Multinationals, franchises, the superwealthy and tax avoidance

Summary

Should we be surprised about attitudes towards global tax avoidance when those at the top of firms do not live in communities their frontline outlets are in?

Three multinationals found themselves hauled in front of the Public Accounts Committee regarding tax avoidance. On Puffles’ feed there has been a polarisation of views between those that take the view of the system as is – firms maximising profits by whatever legal means is fine, and those that take issue with largescale tax avoidance. Before I start, I want to be clear on definitions which I blogged about here. They are what I’m going to be working from for the purposes of this post. For those of you interested in reviews of the hearing, see the BBC here and ITV’s Laura Kuenssberg here.

Evidence from the Starbucks representative showed that the multinational has a special but (so far) confidential tax deal that it has negotiated with the Dutch tax authorities – something that seems to have caught out the Public Accounts Committee. (MPs on the committee noting that this was negotiated for the benefit of the company – ie the firm wouldn’t have arranged such a deal if it led to the company paying more in tax). This feels at odds with principles of a fair tax system and an equal playing field – small independent coffee shops don’t have the option of negotiating bespoke tax arrangements with tax authorities.

To the non-specialist watcher, there is a murky feel about some of the things going on about the financial relationships between subsidiaries of parent companies and relationships with agents and franchisees. To the specialist watcher, it may make perfect sense – a large corporation making use of specialist knowledge and sheer corporate power to reduce its costs – one of those being taxation. The greater the level of total costs that are taxes due, the greater the incentive to structure a multinational business that takes advantage of the various tax rates worldwide to minimise such costs. Countries have been competing on such terms for years – to the extent that it makes it into the text books of GCSE geography courses. Bells still chime with case studies of export development zones where new firms moving there don’t pay any taxes or tariffs – in the hope that people will then get jobs.

Breaking the supply chain

I upgraded my phone recently. I can’t say it was a pleasant experience – it never is. But what struck me was how disjointed multinational supply chains have become as a result of outsourcing and franchising. Which bit of the manufacturing, sales and after-sales does the company really control? One lady seemed to be fobbed off by a manager saying “We only do the sales here, you have to call this number and speak to them” :-/

The companies that make the branded high street goods are seldom the branded firm these days. I first picked up on this with a personal stereo many moons ago. Looking at the smallprint, it said that it was made by some company in China, the name of which I could not pronounce. I thought that if I wanted a product made by that company, I would have done so – but having selected the more well-known brand, I expected the product to be made by that well-known brand. What I didn’t expect was some astro-turfing operation.

There’s a further break in the chain with franchising – one not without risks to the brand either. For an established brand, you could say that someone else does the hard work of selling, while you just sit back and watch the cash roll in. But at the same time you diminish the link between customer and parent company – something that is a big issue where your product potentially requires a major post-sales support operation. Mobile phones are a classic case. Fast food? Not so much. On the former, I saw it today – a customer being fobbed off by a manager trying to cite ‘data protection’ as a reason why he could not call his customer service team on behalf of the customer.

With your top decision-makers being so far removed from the customers that they are facing, is it any wonder that customer service is so poor? What’s even worse is that the poor service is causing many people to lose out – in particular with large firms. Combining this with the allegations of tax avoidance that seem to be coming out every other day of late, is the public being screwed over twice over? First on poor service, second on taxation.

Executive pay

This has also been in the news too. One of the points made on the select committee today was that transferring lots of funds to offshore tax havens created nice slush funds for executives, but shareholders could not get to them because repatriating them to (in this case) the USA would incur a tax hit from the US tax authorities. Hence concerns about shareholders being ripped off by such practices too. It makes you wonder what the non-executive directors are doing – who should be acting in the interests of the shareholders.

When you have such large firms able to manipulate tax rates across international borders, an executive class on telephone number salaries so out of sync with the rest of society, jetting from one mansion to another five star hotel room to another executive apartment, is it any wonder that a culture and a mindset grows up that leads to such a group behaving as if they do not have a stake in wider society? It may come as little surprise that one group of people have survived the financial crisis almost unscathed.

“If your firms are multinational, your regulator needs to be”

This for me is the big issue that the world is going to have to wrestle with sooner or later. Individual nation states are no longer big enough to face down multinational corporation interests. If multinational firms are able to play off nation states that are part of the same economic bloc against each other, will there be growing pressure for tax harmonisation? Such a suggestion is unlikely to find favour in the UK – the very notion of tax rates being set in Brussels would be seen as an outrage. We saw this earlier this year when Cameron defended the City of London over regulatory control so the idea that a UK government would hand over tax-raising powers to the EU as things currently stand, is a fantasy.

But then what levels of transparency should we expect from large firms? Should they have the same levels of privacy as ordinary citizens and small businesses, or does their impact and influence on society mean they have greater responsibilities?

Simplifying the system

This is one of the areas where I agree with a number of Puffles’ Tory followers. The current system is ever so complex that it enables large firms to employ tax specialists and lobbyists to bamboozle politicians and regulators. When you look for example at the Financial Services Authority, you have approximately 4,000 members of staff regulating 29,000 firms and 165,000 individuals. That works out at one member of staff per 7.25 firms and one member of staff per 41.25 individuals. On the tax side, the FDA/ARC union representing senior tax inspectors claim there are not nearly enough of them to enforce the system – despite recent investment. Simplifying the system would certainly help regulators, but when you have corporate interests donating to political parties, you can see how there is a financial incentive for political parties (in order to keep donations coming in) to refrain from tackling this problem.

Ultimately the problem is a political one

Margaret Hodge, the Chair of the Public Accounts Committee said the issue of tax avoidance was a moral one. Yet unless firms are that concerned with a potential consumer boycott, there is no incentive for them to change what are otherwise perfectly legal activities. It’s up to Parliament to lean on The Treasury to come up with decent plans to simplify the tax system – and simplify it in favour of the ordinary citizen, not the jet set chief executive. As things stand, I can’t see this happening in the current Parliamentary political climate.

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3 Responses to Multinationals, franchises, the superwealthy and tax avoidance

  1. One of the most striking things about the session today was the inability of a number of the MP’s to understand what they were being told. Some bizarre questions were asked, many were asked by two or three different people, and there was apparent outrage at the fact that the three representatives either didn’t know, or were not in a position to share, every detail of their respective multi-national organisations.

    Was the problem simply that we had a little posse of MP’s who just wanted to say their piece and look big, rather than learn anything? Or did those involved genuinely think that they had the expertise, understanding, and maturity of approach to make any progress on this issue?

    Further, why did they all steer so far clear of the elephant in the room… which is the single European market? That’s the main reason why the companies can do what they do (and fair play to Mr Google, who was not afraid to say that they do it because of tax. The other two seemed to dance around the matter a bit more… presumably fearing that there’s no PR value in honesty). Had the MP’s been told to avoid the EU issue? Whatever one thinks of the EU, it’s beyond comprehension that a discussion about the taxation of multi-nationals could be held without it being at the very forefront.

  2. rayfatal says:

    Its all up to the International Accounting Standards Board, not anyone else …if the IASB made multinationals break down their financial information country by country and disclose what they do everywhere they operate this would increase transparency to markets, customers, governments and economists. Instead, the IASB allows any company to consolidate all figures from different countries under a region, ie Europe or Africa instead of france or Nigeria. The IASB is a private company registered in Delaware USA and financed by the big 4 accounting firms and multinational companies. Can somebody say conflict of interest?!! Instead of protesting against multinationals people should just focus on the source of the problem, this privately owned organization which gives companies the lawful right to avoid taxes.

  3. Alex Cobham says:

    Some really important points here, BB.

    Simplification, yes, but through international changes. Domestic tax law is inevitably heavily influenced by specialist advisers and lobbyists, often recognising that complexity offers opportunities (making some of the anti-complexity claims a bit rich). It’s at the international level that changes in the transfer pricing guidelines can provide greater coherence for the increasingly widespread use of other methods to allocate profit – and ultimately a much simpler system, recognising that multinational groups are single entities and treating them as such, rather than continuing with the transfer pricing fiction that they are made up of completely distinct, profit-maximising separate companies..

    Transparency, absolutely. it’s quite reasonable to highlight the IASB, rayfatal, but they’re so far behind in trying to respond to the issues thrown up by the financial crisis that it’s hard to imagine when they’d get to this without heavy political pressure. However, the OECD could mandate a combined and country-by-country report in its Action Plan for the G8 next month…

    Political solutions needed indeed. Vilification of random multinationals and accounting firms has its moments, but ultimately the problem is structural. Further thoughts on all this here: http://www.cgdev.org/blog/appletax-its-not-just-apple

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