues in all three countries.
The actual root of the problem lies in international tax law, which dates from the pre-internet era. The major industrial economies have tasked their in-house consultants, the Paris-based Organisation for Economic Co-operation and Development (OECD), to come up with proposals for a new global tax regime. OECD will report to the next G20 summit in July.
Their plan is to reform double taxation agreements, so-called DTAs. These bi-lateral treaties were created to ensure multinational companies do not pay twice, in different jurisdictions, on the same income. Fair enough, except some firms have become adept at manipulating the system to avoid paying anybody. Google uses European DTAs with low-tax Ireland, where it keeps its European HQ, to escape taxes in the UK.
Here’s the problem: reforming a system based on bi-lateral treaties will be difficult because the real culprits are not the companies but complicit governments. Take Ireland, which has low corporation tax (12.5 per cent) to attract inward investment. But Ireland is also a whiz at signing DTAs – it has at least 60 in place. More than a thousand foreign companies have incorporated in Ireland so they can use DTAs for a spot of European tax avoidance. Result: even though it charges tiny business taxes, Ireland collects a larger share of corporation tax as a percentage of GDP than most other industrial countries.
Ireland’s accommodating DTAs have also helped attract important business sectors; e.g. leasing aircraft to the world’s airlines. Irish-based leasing companies account for one in five of all the world’s passenger planes. That has everything to do with tax avoidance. Of course, if you want to complain about the airlines not paying enough tax, remember what will happen to your ticket price if they do.
Ocado deal sets up a new supermarket battle
WHAT should you do if you are the only major UK supermarket chain without an online shopping service? Answer: buy into an existing internet delivery business. Morrisons, Britain’s fourth-biggest supermarket retailer, has just done a smart deal with Ocado. The latter was founded in 2002 as a purely internet-based food retailer – wish I’d thought of that.
Ocado was the brainchild of three ex-Goldman Sachs bankers. Now the firm needs capital to expand and Morrisons is sugar daddy. Ocado shares went ballistic when news of Morrisons ideal broke. The one wee problem is that Ocado already has a ten-year distribution deal with Waitrose. Ocado maintains this contract does not preclude the link-up with an other supermarket. But that will not stop Waitrose being royally hacked off.
A few months back, Ocado was the subject of a brief bout of short-selling, as punters bet that Waitrose would marginalise the company by expanding its own in-house online service. The short-sellers were well and truly burnt but their instinct is not wrong. Expect Waitrose to pull out all the stops in boosting its online offering.