I thought this was going to be amusing and indeed it is.
A household name has been deliberately loaded with debt so that it no longer has any profits to pay tax on.
Horrors! If someone doesn\’t make a profit then they don\’t pay profits tax.
But of course the people receiving the interest do pay tax upon said receipt, something they don\’t bother to mention.
The UK-based drinks giant Diageo plc has transferred ownership of brands worth billions of pounds, including Johnnie Walker, J&B and Gilbey\’s gin, to a subsidiary in the Netherlands where profits accrued virtually tax-free. Despite average profits of £2bn a year, it paid an average of £43m a year in UK tax – little more than 2% of its overall profits.
And a global company will pay tax in other jurisdictions no doubt: said taxes paid being deductible from UK tax.
Some UK-listed companies which have moved control to Dublin to benefit from Ireland\’s low-tax regime appear to have little real presence there.
Better have a word with the EU over that, that\’s the Bolkestein Directive. Where your HQ is is where you pay tax.
If the TUC estimate of £12bn is correct,
It isn\’t that\’s Richard Murphy\’s estimate which we have pointed out ad nauseam is incorrect.
Despite their efforts to shift profits out of the country and minimise UK tax, the companies enjoy a range of important benefits by being based in Britain and listed on the London stock exchange.
A question….do you actually have to be incorporated in the UK to be listed in London? I know that you don\’t if it\’s a dual listing, but for a primary listing, do you have to be?
I was thinking about trying to put together a refutation of their arguments and perhaps even taking it to a think tank for publication. But if this is going to be the level of their research perhaps it won\’t be necessary.
Anyway, whether or not that happens, try keeping an eye on their whole thing. Especially useful would be a description of any naughtiness….a naughtiness that the Guardian itself uses in its own accounts.
Any company can list wherever it likes, so long as it meets that exchange’s listing requirements. There are lots of non-UK companies listed here, for example – Israeli, Russian, Chinese and even some USA entities. The only disadvantage to this is that the company may not be eligible for the local indices, which obviously adversely effects investment and therefore the share price.
But the lawyers have started to find ways around this too – RD/Shell being a great example.
does anyone point out the tax inequity of Advance corporation tax? A group of companies that makes most of its profit overseas and pays tax there has to repatriate dividends to the UK for the UK sharfeholders to receive a dividend. The group holding company pays the dividend and then pays over an amount of tax which is offsettable against UK corporation tax. except that since the group makes its profits overseas, it doesn’t pay Corporation tax in the UK. Thus it has given the Govt an interest-free loan which never gets repaid…does Murphy bang on about this at all?
So how does this work? (genuine question). Year-on-year the owners of the firm are no better off if, instead of generating profits and paying tax on them, they generate no profits because they are servicing a gigantic loan. In fact they look worse off, because they have no profits to distribute as dividends, and just exist to line the pockets of the bank. But of course what’s missing from the above is what the firm did with the money they borrowed in the first place – for the sake of argument, let’s say they paid themselves a gigantic one-off dividend.
So the accusation here is that the “household name” decided it would rather borrow a ton of money and pay itself a big one-off dividend, than continue to earn profits and pay tax on them.
For all I know, that kind of thing goes on all the time. And, here’s where I sympathise with Murphy and not Worstall, this might be a point of legitimate concern.
The democratically elected government has decided how much tax revenue it wants and has a legitimate interest in how that tax is gathered (what the mix of tax levers is) and if it turns out companies are doing the above, then that might reasonably be a matter of concern. For instance, if flows of taxable profits are being transformed into one-off dividends and subsequent loan servicing, then we may wish to adjust tax gathering to tax those dividends and debt servicing. I have no idea whether it is already the case that taxes on bank profits and on dividends have substituted for taxes on corporate profits.
But without reading the Guardian’s report, I rather doubt it sets out the argument in those terms – I suspect “Oh no! the bad companies are avoiding taxes!” is more the level.
I do like the “deliberately” in the sentence you quote – as if there’s something especially sinister about companies choosing their capital structure on purpose.
Are there any other reasons why a firm might choose to be debt-financed to the point where interest payments absorb operating profits, other than tax reasons? If so, how does Mr Murphy distinguish between these reasons?
I suppose what I wrote above only makes sense for a privately held company, because a listed company is hardly going to “deliberately loaded [itself] with debt” so that it’s earnings go to zero along with its share price (zero being the present discounted value of a future flow of zero earnings).
Luis: But presumably that ‘one-off dividend’ is taxable? So how is the treasury worse off?
The main reason to load yourself with debt is to invest it in things that will pay back more than the interest due on that debt – oil companies drilling wells, retailers building shops, etc. As for ensuring that debt repayments = profits, yes, there is (or can be) a good reason: otherwise you’re probably not making the best use of leveraging the companies cashflow for investment. The problems arise when investments do worse than anticipated, or debt repayments go up.
That it reduces your yearly taxes _can_ be entirely besides the point. Unless you’re playing a shell game with different companies in different tax regimes – distuinguishing the two might be a wee bit tricky.
I could also be completely wrong.
I’m not sure that’s it. Borrowing in order to undertake investments that will generate future profits is not the accusation being made here – that would be quite in the interest of tax payers. It’s what businesses are supposed to do, I think, even in Richard Murphy’s ideal world. I think the accusation here is that a business with a certain flow of future profits (assuming, let’s say, that all positive return investments are financed and undertaken) is being leveraged up (capital is being withdrawn from the business by the owner, not invested) to the extent that the future stream of profits is wholly consumed by debt servicing.
Likewise, I am not sure that making the best use of cash flows & capital structure implies ensuring that debt servicing = operating profits so earnings = zero. After all, the usual goal of a shareholder is to maximize earnings (present discounted value of) not set earnings to zero.
It sounds to me like this is the kind of think Philip Green is accused of. You own a company say earning £100m profit per year, paying £30m taxes and £70m dividend for you, and you decide to transform this into a £1000m one-off dividend and leave the company making £100m operating profit and paying £100m debt servicing. To my mind this comes pretty close to selling the company – in effect this is the sort of thing you’d do if you think you can get a better ‘price’ from the bank than you would a buyer. You could sell a company for £1000m, or you could borrow £1000m, pay it to yourself as a dividend and leave yourself owning a company with net present value of zero.
Are dividends like that taxable?
“Are dividends like that taxable?”
yes, also you can’t dividends that bring the equity in a company to below zero.
“After all, the usual goal of a shareholder is to maximize earnings (present discounted value of) not set earnings to zero.”
No, it is to maximise the present value of cash flow to the owners.
Further, you are also (like most others) forgetting that a company is not operating in isolation. Cash withdrawn from a company is usually used in some other way (e.g. invested in another company, spent on buying goods produced by other companies or given to charity). Therefore money leaving a company is not a bad thing per se.
Right, that’s interesting.
I suppose I should have asked: if you were Philip Green would you pay less tax, overall, by paying yourself a big one-off debt-funded dividend, or by paying tax on the equivalent flow of profits and paying yourself a flow of dividends?
Well the cash flow to the owner is still zero if you arrange things so operating profits are absorbed by interest payments, so I don’t see what your point is. Besides, earnings are the same thing as cash flows, once you have adjusted for recognition timing etc.
Lastly, I am not forgetting that, I just don’t think it’s especially relevant to the discussion at hand. Yes Philip Green gets to spend his big one-off dividend on lavish parties, yachts, charity donations, and business investments. The same goes for labour income, annual dividends and all other forms of income, so it’s not clear how your observation effects the question of whether we should be worried about the owners of firms choosing a one-off dividend over a flow of dividends.
Tim adds: Phillip Green and dividends is a bit of a moot point. The equity is owned by Lady Green and the dividends flow to her. And she’s a resident of Monaco, where there is no income tax.
“I suppose I should have asked: if you were Philip Green would you pay less tax, overall, by paying yourself a big one-off debt-funded dividend, or by paying tax on the equivalent flow of profits and paying yourself a flow of dividends?”
That would depend on (amongst other factors):
1) whether I valued having my money now or in the future
2) what rate of return I expected to get from my money by having it invested in the company or by investing it elsewhere
“Well the cash flow to the owner is still zero if you arrange things so operating profits are absorbed by interest payments, so I don’t see what your point is. ”
But you have just paid cash to the owner through a dividend payment or not? Alas, the cash flow to the owner/-s is not zero.
“Besides, earnings are the same thing as cash flows, once you have adjusted for recognition timing etc.”
No, not quite true, if nothing else for the fact that recognition timing is a vital part of calculating a present value, also for the fact that earnings contain a number of abstract entities such as amortizations which might paint the true picture of the actual value of assets (no matter how hard IFRS have tried).
“so it’s not clear how your observation effects the question of whether we should be worried about the owners of firms choosing a one-off dividend over a flow of dividends.”
Well, first I would argue that the money of the owners of a firm belongs to the owner of that firm. It is therefore none of our business what they do with said money. Secondly, even if it were our business to worry about it you cannot per definiton say that dividends or taking money out of a firm is a bad thing if you don’t analyse what is being done with that money once it has been taken out of the firm. It can e.g. be spent on something creates more value than the company in which they are presently invested. I can for example not recall anyone ever complaining about Bill Gates arranging so that Microsoft pays him big dividends that he can “invest” in charity.
I’m sorry I think you’re muddling up my argument, probably because I expressed myself poorly. I appreciate that paying oneself a dividend constitutes “cash flow to the owner”. In my first comment, I wrote “what’s missing [from this story so far] is … [a] gigantic one-off dividend” so I started with a deliberately incomplete story for sake of argument. Later, in my response to Stuart, I was just observing something along the lines that achieving earnings/cash flow of zero is not usually what firms aim to do! Of course, once you are maximizing your cash flows, whether you want to take them as a one-off payment is another matter (the one under discussion, I thought).
I’m aware of the differences between cash flow and earnings; replace the words “earnings” with “cash flows” in my comments, if you like.
I’m not trying to tackle the broader question of whether large dividends that company owners pay themselves are a “good thing” or not, I was just thinking about how and from who the state gathers taxes. I don’t buy the argument that “it’s their money so it’s not our business what they do with it” – we, via our representatives in government, want to raise whatever quantity of tax revenue, and want some control over the incidence of the tax burden. If, to take an extreme example, the top 10% of the income distribution “did things” with their money such that they paid zero tax, I think we, via our representatives in government, have a legitimate interest in that.
Whatever you intend to do with your money once you have your hands on it, surely there still ought to be answer, just from the point of view of the owner of the firm, as to whether more tax is paid via one-off dividend or via taxation of the equivalent flow profits and annual dividend. Especially if the dividends are going to your wife in Monaco!
I guess now is the time to go for a 100% geared company…but if interest rates rise and profits don’t rise as quickly, then there will be blood on the floor