Big companies are quite right to dodge stupid taxes

Give Starbucks and Amazon a break on how little corporation tax they pay, says Matthew Lynn. It's a tax that shouldn't exist anyway. Here's why.

For any investigative reporter who wants to make a name for themselves, there is a new game in town. Think of a big foreign corporation that is a household name. Run down to Companies House and dig out its British accounts. Then write a story about how, despite having sales of a few hundred million in Britain, all it paid to HM Revenue and Customs was 30p and a couple of old toffee wrappers.

This week, eBay was the latest to be caught out. At the weekend, it was Ikea. A week before that it was Starbucks and recently companies such as Facebook, Apple and Google have all been put through the wringer for paying as little tax on their profits as possible.

But the attacks are ridiculous. Corporation tax is a stupid tax. And the attacks are directed at high-tech or high-growth companies precisely the kind of businesses Britain should be trying to encourage, not frighten away.

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Auction website eBay is just the latest example among many. At the start of this week it was revealed that it paid just £1.2m in corporation tax in Britain in 2010, despite racking up sales of £789m which would imply that it should be paying a whole lot more.

And Starbucks? The coffee chain's taxes turn out to be about as substantial as a frothy cappuccino. Starbucks has paid only £8.6m in corporation tax in the 14 years it has been operating in this country. Ikea? Some deft accounting which you can probably assemble for yourselves in a few minutes at home meant that the furniture chain paid just £8.1m in corporation tax on £1.2bn of sales.

It managed to get the total down by paying a huge royalty fee' to a Dutch company no doubt if you come from high-tax Sweden, you get good at this kind of thing. Likewise, Amazon has been criticised for routing its profits out of Britain, and so have Apple and Google.

Every time a big company is put in the spotlight there is the same chorus of complaints. If big business paid its fair share of taxes then the government would not have to make such deep cuts in public spending. Schools and hospitals wouldn't have to close and benefits wouldn't need to be slashed.

Trade unionists and left-wing politicians turn it into a debate about badly behaved big companies rather than over-spending governments. And corporate images immediately suffer.

But hold on. Just for once, let's give the multinationals a break. Corporation tax is a dumb tax. Companies are perfectly entitled not to pay it so long as they are staying within the law.

Firstly, corporations don't actually pay tax. They are inanimate objects they don't eat, drive cars, own houses, or buy the children presents for Christmas. They don't need any money. Like any tax, corporation tax is paid by people. Any money paid has to come from someone. It will either be the staff, in lower wages, the customers, in higher prices, or the shareholders, in lower dividends.

So let's say Starbucks starts paying £20m a year in corporation tax. Where does the money come from? It will have to charge even more for a coffee than it already does, pay its staff less and pay shareholders less as well. What's so great about that? With the exception of Apple an extraordinary business right now in many different ways companies almost never pile up cash in the bank. The money gets paid out to someone who then pays tax on it.

Secondly, corporation tax is becoming difficult to collect. As business becomes more global, it is easier to shift profits from high-tax countries (such as Britain, for example) to low-tax ones. With internet-based businesses it is becoming impossible to say where a transaction takes place.

When Amazon sells an e-book from Luxembourg, so long as the server is there, isn't that where the sale takes place? When you download a song from iTunes, or rent one from Spotify, that is a very different transaction from buying a CD in HMV and harder to tax. So, in effect, corporation tax is becoming a tax on low-tech, parochial companies with lazy accountants.

When companies are attacked for slashing corporation tax bills, it is important to recognise what the critics are actually saying. They are arguing for lower wages, higher prices, and smaller dividends. And they are attacking the most successful companies advanced, global businesses, with ambitious expansion plans. But those, surely, are precisely the kind of companies we should be encouraging to do as much business as possible here.

The likes of Starbucks and Apple may not pay a huge amount in corporation tax, but they pay rates on their shops, national insurance for their staff, their staff pay income tax on their salaries, and the shareholders pay taxes on their dividends, and capital gains taxes on their shares.

In fact, it is successful companies like these that generate the most tax revenues overall, just as the highest-earning 10% of the population pay the most in personal tax because they generate the most wealth.

So give eBay, Starbucks and Amazon a break and wish them well as they plug in their server in Dublin or Luxembourg or establish that subsidiary in the British Virgin Islands. They aren't doing anything wrong just quite sensibly sidestepping a tax that doesn't make any sense anyway.

Matthew Lynn

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years. 

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.