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Tax evasion is legal; tax avoidance is illegal

Ever since Benjamin Franklin said in 1789: ‘In this world nothing can be said to be certain, except death and taxes’, we have been bogged down in the debate about the latter, as the former is unavoidable.

Taxes are what makes the world we have built go round. Taxes provide public services which we may or may not want/need and jobs. Politicians nowadays favour the ‘tax paying opportunity’ version of ‘paying your share’, rather than squeezing taxpayers ‘till the pips squeak’. The net result is the same.

We pay money locally and nationally on our earnings, spendings and savings. Our businesses pay tax on profits on top of all that. They are the price we pay for hospitals, schools, defence, social benefits, transport and some of our culture.

Tax avoidance is legal; tax evasion is not. It all boils down to how much do individuals and busineses have a moral duty to pay a fair share to the greater good? The jury is still out.

Retailers Try New Measures

Store-based companies like Starbucks have recently been in the news for creatively accounting cross-national boundary laws so they pay what amounts to nominal business taxes. Their main rivals, Costa, have taken the honourable route and coughed up a reasonable dollop of cash to the Exchequer.

IKEA have joined the bad boys with minimal tax payments. They are an international company, so they can pass costs, offset revenue, pay royalties from one arm to another. They are also present both in the shopping malls physically and now online.

Online Giants Are the Serious Villains

It’s internet mega players such as Facebook, with over a billion users, that now feature in Her Majesty’s Revenue and Customs (HMRC) plans. Facebook UK generated revenues of merely just over £20 million last year, which gave a tax liability of less than a quarter of a million pounds. Most of their staff individually earned more than that in 2011.

Various tax experts and MPs have been jumping up and down about those figures. ‘Disingenuous and immoral’, tax dodging’ and ‘piracy’ have been the politest of the critical comments. But Facebook is not the only online company sitting on the naughty step over tax.

Skype, Netflix, Ebay, Apple (£14 million on over a billion pound turnover, which analysts suggest should have read 7 billion!), Google (£6 million tax on over £3 billion UK sales) and Amazon (zero Corporation Tax on £3 billion UK sales) all follow the same sleights of hand with intricate and complex global structures to avoid British taxes.

International tax law is based on the fundamental rule that companies pay tax where their decision makers and risk takers are based.

Creative Accounting

Facebook’s UK accounts describe their principle activity as ‘providing marketing and sales support to Facebook Group’. That is based in the USA. Their European HQ is in Dublin where their business tax tops at 12.5%. Apple also uses Ireland and Amazon uses Luxembourg for the same reason. So in Britain, they can deduct salaries, office costs, national insurance from earnings each year, but the flotation distribution of shares to staff incurred extra expenditure.

Therefore they made a technical loss. All companies follow this broad line, but internet ones seem to be able to distort it somewhat.

The rule increasingly seems out of date as more companies are entirely in cyberspace, but to legislate to change it risks discouraging new start ups and migration of existing companies to set up in the UK bringing jobs and employment taxes.

Is a few million tax into the national coffers better than nothing at all?

Company spokespeople fall over themselves to deny wrong doing and say they pay ‘appropriate’ or ‘legal’ taxes. And so they do.

Is There an Answer?

The answer might be to simplify our bewildering, creaky, arcane tax system from top to bottom instead of tinkering with the margins and the loopholes.

Plus, it’s worth remembering that with these online giants, there is a massive supply chain of jobs and subcontractors existing entirely on the back of the internet companies who not only do well but pay full British taxes and NICs.

The Google campus in Shoreditch in London’s ‘Silicon Roundabout’ is a free boon of flexible space, technical support, business advice and high sped internet to new innovative tech start-ups that could pay dividends to the British economy in the future.

Further info on this topic:

Daily Telegraph, Foreign firms face tax crackdown in UK and Europe, Louise Armitstead, 24 October 2012

Steve Jobs: One Year On and Apple Still Counting the Money, the Fame and the Glory, 6 October 2012

Does Facebook Have Friends in All the Right Stores? 30 August 2012

Apple vs Google: Showdown of the Year, 5 July 2012

Facebook’s Bid for Your Dollars and Your Organs, 7 May 2012

Will Apple Make the Superbrands Look Like Small Beer? 8 March 2012

A Hard Day at the Office, 24 April 2012