More Tesco Tax and the Guardian

I\’m not sure that the Guardian is doing itself any favours here.

In a response to a series of points prompted by the Private Eye story, a Tesco spokesman declined to address details. He said: "The Guardian has already admitted a serious libel against Tesco after the last time it conducted an inept investigation into our tax affairs. It appears from these further allegations that the paper is waging a vendetta against Tesco in order to, somehow, justify this earlier libel."

It\’s one of the oddities about libel law, that if you try and justify what you\’ve said, but still lose, then that very attempt at justification is seen as making the original offence worse. Which is why I don\’t think they\’re doing themselves any favours.

Tesco, the retail and property giant, is facing new allegations of seeking to avoid corporation tax on millions of pounds of profits through an offshore scheme.

The magazine Private Eye this week identified what it said was a Tesco tax avoidance operation involving a complex web of offshore operations centred on the Swiss canton of Zug. These arrangements involved an English limited liability partnership (LLP) called Cheshunt Overseas. Cheshunt is the name of the Hertfordshire town where Tesco has its headquarters.

The Cheshunt Overseas accounts provide grounds for believing that the structure may so far have assisted the international retailer in sheltering more than £66m in profit from UK tax.

Hmm, well…

Tesco appears to have used the structure to channel £1bn debt finance to other divisions of Tesco. The company says: "This partnership is used to fund our overseas businesses." As interest of £66m accrued to Cheshunt Overseas in 2007 these arrangements appear also designed to enable Tesco to defer (possibly indefinitely) UK corporation tax of £20m.

Umm, well, yes, given the way they describe it it\’s very likely that this will defer a UK tax bill. Because UK tax is only ever due on foreign profits when they are repatriated to the UK (in order, for example, to pay a dividend). So if you don\’t bring the profits into the UK, you don\’t owe any tax on them. There\’s nothing I can see dodgy about this at all: only repatriated foreign profits are subject to UK tax (at least as far as I know) so not repatriating them isn\’t tax dodging.

Richard Murphy of course doesn\’t agree but then so what? He\’s in fact completely missed which Treasury is losing from the arrangment, and it ain\’t the UK one. It\’s the ones in the countries where the money was lent, not us. And even then, there\’s nothing illegal or even dodgy about it.

Think through what the allegation is. Tesco has cash at some point in the company. Tesco also has other parts of the company that need to borrow cash for investment purposes. Fine, lend from one to the other. Charge an interest rate for doing so (which you do need to do, yes, you need to price internally just as you would on an external market).

OK, those foreign subsidiaries will be deducting the interest paid as an operating cost, as a cost of doing business, which it is. Those deductions will be the same whether they are borrowing from Tesco itself or from an unconnected bank. The Treasuries in those host countries do lose revenue, yes….but it\’s not because the subsidiaries are borrowing from within the Tesco group, it\’s because they are borrowing in the first place (because interest is indeed a deductible expense).

The one exception here would be if Tesco were charging an over the market interest rate so as to shift monies from those subsidiaries to Switzerland. But at £60 million interest on £1 billion that doesn\’t seem to be true. 6% seems fair enough for a commercial loan.

At the other end of the process, Tesco will pay UK tax on that interest received if it repatriates the money. If it doesn\’t no UK tax is due.

Think of it another way. If we replace Cheshunt Overseas with a Swiss bank, does anything change? The Swiss bank lends the money to the Tesco subsidiaries and they pay interest in the normal manner. The same loss to those Treasuries where the subsidiaries are and the same UK tax liability occurs: ie, none.

I have to admit that it\’s very difficult for me to see where the tax dodging is here. The tax situation is exactly the same as if it were being done as an arm\’s length transaction. So what\’s the problem?

One further amusement. Murphy wants country by country reporting and for all transactions and activities to be taxed where the economic substance of it actually takes place. The above would seem to match this….the subsidiaries are paying the right tax in their jurisdictions, for they pay the same tax as they would whether they were borrowing from Tesco or a Swiss bank (or, indeed, any other). Tesco itself shouldn\’t be paying UK tax on it as the economic substance of the transaction has nothing to do with the UK (indeed, under Murphy\’s rules it shouldn\’t pay tax even if it does repatriate such profits). And the money is being loaned from Switzerland just as if it were being loaned from a Swiss bank, meaning that the economic substance of the lending transaction is in Switzerland, and should thus be taxed there at whatever Swiss rates are. Which it appears to be.

So what\’s the problem and where is the tax dodging?

9 comments on “More Tesco Tax and the Guardian

  1. Allow me to explain.

    Tesco is a BIG company. It makes lots of profit. Profits, as any Guardian reader can tell you, is just another word for stealing. So if Tesco doesn’t voluntarily give all its profits to the state for cleansing and then distribution to Labour voters, it’s compounding the stealing with cheating. Bad Tesco – all its money, like your money and my money, really belongs to the government.

    I hope this makes it clear

  2. Oh dear, Tim. You really do not know a lot about tax, do you?

    Your comment that ‘only repatriated foreign profits are subject to UK tax (at least as far as I know)’ should have been the point at which you stopped commenting. Because the fact is that this showed you do not know.

    Controlled foreign company legislation ensures that the Uk can, and does, charge companies operating outside the Uk but controlled by UK corporations to tax when it is obvious that the structure adopted has no economic substance and has no commercial justification.

    It is not alone. Most countries have similar legislation, including some of the so caled ‘flat tax’ states.

  3. “Oh dear, Tim. You really do not know a lot about tax, do you?”

    “Mr. Pot, you’re black!” said Mr. Kettle.

  4. “…when it is obvious that the structure adopted has no economic substance and has no commercial justification…”

    Hallo Murphy. You shouldn’t comment here and say something stupid because even though you won’t allow my comments on your stupid posts on your own site, I’m sure Tim will let me rant.

    I expect Tim knows, as does anyone but a quarante-watt, that your phrasing above applies to every transaction, internal, external, domestic or international. That’s why Tim mentioned that a 6% rate is commercially reasonable.

    Every business person in every country knows you cannot pay for anything at stupid rates or without good reason without exciting the revenuers.

    It’s so obvious most of us don’t bother to mention it. Tim actually made a concession to the dolts among us with his short comment on the 6% rate. Pity you didn’t understand it.

  5. The legal power to unroll transactions or structures if they have been shown to have been ‘devices’ merely designed to circumvent the law is found beyond tax matters.

    For example, if I use such transactions to asset strip a business, then put it into liquidation, a receiver can take action to recover assets. This is what R.Murphy referred to above when he typed: ‘… the structure adopted has no economic substance and has no commercial justification’. It isn’t specifically a tax provision at all, it’s an anti-fraud power with fairly wide applicability.

    Despite the bluster, Murphy’s comment actually made no attempt to challenge the particular point of fact it was apparently designed to contradict.

    In other words, he was operating his fog machine.

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