Apparently not making a profit is tax avoidance now

According to Ritchie anyway

I know and respect Michael Izza, but on this occasion have to say he has just got this wrong. As example, the transcript of the hearing before the House of Lords I attended on Wednesday will show that Bill Dodwell of Deloitte, who was also giving evidence, said he could not see how Starbucks were avoiding tax in using the arrangements they did in the UK.

Now if Michael is agreein with Bill that there was no tax avoidance then his comment is justified.

If on the other hand the Prime Minister is right in correctly reflecting the mood of the country that the schemes used were obviously abusive tax avoidance, which the Public Accounts Committee concluded as do I,

Recall, that when everyone dived into Starbucks\’ accounts, we found out that they really hadn\’t been making a profit in the UK. No, not even when you added back in the royalties etc.

According to Ritchie not making a profit is tax avoidance these days.

49 thoughts on “Apparently not making a profit is tax avoidance now”

  1. He is simply following in the steps of the Harperson – the court of public opinion says that Starbucks made taxable profits, therefore they made taxable profits.

  2. I agree with Ritchie. It is abundantly clear that Starbucks is deliberately not making a profit so as to avoid paying tax. Now I’m off to talk to the fairies at the bottom of my garden.

  3. I had a look at Starbucks’ published accounts. They include over £100m a year of “administrative expenses”. That seems to me to be an extraordinary number which needs explaining before we can conclude that there’s genuinely no profit.

  4. Were the accounts signed off by the auditor? Becuase excessive expenses are near the top of the list of things to check. There might be things that you don’t consider true admin expenses, but if they got past the auditor they’re at least ‘true and fair’.

  5. PaulB

    You insinuate that there’s something a bit shady about ‘administrative expenses’. It’s just a catch-all for all the indirect costs of running a business.

    This stuff gets audited… so the money has gone somewhere. You don’t get to just make it up.

    Your comment reads like something Eoin Clarke would write.

  6. You overlook an obvious fact: Posting a loss is the surest way to legally avoid paying income taxes.

    I think what Ritchie is really trying to point out is that whether a company makes a profit or loss is entirely irrelevant… the company should be paying income taxes irrespective.

    Perhaps Cameron could get a tax on future expected profits (as estimated by the bright boys and girls HMRC) passed. He could call it the “Ritchie Tax”.

  7. PaulB: “I had a look at Starbucks’ published accounts. They include over £100m a year of “administrative expenses”. That seems to me to be an extraordinary number which needs explaining before we can conclude that there’s genuinely no profit.”

    Please do share with us the financial metrics (and the source of those metrics) you used to arrive at the idea that the number was “extraordinary”.

    If you don’t have said metrics then, well, it would appear you’re just talkin’ out your dumb, ignorant ass.

    I love it when the untrained and uninformed spent 15 minutes in research before damning something or someone.

    Twat.

  8. What I’m insinuating is that some significant part of those administrative expenses may be being paid to an overseas office for some sort of administrative services.

  9. “What I’m insinuating is that some significant part of those administrative expenses may be being paid to an overseas office for some sort of administrative services.”

    Anything paid overseas is subject to transfer pricing rules.

    As we know about the overseas royalties and the overseas coffee purchasing.. and we know these are both fully tax compliant.. it’s reasonable to conclude that there’s not something else of significance hidden in the numbers.

  10. @PaulB ‘What I’m insinuating is that some significant part of those administrative expenses may be being paid to an overseas office for some sort of administrative services.’

    Precisely the throw-mud-and-some-of-it-will-stick argumentalism that leftist, statist, drone-loving tools like you love to use.

  11. According to Ritchie not making a profit is tax avoidance these days.

    He was giving Vodafone stick back in June as the UK entity wasn’t paying any tax. However this was because it was still writing off the 3G spectrum fees and also because there was significant capex for enhancing its 3G network to cope with demand and setting up the 4G network for whenever that is being launched.

    Isn’t that exactly what we want companies to do, i.e. invest?

  12. @PaulB ‘What I’m insinuating is that some significant part of those administrative expenses may be being paid to an overseas office for some sort of administrative services.’

    Translation: “I’m talkin’ out my dumb, ignorant ass.”

    You couldn’t name the top ten components of Starbuck’s adminstrative services, nor what percentage they are of the total, nor what methodology was used to assign and allocate those expenses… but you’re gonna tell us you don’t think it sounds quite right because, well, you looked at their accounts on the innertubes for a few minutes one day.

    Twat.

  13. Dennis

    Well, you have to remembern that 100 million is a BIG number!

    Do people think that all auditors are crooks, selling their integrity down the river for a fiver?

    Do they really believe that HMRC do not check anything?

    I would be heartily p**sed if I was either and people are thinking that they slipped an obvious one by me.

    I am thinking of joining Tim’s team here. More and more I feel that corporate income tax ain’t worth the bother. Do away with it and tax dividends as regular income (at the rate that corresponds).

    Think of all those lovely professionals freed up to do something innovatiive and wealth creating.

  14. Obviously the appropriate reaction to someone raising an eyebrow at Starbucks’ accounts is a tirade of abuse. What more persuasive argument could there be?

    I remind you that Tim claimed that examination of Starbucks’ accounts shows that it’s really not making a profit. My point is that the accounts don’t show anything much, because over a quarter of turnover is lumped into “administrative expenses”. It’s impossible to do any detailed analysis on those expenses, because there’s no indication of what they represent. I don’t say that that proves there’s improper tax avoidance going on, I say that the accounts can’t be used to prove there isn’t.

    You may think that we can trust there’s nothing improper because of Starbucks’ shining integrity, or because of HMRC’s diligent examination. You may be right. But you can’t conclude that simply from the accounts.

  15. Tax avoidance is legally making sure that you do not need to pay tax.

    Well, no. “Tax avoidance” used to be ritchiefined as paying less than “Gross Operating Profit” x headline rate. Since he has embraced his inner moron, it now appears to be ritchiefined as paying less than “Some number he just made up which is what he thinks your profits, gross, operating? Who cares? He doesn’t” x “the ritchiefined ‘Fair Tax’ rate”.

  16. I remind you that Tim claimed that examination of Starbucks’ accounts shows that it’s really not making a profit. My point is that the accounts don’t show anything much, because over a quarter of turnover is lumped into “administrative expenses”.

    So a company’s accounts don’t show profits, then? And there are no regulations in place to prevent a company from misleading potential investors by fiddling its accounts?

  17. @ PaulB, your comment has no basis in fact, it just sounds, as has been pointed earlier, that you’re reasoning on the level of “oooohhh 100 millions, thats A lot, must be fishy”.

    It does beg the question though: what can one conclude based on a company’s accounts then? Nothing? You do not explain either how IR would have been mislaid.

    It may be that you got a tirade of (mild) abuse because your kind of attitude is getting tiresome to a lot of people and that their patience is wearing rather thin.

  18. Tim Newman>

    “So a company’s accounts don’t show profits, then?”

    Well, the whole debate here is over whether actual profits are accurately reflected in the accounts, or whether (legal) accounting ‘tricks’ have been used to hide, offshore, or otherwise obscure some amount of profit.

  19. @ PaulB

    “It’s impossible to do any detailed analysis on those expenses, because there’s no indication of what they represent.”

    You’re right. We don’t know. We *could* demand that all companies publish their complete accounting ledger.. but we don’t, because that would be stupid. Instead, we demand that they have their accounts audited by appropriately qualifed and regulated people.. they’re supposed to know what they are doing.. so they can look at all the detailed information and ask the necessary questions and then tell us if everything is OK.

    Now.. I know that, on occasion, these audit firms have been known to fuck things up. However, that is pretty rare… and when it’s happened it’s usually been because of fraud (Maxwell, Enron) or judgement matters (the banks). Checking that admin expenses are legit is bread’n’butter stuff.

    So, yeah… you’re going to get abuse if you, having glanced at some numbers you don’t really understand, blithely disregard the work and expertise of a large number of professional accountants, auditors and tax officials.

    As one of those people, I can tell you that monoi (@ 19) is on the money. ‘We’ are sick to death of being constantly derided by amateur number-spotters who keep throwing ill-informed accusations and insinuations at our various professions.

  20. @PaulB ‘You may think that we can trust there’s nothing improper because of Starbucks’ shining integrity, or because of HMRC’s diligent examination. You may be right. But you can’t conclude that simply from the accounts.’

    I know (from personal experience) HMRC are idiots, but I don’t think even they will have neglected to ask what the £100 million was for.

    So the only conclusion can be that you think you might disagree with whatever it is that HMRC has allowed Starbucks to file in that column, even though you have no idea what it is.

    I like the way your mind works.

  21. TTG: as one of those people, perhaps you could tell me what action if any the auditors should take if some of the admin expenses are a payment for services to an offshore office?

  22. I would be interested to hear any answers to these questions please.
    Do corporations pay any CT, or do they merely collect it from their customers via pricing?
    What would happen if we abolished Corporation Tax? Fewer civil sevants or more? More inward investment or less? Greater employment (and so greater tax revenue) or less?
    I fear I am missing something fundamental.

  23. PaulB are you talking about the stand-alone accounts of Starbucks UK or the consolidated accounts of Starbucks the group? On a consolidated basis, I am sure that you are aware that intra-group transactions cancel out. And that if you are talking about Starbucks UK, then valid payments to companies in the same group can validly be described as administrative expenses.

  24. PaulB has a point in that Starbucks Coffee UK does not disclose transactions with other group companies (note 22 to the accounts).
    However it is quite easy (well it is for me) to identify the major components of administrative expenses. Most of the staff costs of £123m are included in “cost of sales” but those for directors and the 328 administrative staff must come in “admin costs”. Shop rentals and business rates are in “cost of sales” but HO rent is admin (total rents amount to £59m, business rates same order of magnitude); likewise the £15m depreciation charge gets split. License fees and royalties (£25m) are in cost of sales but £6m of impairments cannot be, nor audit fees, the cost of issuing shares (£4.5m was raised during the year) nor the obvious things like postage, stationery, bank charges, lawyers (for negotiating shop leases and to help them get away with breaking the law). We haven’t touched on coffee, milk and sugar and already covered two-thirds of total non-interest expenses.
    There is also note 23 that shows the parent company injected £17 million to re-capitalise the UK company after its losses. Unless the offshore company is in a haven that charges *negative* rates of corporation tax, either the guys in Seattle are morons or PaulB’s suspicions are unjustified.
    One might plausibly suspect that the excessive handout to the Swiss affiliate buying coffee beans is a way of overcharging the franchisees who operate one in six of the UK outlets more than a tax dodge.
    I don’t like Starbucks, but not because they don’t pay tax on losses.
    Paul – if you want accounts analysed, you could always try sending me a copy

  25. @ SE #16
    Are you trying to get up my nose by pretending that Murphy’s attempted rewriting of the English language by a foreigner has any validity?

  26. @ PaulB

    “TTG: as one of those people, perhaps you could tell me what action if any the auditors should take if some of the admin expenses are a payment for services to an offshore office?”

    They would ensure that any such transactions are compliant with transfer pricing regulations… which means ensuring that they are priced on an ‘arms length’ basis.

    This means that you can have an offshore entity providing IP rights for which you pay a commercially priced royalty.. but you can’t have a bloke sat in an office in the Caymans who arranges photocopier maintenance visits and charges £30m a year for that service.

    If it was as easy to shift profits from the UK to other jurisdictions as you seem think think it might be… why do you suppose that ANY company with the means to do so pays an UK tax at all?

  27. TTG: Thank you.

    Murphy’s argument is that it is easy for companies to avoid paying UK corporation tax. Some of the counterarguments seem to be begging the question.

    Diogenes: I’m talking about the UK Financial Statement, which I believe is what the FT guys used for the analysis Tim mentions. You should be able to find it on the internet, but I’d be happy to send you a copy.

  28. @ PaulB

    Murphy has got a bit of a problem. He’s been banging on about the ‘tax gap’ for a fair while.. but whether that gap is £40bn or £120bn, the truth of it (and this point has been quietly conceeded by the man himself when pressed) is that the bit of the gap that comes from big corporates is not especially significant.

    Unfortunately for Murhpy, that ‘not especially significant’ bit is the only bit that anyone else wants to talk about. There’s loads of traction to be gained from bashing big buiness, but not a lot from pointing out that it’s the ordinary folk paying ‘cash in hand’ or fudging their expenses and tax returns who make up the majority of his own tax gap calculations. Once you go down that road, there’s an admission that almost everyone thinks that they should pay less tax, and the whole debate goes to places that Murphy does not want to go.

    That’s not to say he doesn’t think big companies should pay more tax. He thinks everyone pays more tax. The fact that some companies pay less than he thinks they should means, by definition, that it’s too easy for them to avoid paying what he thinks they should. But when it comes to the specifics, his arguments are usually weak because he’s having to follow the agenda set by the UKUncut (who are idiots) and the politicians (who just want to distract everyone by saying nasty things about some American companies.. revenge for the treatment of BP, perhaps?). I’m not sure Murphy really believes half of what he’s saying.. but doesn’t care because it’s all about the narrative.

  29. It may be that you got a tirade of (mild) abuse because your kind of attitude is getting tiresome to a lot of people and that their patience is wearing rather thin.

    Indeed.

  30. PaulB, you say the admin expenses are extraordinary. So by definition they are not ordinary which means that they are not the same as many other companies in similar markets.

    So did you compare Starbucks accounts to any other company?

    I didn’t think so.

    You just saw a big number and not knowing anything about how a business is run thought something fishy was happening. That’s the same thought processes of a Occupy UnCut layabout who looks at services being cut and says that it’s because people aren’t paying tax.

    And when you say that something fishy is going on you are also implying that nobody is doing their job correctly. All those accountants who job is to check otherwise they lose their job. All those auditors whose job is to check otherwise they lose their job. All those tax inspectors whose job is to check otherwise they lose their job. At each stage, people are checking the working of the people before them.

    If there was anything at all fishy going on they would be the first to shout about it – not some commentator on some blog who has “had a quick look” at the published accounts. That’s published accounts, not the raw data that the accountants, auditors and inspectors would look at.

    Sorry Paul, you’re so wrong that you should just shut up.

  31. If you pay enough accountants and lawyers to ensure that a vehicle designed to pick holes in the tax laws in order to minimise the tax bill will pass audit and HMRC, then yes, you will incur massive costs.

    If those lawyers and accountants are offshore, and especially if the necessary expertise for the planning work (plan, submit to law/audit corps, tweak, resubmit etc) is in your offshore subsidiary, then you are legally able to be invoiced for their time and so account for this entirely differently.

    Either way the argument is the same.

    It’s all very well saying the published accounts have gone through audit etc, but what happened up to that point? Are people saying that those processes are not to be scrutinised because the legal and accounting professions are so unable to unscrupulous?

    As for audit failures being rare. Try harder.

  32. @ Arnald
    I have been complaining about errors that got approved by auditors for forty years (I started when I saw sheep classified as “fixed assets”).
    Starbucks is a lousy case to argue because it seems to be trying to avoid taxes that it is not liable to pay. However I can say that you are ridiculous when you suggest that Starbucks UK will volunteer to incur £20-odd million more accountancy costs than the tax that they want to avoid.
    Try thinking next time

  33. PaulB…John77 might well have answered your specific points, but I would like to make one further point about international groups. The SGA expense line is very contentious. In a group such as Starbucks, central management realise that local managers have very little traction over the gross margin – revenue less cost of sales. therefore the point of traction for profits and cash-flow is the SGA expense line.

    So, this means that SGA costs get examined at local level. they get examined at group level. They get examined both locally and group-wise by the auditors. Then they get examined by the folks who prepare tax computations. Then they get examined by tax authorities.

    The tax authorities will check the gross margin to see if it is roughly ok and then focus intensely on SGA expenses to check for disallowable expenses.

    They will often demand itemised listings of each expense line.

    but before then, head office accountants and auditors will ahve demanaded to know why SGA has risen by x….against a budget of x-10%.

    Probing SGA costs is what everybody does. PaulB is not wrong to suggest that something might be amiss with Starbucks…but….?

  34. PaulB: “Obviously the appropriate reaction to someone raising an eyebrow at Starbucks’ accounts is a tirade of abuse.”

    You know what, Paul, the appropriate action to someone talking bullshit is to call them out on that bullshit. If you don’t like being called on it, then shut your pie-hole until you’ve actually done enough work to actually know what you’re talking about. I called you a twat because you were being a twat. You had no factual basis for “raising you eyebrow” and I pointed that out in terms that a twat would be most likely to understand.

    Oh, and by the way, what the fuck makes any of you think the UK is the center of Starbucks’ world? If they’re evading taxes in the UK by illegal transfer pricing, that means they’re paying more taxes elsewhere (like the USA) because of the over allocation of costs and higher net profits. If you knew, Paul, (and of course you don’t, Paul) the differential between US corporate tax rates and UK corporate tax rates, you might come to the conclusion that Starbuck’s probably wouldn’t have bothered with a massive tax scam in the first place.

    Twat.

  35. I suppose you live in a world in which companies operate in only two countries, and using rude words shows how clever you are. I hope that makes you happy.

    Despite all this vituperation, no one has said a word to rebut my point that there’s plenty of room in Starbucks’ UK accounts for intra-company transfers in excess of their reported UK losses. Because there is.

    Some comments have understood me to suggest that accountants, auditors, or HMRC have been incompetent or worse. That wasn’t my intention, and I regret not having made that clearer.

  36. as usual dennis makes the key poijnt…less income declared in one jurisdiction meqans more tax declared elsewhere. given that Styarbucks is a US com,pany, they will want to declare more income there for their shareholders.

    I suggest that PaulB step back gracefully, since he seems to have little awareness of how multi-nationals actually operate and is judging on the basis of blind prejudice.

  37. I am by no means unaware of how multinationals react to variations between tax jurisdictions. In 2004 the USA implemented a “tax amnesty” which allowed corporations to repatriate overseas profits at very low tax rates. Since then, companies have held ever-increasing sums offshore, in anticipation of another amnesty, for which they are lobbying (Tim has argued here in favour of such an amnesty).

    The consensus here is that companies should do whatever they legally can to reduce their tax obligations. So why do you think it outrageous to suggest that a company is reducing its tax obligations?

  38. Paul-

    I’m still waiting for you to produce the justification for your initial ‘raising of the eyebrow’ over Starbucks’ administrative overhead allocation.

    You know, the proof that you know what you’re talking about and I don’t…

    Until then, pray continue to pretend you’re offended by the manner I’ve used to call you on your bullshit.

  39. Anyone who wants a friendly discussion of the numbers is welcome to get in touch with me.

    Meanwhile Dennis is welcome to post his calculation showing that it’s impossible that any significant amount of Starbucks’ £107m admin costs is going to Starbucks offshore.

    Dennis, allow me to give you some advice. If you want to enter into a technical conversation with someone, don’t include insults in your every request for information.

  40. Paul –

    Let me give you some advice: If you don’t want to be insulted quite so much, stop trying to pass off uninformed cynicism as insightful commentary. It annoys those of us who have knowledge of the topic under discussion.

    Oh, and I’m still waiting for you to provide the data and analysis to back your initial claim…

    I see that you’re now reduced to trying to suck me into ‘proving’ that your initial contention isn’t correct. That’s not the way it works.

    Twat.

  41. Dennis, my contention is that there’s room within Starbucks’ accounts for substantial intra-company transfers. Since there’s £107m of unitemized administrative expenditure, that’s trivially true.

    Your contention is that there’s obviously no such room. The only way you could have arrived at that claim is to have identified what they’re spending the money on. So tell us.

    Alternatively, if you’re actually interested in what’s going on, I extend to you also the invitation to get in touch by email. So long as you can control your potty mouth.

  42. Paul –

    This is what you said: “I had a look at Starbucks’ published accounts. They include over £100m a year of “administrative expenses”. That seems to me to be an extraordinary number which needs explaining before we can conclude that there’s genuinely no profit.”

    I said, in effect, this: “Really? On what factual basis do you make the assertion that 100 million in administration expenses are an ‘extraordinary number’.”

    You haven’t answered that question.

    You don’t have the facts, you cannot back up your initial assertion, so now you are reduced to trying to rewrite the history of what you said.

    So, in effect, you’ve simply proved yourself to be both uninformed and intellectually dishonest.

  43. I’ve proved myself unwilling to enter into analytical discussion with people who swear at me.

    I’ll write up my numbers and post them on my blog.

  44. You were sworn at precisely because you didn’t enter into an “analytical discussion”, you fool.

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