All your income are belong to Ritchie
Posted by Christie Malry on October 23, 2012 at 9:02 pm
Ritchie has a go at applying the Meacher/Murphy bill to Starbucks. With terrifying results:
First, given that the business is being very obviously run for profit and is obviously profitable or the chain would not currently be subject to expansion plans the motive for these structures that seem to turn profit into loss cannot be profit: that has already been achieved. So, using the motive test in the Bill these transactions fail: they do not appear profit driven, they appear tax driven. If they really do turn profit into tax loss then their purpose would fail the General Anti-Tax Avoidance Principle Bill. Their purpose must be tax avodiance. In that case the option of ignoring them for the purposes of tax assessment would arise. They could be ignored.
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But the royalty would be a prime target for attack: it has no commercial purpose at all. The profit stays within the group, and it cannot be justified as commercial since no one would pay a royalty for thirteen out of fourteen years to make continuing losses. In that case the Bill I have written would be a perfect mechanism for targeting such arrangements that represent what seems to be tax abuse.
Remember, this is a business that has reported losses in its accounts and has reported losses to HMRC. But Ritchie deems that it has somehow turned profit into loss inappropriately, so he can ignore a bunch of costs at will. Note that the only evidence he supplies is that it is "subject to expansion plans". So any business that has a turnaround strategy could find a load of its legitimate costs disallowed by Ritchie for having the audacity to try to survive instead of fail.
The point he makes about the royalty is even more ludicrous. A business might find itself locked into a long term arrangement whereby it must continue to pay amounts to third parties. In these circumstances, the last thing it needs is for Ritchie to deem these costs disallowable merely because they result in losses.
Ritchie considers that the Meacher/Murphy bill can be used to turn any loss-making company into a profitable one that can be taxed. The man has jumped the shark.
Perhaps he can consult an accountant regarding cashflow and expansion. Or even what can be done with franchises.
Occasionally come across people like him, that exist in their own version of reality they try and impose onto others one way or another.
So paying a royalty equivalent equivalent to 6% of revenues to a Dutch subsidiary in return for a brand which has been developed in the US is of course a legitimate business cost. Of course everyone is encouraged to go into StarbucksUK by watching all those episodes of Friends and having had a nice time when they visited Starbucks on holdiday in the US - and have noting to do with all the marketing and advertising spend undertaken by StarbucksUK, which has no doubt also been considered a legitimate expense for UK tax purposes
I appreciate that these arguments may wash in tax adviser land and may be enough to convince HMRC, but I somehow doubt that they will wash us mere mortals back on planet Earth. They certainly didn't wash with the IRS in the case of GlaxoSmithKline when they tried to argue that their brands were offshore did they?
Perhaps rather than continually displaying your rather boring animus for Murphy all the time you might wish to recognise that is something genuinely wrong (in the ethical sense if not legally) in what is going on here.
I completely disagree with you. It cannot be unreasonable, ex ante, to pay a licence fee to the licence holder for the use of their licence. And I don't think you're suggesting that it should become impossible for intellectual property rights to be sold from the US to the Netherlands. So the principle of paying a licence fee to the Netherlands seems indisputable. The only argument, therefore, can be over the amount. And HMRC is satisfied that the amount is reasonable. You and Ritchie, based on a lot less information, think it's not. I'm afraid I'll trust the informed judgement of HMRC over the ill-informed blather of Ritchie any day of the week.
My objection to Ritchie's approach here is that he is failing a fundamental principle of tax: that it must determine a taxpayer's liability with sufficient certainty. Ritchie is turning that on its head. Because the certain answer is one he doesn't like, he is disallowing costs willy nilly until he gets an answer he does like. That's bad reasoning, bad tax law and bad policy.
The issue of public confidence is important, I agree. In that regard, it might help if Ritchie could refrain from talking total bollocks about tax when, so often, he clearly has no idea what he's talking about.
Whatever you might think a 6% royalty for the intellectual property right to make not very good coffee in a coffee shop with sofas does appear somewhat on the steep side - and if the HMRC had sufficient resources I would have expected them to challenge it (just as the IRS did very sucessfully with GSK). I have no problem with there being certainty about tax liabilities - but as you probably know all too well there are plenty of tax advisers out there who seek out areas of uncertainty in tax legislation and then push them to their limit, and given the size of the royalty in StarbucksUK case (have you seen anything as large for what is a pretty straightforward product?) I suspect that is what has happened here. Perhaps we could have a bit more certainty if HMRC were to provide more details as to the range of what they are prepared to accept when it comes to transfer payments?
I also somehow doubt that the price used for the sale of the intellectual property rights from the US to the Netherlands factoired in the 6% royalty rate - or if it did it was based on substantially lower volumes than might be expected to occur given StarbucksUK expansion and marketing plans.
BTW what happened to the concept of "truth and fairness" in accounts - I'm sure the 6% royalty was all legal and supported by agreements - but that doesn't mean that it is a "fair" amount to charge for what is being provided in return, especially if the entity then has to bear the marketing and advertising spend that is necessary to maintain the brand? Or does legal form take precedence over substance nowadays?
HMRC did challenge the royalty already: http://www.ft.com/cms/s/0/6dd08afa-1d3b-11e2-abeb-00144feabdc0.html#axzz2AC2cplot
Starbucks still didn't pay tax after the transfer pricing adjustment
I woulr read the comments by Hephaestus of London under the article re the StarbucksUK justification for the recharge - I would also look at the Starbucks Corp accounts which point to profitability in their international segment and are thoroughly misleading in the Business Review if it really is the case that they really are not profitable in the UK and they chosen to remain silent on that matter until now - SEC please note.
That comment doesn't actually raise any points regarding royalties, it just disagrees with it and expresses disbelief.
A lot of people are surprised how tax legislation works in practice, but their surprise isn't a legal, commercial or moral argument. It is more of an opinion, and everybody is allowed one.
The real point is that HMRC (we are told) have agreed an adjustment with Starbucks. It's probably not as big an adjustment as HMRC would like, but it's probably more than Starbucks wanted.
4.7% of turnover to use Starbucks brand, marketing and supply chain, would seem a good deal if you were a franchisee. That's what the law is aiming, at: an arms length price. And both parties have agreed that this represents one.
But in this case the "franchisee" StarbucksUK is actually bearing the costs in supporting the brand by doing its marketing and advertising in the Uk and paying for the supply chain by paying for overpriced beans from the Swiss subsidiary - the comparison to a normal arms lenght franchise arrangement is just not valid, and I hope HMRC have not fallen for it.
OK, so you accept that the arms length principle is fair.
The royalties would be for the use of the brand itself, not ongoing advertising costs. The intellectual property attached to brands like Starbucks is worth a significant amount.
If you were to acquire the exclusive license to operate all Starbucks in the UK, what percentage of turnover would you value that at?
Prior to people trying to arrange boycotts, of course
Ben
You cannot really apply arm's length pricing to what is not an arms length transaction - the difference from the arms length transaction you set out is that franchisor would be responsible for undertaking some expenditure to advertise and maintain the brand and the supply change and would provide management support and training. If as a franchisee I had to undertake the advertising and marketing expenditure, was tied int a supply chain which required me to pay above market prices for the coffee beans - then to be honest I wouldn't pay anything like the royalties being bandied around in this case. This is i'm afraid what happens when you try and apply arm's length pricing to intra group deals - there isn't an arm's lenght price so people try and invent one - of course this the sort of ambiguity that tax advisers love and where they play their games with the HMRC - and I think in this case beat them hands down, I had to smile when Christie siad one of the priciples of good taxation was certainty given that nearly all the tax advisers I have met usually look to exploit ambigiuty for their and their client's advantages.
I have boycotted Starbucks fro many years on the grounds that I don't like their poorly made coffee. I also have no problems with people deciding what companies they do business with on the basis of how they view that company's behavior. In most case I find locally based coffee shops offer better (and cheaper) products, service and ambience than Starbucks - and given that they cannot transfer a proportion of their profits to a tax haven they are operating at an unfair advantage - so I would suggest giving them our support rather than Starbucks. That said the decision should be a free choice - and I would hope that the silly elements in UK Uncut realise that their cause is best served by the current approach rather than any stupid occupations or the like - and they should certainly respect the right of people to go about their ordinary life without threats or unpleasantness.
"this the sort of ambiguity that tax advisers love and where they play their games with the HMRC"
No disrespect intended, but that opinion is a better reflection of you than tax advisers.
Certainty is a principle of good taxation. However, it doesn’t provide flexibility to allow fairness for all taxpayers. Ambiguity in the law is as much a risk to tax advisers as it is to their clients.
Most of the tax advisers I have ever worked with don’t “play games”. They provide professional advice.
That means laying out all the possible interpretations of the law from the worst case scenario to the best. And risk is always inversely proportionate to a beneficial interpretation because HMRC will only seek to raise tax.
I have never seen a case, or know of one, where HMRC have opened an enquiry to assess a legal interpretation in the taxpayer’s favour. So the obligation is on the tax adviser to lay out risk and for the taxpayer to decide what balance of fairness and risk they will accept.
For most tax advisers, ambiguity in the law is a risk to their business if a client decides that they like the most risky course of action.
As to your points regarding such payments not applying to groups, as I said, HMRC have looked at it. Without looking at the transfer pricing documentation backing the agreement, both of us are just speculating.
It is almost as if you are enjoying the ambiguity of the situation...
Specialists from both sides have looked at it and agreed a deal that probably neither is entirely happy with, but both accept. The real world is full of compromise and taxation is no different.
"So the obligation is on the tax adviser to lay out risk and for the taxpayer to decide what balance of fairness and risk they will accept."
I'm sorry but isn't game playing also about making decisions based on the balance of risks and rewards. You can be professional about laying out those risks and rewards but it is still pretty similar to playing games. Where there is certainty it becomes pretty pointless playing any game.
I'm sure there are some tax professionals doing purely compliance work who are not too keen on ambiguity - but there also those who are quite happy that ambiguity exists when it comes to their less risk averse clients as this presents them a wider range of possible alternatives to pursue with their clients.
My scepticism about the Starbucks deal is based more on my knowledge of brands and intangibles accounting - and like the IRS in the GlaxoSmithKline case I would argue that economically most of the value of the StarbucksUK brand has been created by advertising and marketing expenditure undertaken by StarbucksUK and hence should be considered as a UK based asset and so the royalty paid to the Dutch entity really has no economic substance. I appreciate this is not consistent with the (highly flawed imho) transfer pricing rules used by HMRC which seek to establish arms length transaction prices even where there are clearly no arms length transactions (and so introduce areas of ambiguity or opportunities for compromise if you wish) but I am arguing for something quite different from the status quo. If the taxation and accounting were to get nearer to the true economics of the situation - then I think we would all be in a better place.
No need to get defensive, I'm just making the point you're making an incredibly sweeping generalisation about the tax profession.
Almost as sweeping as the generalisation that there is a tax profession - the idea about professions is that they recognise that they have a public service obligation and deal with those elements that put their own self interest before that obligation. Where is the evidence of the tax profession self regulating those elements who clearly do not act in the public interest?
You want to move onto semantics now? I'm interested to see how you think the "oldest profession" has maintained their standards.
We all know anybody can call themselves a tax adviser, a tax specialist or tax expert. It's not a regulated area of advice. But that's why there are professional bodies such as the CIOT and ATT to ensure a high level of professional standards and ethics.
If you get bad advice from somebody in either of those organisations, whether poor quality or "immoral", feel free to refer them to their professional body.
Check the disciplinary hearings sections of Tax Adviser if you want evidence.