Vodafone didn't have a £6bn tax bill. Sort yourselves out, Lefties

Quit whinging. Change the system if you care that much


Worstall on Wednesday I find myself watching current politics completely open-mouthed in amazement. The number of what are, if we are to be unkind about it, simply outright lies that have become common truths astonishes me. I refer, of course, to the latest revelations of the tax affairs of the nation.

The latest round is those revelations from HSBC's Swiss arm. One complaint is that there were 7,000 accounts found but only 1,000 people have coughed up any cash. An outrage!

In vain is David Gauke, the responsible minister, pointing out that of those 7,000 accounts, after duplications, there were 3,600 people, of whom 2,600 had been merrily paying all the tax due all along.

Either they declared the accounts in the UK, didn't live in the UK and so didn't owe UK tax, or were non-domiciled, where having a foreign bank account to keep your money in is actually necessary for you not to owe UK tax.

As a part of this manufactured outrage we're seeing articles outlining all of the other cases people have been shouting about over the years. For example, the Vodafone case:

The most notorious case came when it emerged in 2010 that Vodafone owed the Exchequer £6 billion in unpaid taxes. Hartnett, after a series of private meetings and with no legal representation, agreed to accept a massively reduced £1.25 billion payment — and allowed the money to be paid back in instalments over several years.

Umm, no, that's not how it happened at all. And you'd expect the Daily Mail to get these tax stories right, given that it's owned by a tax-efficient trust.

Here's what actually did happen at Vodafone. The company bought Mannesman in Germany and made a vast amount of money in Germany as a result. This it stashed in Luxembourg. Normal corporate tax practice is that such profits will only be taxed in the UK when they are actually brought into the UK. Except, that is, under the controlled foreign company (CFC) rules when they're taxed whether you bring them back or not.

This is very different from the US system where foreign profits of Microsoft, Apple, Facebook, Google and so on only get taxed in the US if they are taken back into the country. Obama's latest proposed budget contains a legal change to get rid of this distinction, taxing profits when they are made and not when they are repatriated.

Everyone agreed that if Vodafone's German cash had been piling up in the Caymans then it would have been taxable in the UK. HMRC said this also applied in Luxembourg; Vodafone begged to differ. They said that the EU's rules on freedom of establishment and the like meant that the UK's CFC rules couldn't apply within the EU. This went up and down the court system a couple of times and it became clear (in Cadbury, a related case) that under EU law the UK's CFC rules did not apply within the EU.

At which point it was established that there's no tax bill at all. The £6 billion figure was entirely made up out of whole cloth by Richard Brooks at Private Eye. He looked at how much cash was in Luxembourg, applied the UK's tax rate and declared that there was thus a £6 billion bill. And if the CFC rules applied then there could have been: but they didn't and so there wasn't. Both HMRC and Vodafone have been shouting for years that there never was a £6bn bill but that doesn't seem to stop people repeating that there was.

As to the £1.25bn, that wasn't a deal either. As above, everyone agrees that if the cash is brought back into the UK (say, to pay a dividend to shareholders) then UK corporation tax is payable, minus whatever foreign taxes have already been paid. And that's what Vodafone did: brought some of the cash back, paid tax and sent it out as dividends. The reason for the “instalments” is that those brought the cash back over several years. There simply was no deal, no negotiation. All that actually happened was that there was an argument in the courts about what the law was. The company, and HMRC, followed that law to the letter once everyone knew what it was.

Other similar cases fall apart upon close examination as well. I was particularly taken by one of the Starbucks allegations. They were buying coffee beans from their own subsidiary in Switzerland and paying a 20 per cent margin on the price of the beans to said subsidiary. Clearly and obviously tax dodging! Except, well, no. Not to pay a margin would be tax dodging.

Deal with international purchases across tax jurisdiction boundaries is covered by the “transfer pricing rules”. This says that, if you're buying from a group company, then the price at which you purchase should be an “arm's length” price (we discussed this previously with respect to Apple here), as if it wasn't a group company but was an independent one. There's a dreadful paucity in the world of coffee bean companies that are willing to sell at cost price with no mark-up. Not to pay a mark-up would be illegal: so, yes, the lefties really were shouting at Starbucks for following those international rules.

Which brings us to what I think is the very best part of this political agitprop, the taxation of those big tech companies. Yes, Microsoft, Google, Facebook, Amazon, Apple, we're lookin' at you. We know that they're all piling up their cash in Ireland or Luxembourg. And, arguably, the economic activity that leads to those profits being made is happening, some of it at least, in the UK. Why shouldn't they be paying UK tax? Well, part of that is because as HMRC says, that's not the way that the tax system works:

Non-resident trading companies which do not have a branch in the UK, but have UK customers, will therefore pay tax on the profits arising from those customers in the country where the company is resident, according to the tax law in that country. The profits will not be taxed in the UK. This is not tax avoidance: it is simply the way that corporation tax works.

OK, maybe it shouldn't be this way. Maybe we should change the system. My own suggested change would be to simply abolish corporation tax and tax dividends and capital gains on shares at normal income tax rates. Done and dusted ... but that's an amazingly unpopular suggestion, if I'm honest.

Think for a moment about what the popular demand is at the moment; namely, that profits made in Britain should be taxed in Britain. OK, now add that to the demand in the Vodafone case: that profits made in Germany should be taxed in Britain. All a bit Leona Helmsley, isn't it? Consistency? Pah, that's just for the little people.

I'll readily agree that all of this shouting about tax dodging has been politically very successful, and most impressive political agitprop. It's just the veracity of the allegations upon which it has all been built of which I am much less certain. ®

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