Ritchie gets Rolls Royce\’s taxes wrong. As you would expect

His post is here. A decent post explaining things is here.

The basic point is that Rolls Royce doesn\’t have many sales in the UK therefore has little profit in the UK. And Ritchie manages to get this bit wrong too:

And they say its because they have to pay tax where they make their sales. Now this second excuse is odd for two reasons. First, because its not true. The world does not have destination taxes.

Actually, in the jet engine business, it largely does.

For here\’s how the business really works. You sell the engine to the airline at something around and about cost price. Then you also sell them a maintenance contract for the life of the engine. Decades in the case of some of RR\’s products. In order to provide that maintenance service you clearly and obviously have to have bases around the world from which you can provide it. These bases are, under the usual tax laws, permanent establishments. That is, they are taxed under the corporation tax laws of the country that they are in.

Sure, the one in Dubai (no, I don\’t know but I would suspect there is one) ain\’t payn\’ much but the one in the US will pay US corporate income tax and so on.

And I\’m afraid this really is true. The selling of engines is pretty much a no profit business. The maintenance and servicing of engines is a high margin, very profitable business. But just because of the way that the servicing takes place elsewhere the profits will be elsewhere. And so will the tax being paid upon them.

And second it’s odd because Amazon make a stack of sales in the UK but say they have to pay no tax here because they’re based in Luxembourg. That’s the exact opposite of the Rolls Royce line.

And the entire set of double taxation treaties around the world says that the use of warehouses and logistics chains does not lead to the creation of a permanent establishment and thus not to the liability for corporation tax paid on sales in a territory where there are only warehouses.

A service centre is a permanent establishment. And thus why RR pays foreign taxes and Amazon does not UK.

And here\’s what\’s so annoying about the MurphClown. He argues that tax should be paid where the economic substance of the transation resides. RR is doing so, paying tax where they provide the service that produces the profits. Eppur se queribunde.

23 comments on “Ritchie gets Rolls Royce\’s taxes wrong. As you would expect

  1. The Murphclown is a hypocritical clown, but the actual current tax treatment (ie Amazon’s core business is “a warehouse” and hence non-taxable, whereas RR’s is “a service centre” and hence taxable) is bloody silly.

  2. @Blue Eyes: Many, perhaps all these days, of RR engines are leased to the airlines on a fully managed basis, and billed by the month for each hour of usage. RR do the maintenance, spares and supply chain management, the overhaul scheduling, etc.

    A former colleague worked on the wind up of Ansett in Melbourne. He said their spares situation was completely out of hand, Just-in-time was an alien concept to them, apparently.

  3. David is quite correct, in fact the business model RR now uses is a fascinating example of converting a product based industry into a service based one.

    Plane manufacturers and airlines don’t actually want to buy engines so RR sells them what they really want: they sell “hours of thrust”. This means that it is in the interests of RR to ensure that their engine plant is as reliable, and efficient as possible i.e anything they can do to maximise “thrust hours” from the same capital asset will be good for the bottom line

  4. Ritchie needs to look at his card statement next time he holds his nose and buys from Amazon. I think he may be surprised to learn his purchase took place in Lux. Denominated in GBP, for sure, but in Lux.

    Why is this so difficult for him?

  5. I thought the best line from his post was that since half the staff are in the UK it was probable that half the profit was made here.

    Just, just… Oh, I dunno…

  6. RR are so into the service mode that they have sensors in the engines feeding data back to RR in real time. RR are very proactive in fixing the engines and keeping them in tip top condition. They need to because that’s how they’re paid.

  7. Sounds like RR have a good handle on their market then. And if they have a good reputation (presumably they do) then they have to keep the reputation to keep business.
    Media makes a big deal about how expensive service contracts are but the point is it becomes someone else’s problem to fix/solve with the item.

  8. Tim, have you or someone modified your web server in the past few days? I’ve had to start forcing my browser to reload in order to see updated pages. Looks like your web server config is serving an incorrect Last-Modified time:

    Server: Apache/2.2.8 (Ubuntu) mod_ssl/2.2.8 OpenSSL/0.9.8g
    X-Powered-By: W3 Total Cache/0.9.2.8
    Vary:
    Last-Modified: Thu, 01 Jan 1970 00:00:00 GMT

    so my browser thinks your page was not modified since its last visit, and serves me out of its cache. Verified on a couple of browsers and computers. Anyone else seeing the same thing?

  9. Tim, have you or someone modified your web server configuration or file uploader in the past few days? I’ve had to start forcing my browser to reload in order to see updated pages. Looks like your web server config is serving an incorrect Last-Modified time:

    Server: Apache/2.2.8 (Ubuntu) mod_ssl/2.2.8 OpenSSL/0.9.8g
    X-Powered-By: W3 Total Cache/0.9.2.8
    Vary:
    Last-Modified: Thu, 01 Jan 1970 00:00:00 GMT

    so my browser thinks your page was not modified since its last visit, and serves me out of its cache. Verified on a couple of browsers and computers. Anyone else seeing the same thing?

  10. The server’s been messed up for a week or so now. Needs a look at by somebody who can use vi without their brain asploding.

  11. Oh, sod it; disappearing comments again.

    What I was trying to say (in response to john b) is that the current system is trying to be a simplified version of taxing economic activity. The RR service centre generates lots of profit so is a taxable PE. A warehouse doesn’t generally generate lots of profit, so isn’t a PE.

    Technically we should treat the warehouse as a PE and allocate a bit of profit to it, but it’s reasonable to say that it’s not worth the hassle.

  12. The big issue is how they have set their transfer pricing particularly for the real-time in flight engine monitoring that is done in Derby. One might argue that is a variable that has been adjusted to minimise overall tax liability worldwide.

    Good for them, it seems to me that RR has got it right. Their tax liability in the UK is almost exactly balanced by their R&D tax allowance. What else should they do? Should we reduce the R&D tax allowance to increase their tax? Which would be stupid and counterproductive. So perhaps we should increase the R&D allowance which will enable RR to conduct more research in the UK even if they pay no more tax.

    I don’t think RR is registered in the British Virgin Islands or delivering engines from Luxembourg. The Amazon’s, eBays and Googles of the world, on the other hand, are just using all countries as cash cows.

    Although their avoidance is just common business sense.

    What we need is a withholding corporation tax charged on a monthly basis as a (smallish) percentage of the actual trading done in the UK (other countries may do this too). Then (a) the money will be in the taxpayers hands and they can argue about it later rather than the other way round and (b) that money is paid up front by a year so, as with PAYE introduction in 1944, the government gets a good proportion of a whole years tax upfront.

  13. The great fun about Amazon is that, for all its hype and size, it has not been terribly profitable. So bringing it partially within the scope of UK corporation tax seems likely to be a waste of everyone’s time and energy. 2012 results culled from the net:
    “Net loss was $39 million, or $0.09 per diluted share, compared with net income of $631 million, or $1.37 per diluted share, in 2011.”

  14. Ian>

    “Needs a look at by somebody who can use vi without their brain asploding.”

    Or somebody competent instead? ;)

    (Anyone under 50ish who knows how to use Vi is merely demonstrating that they don’t know how to choose good tools…)

  15. It was a long time since I had been to Mr. Murphy’s page.

    It will be a long time before I go back.

    Dearie me!

  16. Even by Murphy’s standards the level of ignorance on the post is completely astonishing. I can presume the Public Sector will pick up the slack in ‘The Courageous State’ when Rolls Royce sends all its manufacturing out of the UK.

    It’s worth going to the bottom of the comments (60 plus of them) as the level of ignorance, bile and spite from Murphy is exceptional even by his standards. Based on the Eastleigh by-election, as well it’s worth pointing out that this guy is likely to be a crucial influence on UK economic policy from 2015. God help you all.

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