Ebay - the final straw.

[mustang1]

It is illegal because it violates transfer pricing rules because it violates the arm's length principle. It is usually not easy to police, however.

This is going beyond my understanding so I had to Google TPR and ALP (I still dont think I fully get it but...)

I saw TPR as a way for Amazon (as one example) to reduce the amount of tax it pays. If the UK govt (in this case) does not feel Amazon are paying the right tax, then Amazon is charged a penalty. I _assume_ this penalty is being, or has been, paid, but some ministers are still unhappy because they feel they can get even more from Amazon in taxes. So it still looks to me like Amazon are within the legalities of the law, otherwise instead of the newspapers running with the stories, the courts would be.

Again I googled this and dont fully get it, but ALP is when a subsidiary company benefits from the main company when the main company sells products to the subsidiary company at a price lower than any third company can supply the same product? If I understood that right, it seems ok to me. Incidentally if this is along the same lines as Microsoft bundling Internet Explorer within Windows, I was on MS's side (sorry OP to expand on your thread). If for example you are my friend (of course you could be) and I sold you a product cheaper than I would on the open market, I would see that as fair. Does ALP imply that is not the correct thing to do?

EDIT: 1. spelling mistakes, 2. Instead of Amazon, I meant to write eBay (I think there was an Amazon thread I was following and got mistaken with that one.

 

[bikingdad90]

It is illegal because it violates transfer pricing rules because it violates the arm's length principle. It is usually not easy to police, however.

I disagree that what they have done is illegal but it is unethical.
As an accountant I don't like to see this kind of behaviour as it shows a disregard for social responsibility and a nod that all they are bothered about is shareholder wealth rather than stakeholder needs.

From a technical point of view
transfer pricing is usually used between departments in the same company and is an adjustment to the books to satisfy the manager of both departments. For example manager A could sell for £3 and manager B could buy for £1. The £2 diff is lost on the balance sheet to make it work.

They could use intercompany charges to invoice another subsidiary in another country for services provided. As this is an invoice (and at group level nets off) it is a perfectly legal way of shifting profits between countries to reduce tax liabilities.

The rules around where the company is controlled from can also be exploited to reduce liabilities but is harder to achieve.

To sum up there are many ways to shift profits away from the revenue and it's the non execs and to a degree the auditors responsibly to ensure a company is been ran ethically responsible of which the degree of responsibility is open to interpretation.

 

[RecordAceFromNew]

Again I googled this and dont fully get it, but ALP is when a subsidiary company benefits from the main company when the main company sells products to the subsidiary company at a price lower than any third company can supply the same product? If I understood that right, it seems ok to me. Incidentally if this is along the same lines as Microsoft bundling Internet Explorer within Windows, I was on MS's side (sorry OP to expand on your thread). If for example you are my friend (of course you could be) and I sold you a product cheaper than I would on the open market, I would see that as fair. Does ALP imply that is not the correct thing to do?

The issue arises from the holding company (or its subsidiary in another tax jurisdiction) selling goods to the (e.g.) uk subsidiary at an artificially HIGHER price than the goods would have been available in the open market in uk. The reason being that the high price would artificially depress the profit of the uk subsidiary, giving rise to lower or perhaps even zero income tax for the subsidiary in uk (since income tax is only chargeable on taxable profit).

For example, S*bucks holding in Holland (which happens to have "useful" tax regulations for holding companies) could, for the sake of discussion, charge S*bucks in uk £3 per pristine, beautifully printed S*bucks paper coffee cup, resulting in accounting AND tax loss in S*bucks uk for every cup of coffee sold. No uk tax will therefore need to be paid despite their turnover of £X00 of millions by having sold millions and millions of cups of coffee pa.

As I said it is somewhat difficult to police, because hmrc is not exactly best positioned to accurately price (at a free market price, which is what arms length meant in this context) specially formulated coffee by S*bucks, or custom printed paper cups, or the value of their global marketing/brand value etc. etc. and S*bucks is not the only company they have to police.

I disagree that what they have done is illegal but it is unethical.
As an accountant ....

I must say I am surprised, given you are an accountant. Did you do any tax law prequal at all?

 

[bikingdad90]

I must say I am surprised, given you are an accountant. Did you do any tax law prequal at all?

I come from an industry background so more used to seeing transfer pricing and intercompany recharges at subsidiary level between companies. I would say I have a general understanding in how companies try to minimise tax liabilities by exploiting legal loop holes in the legislation but I am the wrong guy to tell you the specific technical details and double entries required at group/holding level to do it, that's what finance advisors are for.

To explain my statement further I agree that what these companies are doing is morally wrong and shouldn't happen as companies should pay tax where they do business and are habitually resident in for the majority of their operations.
So in Starbucks case, I believe they should have paid UK corporation tax on UK earnings and also tax on investment income (or dividend income from Starbucks uk, whatever you want to call it) in Holland rather than transferring all profits to Holland through TP to pay a lower tax liability overall.
That said what they appear to be doing is above board legally speaking because they are simply bending the legislation for their shareholders gain using expert power which HMRC is not in a position to challenge (I.e they know the value of their brand and true profitabilty, HMRC does not) which is why I stated it is not illegal.

In response to the ALP issue this is often worked around by not doing a TP adjustment but an intercompany recharge which is a different methodology of moving profits and involves invoices for "services or products".

Where the issue lies, which as you correctly pointed out is illegal is in companies deliberately lowering operating profit in one country by over stating the TP with an artificially high price that cannot be proven. Even I would agree that is illegal but manipulation of the TP within logical reason. I.e such as higher price due to brand value, or the cost plus model used with a plus that satisfies shareholder return requirements I think isn't illegal.


Hope that my interpretation has come across more clearly now as I was trying to distinguish between legality and manipulation.

 

[mustang1]

The issue arises from the holding company (or its subsidiary in another tax jurisdiction) selling goods to the (e.g.) uk subsidiary at an artificially HIGHER price than the goods would have been available in the open market in uk. The reason being that the high price would artificially depress the profit of the uk subsidiary, giving rise to lower or perhaps even zero income tax for the subsidiary in uk (since income tax is only chargeable on taxable profit).

For example, S*bucks holding in Holland (which happens to have "useful" tax regulations for holding companies) could, for the sake of discussion, charge S*bucks in uk £3 per pristine, beautifully printed S*bucks paper coffee cup, resulting in accounting AND tax loss in S*bucks uk for every cup of coffee sold. No uk tax will therefore need to be paid despite their turnover of £X00 of millions by having sold millions and millions of cups of coffee pa.

As I said it is somewhat difficult to police, because hmrc is not exactly best positioned to accurately price (at a free market price, which is what arms length meant in this context) specially formulated coffee by S*bucks, or custom printed paper cups, or the value of their global marketing/brand value etc. etc. and S*bucks is not the only company they have to police.



I must say I am surprised, given you are an accountant. Did you do any tax law prequal at all?

I understand what you wrote, I dont agree that it's wrong, but you explained it simply enough for me to understand. So what I dont get now is, if it's that simple, why havent these companies been prosecuted? Is it just that it's difficult to prove? Is it a grey area?

All I hear from the media is what the government say:
"These guys aren't paying taxes"
and the companies respond with
"We're paying the tax we are supposed to, and if you think we're not, then change the law".

I'm also skeptical why it's taken sooo long for this to come out, is there not enough tax revenue coming in due to the bad economy, did something happen against the MPs that they needed to deflect media attention from themselves and onto other companies? (Im not asking you that question, just putting it out there... I recall MPs getting bad publicity about something and all of a sudden this news took over).

 

[fossyant]

@smokeysmoo Get rid of the avatar. It's freaking me out.

 

[RecordAceFromNew]

I understand what you wrote, I dont agree that it's wrong, but you explained it simply enough for me to understand. So what I dont get now is, if it's that simple, why havent these companies been prosecuted? Is it just that it's difficult to prove? Is it a grey area?

All I hear from the media is what the government say:
"These guys aren't paying taxes"
and the companies respond with
"We're paying the tax we are supposed to, and if you think we're not, then change the law".

I'm also skeptical why it's taken sooo long for this to come out, is there not enough tax revenue coming in due to the bad economy, did something happen against the MPs that they needed to deflect media attention from themselves and onto other companies? (Im not asking you that question, just putting it out there... I recall MPs getting bad publicity about something and all of a sudden this news took over).

The last time I looked into this subject was a long time ago, but it seems this document might give you a flavour of some of the recent changes and why it is hard to enforce the rules or penalise wrongdoers.

What pwc did not say in the document, unsurprisingly really, is why the public sector will nearly always be playing catchup in commercial zero sum games against the private sector. To me the key reason is because the latter can afford and will pay for many and much sharper minds in pursuit of profit, and has every incentive to do so. I know this opinion might offend some, but it is the truth and what I saw in many and different encounters between the two in my career.

 

[mr_cellophane]

Blame it on all those Chinesse sellers who only sell for 1p + what ever the item is worth as a "postage" charge. Fleeces both eBay and the buyer as they only give buy price back, not postage.

 

[MarkF]

I used to think Ebay was great, it was at first. But now it's a game, it's up to you to play it, I still use Ebay but cancel plenty of auctions and sell outside of it. It is still useful, I sold 2 water damaged phones last month that were worthless to me, I think they went for about £25 less Ebay fees, money I'd not have got anywhere else.

 

[nickyboy]

The issue arises from the holding company (or its subsidiary in another tax jurisdiction) selling goods to the (e.g.) uk subsidiary at an artificially HIGHER price than the goods would have been available in the open market in uk. The reason being that the high price would artificially depress the profit of the uk subsidiary, giving rise to lower or perhaps even zero income tax for the subsidiary in uk (since income tax is only chargeable on taxable profit).

For example, S*bucks holding in Holland (which happens to have "useful" tax regulations for holding companies) could, for the sake of discussion, charge S*bucks in uk £3 per pristine, beautifully printed S*bucks paper coffee cup, resulting in accounting AND tax loss in S*bucks uk for every cup of coffee sold. No uk tax will therefore need to be paid despite their turnover of £X00 of millions by having sold millions and millions of cups of coffee pa.

As I said it is somewhat difficult to police, because hmrc is not exactly best positioned to accurately price (at a free market price, which is what arms length meant in this context) specially formulated coffee by S*bucks, or custom printed paper cups, or the value of their global marketing/brand value etc. etc. and S*bucks is not the only company they have to police.



I must say I am surprised, given you are an accountant. Did you do any tax law prequal at all?

Before I comment, just to let you know I have specific experience of transfer pricing and of Inland Revenue investigations of them.
In your example, Starbucks (Holland) supply product to Starbucks (UK). The tax regime in Holland v UK means that it is to Starbucks (Group) advantage to maximise profits in Holland and minimise profits in UK. All OK so far
IR look very closely at transfer pricing as it is a very obvious way to manipulate profits in different tax jurisdictions. In your example they would do the following:
1) Require Starbucks (Group) to supply detailed cost breakdown of the coffee and cups manufactured in Holland
2) Require Starbucks (Group) to provide evidence of the selling prices of these to countries other than UK from Holland
3) Require Starbucks (Group) to supply detailed on-costs in getting the products to the UK
4) Require Starbucks (Group) to provide detailed analysis of Fixed Overheads to support their UK pricing
5) Require Starbucks UK to provide evidence of similar products available in UK at prices similar to those paid to Starbucks (Holland)

So you can see that it actually quite difficult to successfully manipulate profitability using transfer pricing. The reality is that there is an envelope of acceptable behaviour by companies like Starbucks. Transfer pricing is not an exact science. Providing they act in an "acceptable" manner is setting transfer pricing then IR will be satisfied.

The reality is that Starbucks push the envelope as hard as they can, but IR are no mugs. Starbucks cannot just shift profit around willy nilly

 

[RecordAceFromNew]

Before I comment, just to let you know I have specific experience of transfer pricing and of Inland Revenue investigations of them.
In your example, Starbucks (Holland) supply product to Starbucks (UK). The tax regime in Holland v UK means that it is to Starbucks (Group) advantage to maximise profits in Holland and minimise profits in UK. All OK so far
IR look very closely at transfer pricing as it is a very obvious way to manipulate profits in different tax jurisdictions. In your example they would do the following:
1) Require Starbucks (Group) to supply detailed cost breakdown of the coffee and cups manufactured in Holland
2) Require Starbucks (Group) to provide evidence of the selling prices of these to countries other than UK from Holland
3) Require Starbucks (Group) to supply detailed on-costs in getting the products to the UK
4) Require Starbucks (Group) to provide detailed analysis of Fixed Overheads to support their UK pricing
5) Require Starbucks UK to provide evidence of similar products available in UK at prices similar to those paid to Starbucks (Holland)

So you can see that it actually quite difficult to successfully manipulate profitability using transfer pricing. The reality is that there is an envelope of acceptable behaviour by companies like Starbucks. Transfer pricing is not an exact science. Providing they act in an "acceptable" manner is setting transfer pricing then IR will be satisfied.

The reality is that Starbucks push the envelope as hard as they can, but IR are no mugs. Starbucks cannot just shift profit around willy nilly

As you can see I did not comment on Starbucks. If you think the S*bucks I referred to is the same entity then I am afraid it is a pure figment of your imagination...

According to this 2012 accountingweb article the Starbucks you mentioned paid £8.6m in tax out of £3+ billions in UK income (I presume that is revenue or turnover) since 1998, while growing its uk operation all along. Given nobody grows a business unless it is worth growing financially, I wouldn't go as far as saying IR are mugs, but it doesn't take a genius to spot who has been running rings around who at whose expense, does it?

Irrespective what their information "requirements" may be, the difficulty hmrc has is one of resource and expertise. It is hard enough for an external auditor to truly know and understand a business it audits, for hmrc to appreciate the minute details required to fight transfer pricing tricks effectively has to be a near impossible task, in my view.

 

[martint235]

...and their coffee tastes like s***e.

Yep that's the main reason for staying away from Starbucks and Costa and Cafe Nero et al. Baristas? Don't make me laugh, couldn't make a decent cup of coffee in a million years.

 

[martint235]

Is tax only paid on profits? If so surely all you need to do is set up a huge R&D or expansion pot before declaring your profits.

It's the energy companies that p me off. "We are paying exhorbitant wholesale prices", yes they are set by your parent company!! And "But when you look at those huge profits, you forget that we pay for new pipelines, repairs etc". Notice they don't actually say they pay for these things out of their profits they just lead you in that direction. Like salaries, R&D, repairs etc are all taken out before profits are declared.

 

[nickyboy]

As you can see I did not comment on Starbucks. If you think the S*bucks I referred to is the same entity then I am afraid it is a pure figment of your imagination...

According to this 2012 accountingweb article the Starbucks you mentioned paid £8.6m in tax out of £3+ billions in UK income (I presume that is revenue or turnover) since 1998, while growing its uk operation all along. Given nobody grows a business unless it is worth growing financially, I wouldn't go as far as saying IR are mugs, but it doesn't take a genius to spot who has been running rings around who at whose expense, does it?

Irrespective what their information "requirements" may be, the difficulty hmrc has is one of resource and expertise. It is hard enough for an external auditor to truly know and understand a business it audits, for hmrc to appreciate the minute details required to fight transfer pricing tricks effectively has to be a near impossible task, in my view.

OK. I will stick with my opinion based on personal first hand experience of IR investigation of transfer pricing

 

[RecordAceFromNew]

Is tax only paid on profits? If so surely all you need to do is set up a huge R&D or expansion pot before declaring your profits.

It's the energy companies that p me off. "We are paying exhorbitant wholesale prices", yes they are set by your parent company!! And "But when you look at those huge profits, you forget that we pay for new pipelines, repairs etc". Notice they don't actually say they pay for these things out of their profits they just lead you in that direction. Like salaries, R&D, repairs etc are all taken out before profits are declared.

Income tax (as opposed to e.g. vat) is paid by companies on taxable profit, which is not the same as accounting profit, because generally speaking infrastructure investments and r&d e.g. may not have the same treatment from an accounting vs tax standpoint.

If you sell coffee you probably would not be spending much money on R&D like e.g. McLaren or Dyson have to, because you are unlikely to get economically rewarded by throwing a lot of money at it. You will try to depress taxable profit by other means (e.g. locate as much of your overhead in uk as possible, since it is not always easy for hmrc to distinguish which staff is doing what all the time, and there must be a million other similar tricks).

In the case of utilities with clapped out Victorian infrastructure they would want and have to invest in it to remain viable, and we also need that because we can hardly take baths only from rainwater or spin our own generators for electricity, and whatever it costs we will have no choice but to pay. Since they are private companies they will only get investment for expensive infrastructure if banks and institutions (e.g. pension funds) lend them money, and nobody would lend anybody any money if they do not have a viable economic future underpinned by profit not just now but also future. Because of this barred wastes, inefficiencies and tax-evasion, utility bashing seems to me to be a lynch mob appeasing political agenda that does nobody any good. But that is life.

For the avoidance of doubt I have zero involvement with any utility except as a customer (or S*bucks which coffee I detest).