Corporate whining : Thames Water and Tax Avoidance. unpacked and debunked by the OL Economics WorkingGroup.
Question: article from Forbes magazine.
This article was sent to me by a friend who is slightly sceptical about my activities. Can someone who is less economically challenged than myself help me unpack this one?
Answer from Clive:
These tax avoidance stories are complex and lead to ambivalence among the audience. Unlike many within the EWG (Economics Working Group), I come from the perspective that income tax (much like corporation tax) is tax on enterprise and labour of the honest man. In the case of corporation tax it is discretionary how much companies pay. However, in the absence of 100% land value tax, we need the revenue from these taxes.
First and foremost, the company directors have a duty to shareholders to maximise shareholder value and that means they are duty bound to minimise tax legitimately (avoidance is legal, evasion is not). Evasion means hiding information or revenues which should be declared eg. charging cash and not issuing a receipt or invoice is evasion and consequently illegal. Under current rules adding debt to your balance sheet rather than increasing shareholders equity is a way of creating a bigger business (through investment in productive assets and taking over competitors) and has the distinct advantage of reducing the taxable profits by the amount needed to pay the interest on the debt.
I haven’t checked Tim Worstall’s figures but I suspect he’s right, these regulated utilities can’t make profits of 30% on turnover.
The board of a company can also make provisions against future contingent liabilities, thereby further reducing profits. It is in this sense that the amount of profit declared (and consequently the tax due) is discretionary. On the other side of the equation is shareholder value which for some means maximising the dividends (income) to shareholders and normally dividends are paid from profits. To sustain a high shareprice (maximising shareholder value) the board are motivated to maximise profits and therefore dividends. So there is a trade off. Dividends to shareholders versus the corresponding tax which needs to be paid.
To complicate matters further, one of the biggest shareholders in Thames Water is Macquarie Group Limited (Macquarie is an Australian company ), which in turn has a sizeable Chinese government backed shareholder. So our water supply is hostage to overseas interests – but that’s another story. Where there is a large shareholder, it is not unusual for the balance sheet to be leveraged with debt for to serve that particular shareholder’s interests and to minimise the dividend income, which further clouds the waters.
So without going into “War and Peace”, when there is not an offshore service company through which revenues are passed (such as for Google, Amazon etc.) deliberately to avoid UK taxes (legitimate but questionable), challenging the likes of Thames Water on corporation tax is not easy or straightforward.
I would say the bigger problem is that our strategic, monopoly, utility assets have been sold to private foreign interests who have no obligation to the UK and the process of privatisation has driven up our costs for water, energy and transport. 100% tax on land values would remove the need for income and corporation tax and it would be impossible to avoid or evade.
Answer from Peter D.:
There’s another, possibly simpler explanation of what’s going on:
Companies can offset tax liabilities against interest payments, so what a lot of them are doing are lending money to THEMSELVES, via foreign subsidiaries in Tax havens, and so are able to claim ‘we don’t owe any tax’ while nonetheless collecting all the profits being made. It’s a Tax Avoidance Scam.
The guy writing the Forbes article is therefore basically employing the trick of ‘it’s all far more complex than you little people can understand’ so defending rich tax avoiders who are fleecing the rest of us. In other words he’s a liar.
If you want a fuller explanation of how they do it this link might be useful:
From Mike Gold:
The debt is often coming from the owner and it is hardly hidden; as it is legal!!!!!!!!!!!!!!!!
See Collecting Tax is about Political Will at http://bit.ly/ZmAFOf.
From Tom M.
Well of course they are welcome to turn a blind eye to tax avoidance if they want. And it’s always easy to find one story somewhere that argues the other way. Where do we start. We can start with the regulator. In general, regulators in the past 20 years or so have been toothless and one only has to read various articles in this person’s beloved Telegraph to know the undercurrent of lobbying and blackmail used by utilities companies to ensure the playing field is how they want it. EDF is a good example who will routinely threaten to leave us without electricity. Companies that are part of oligarchical markets can do this. That’s why they meet every year to discuss how much they are all going to charge. Of course that regulator has said it will reign in the oligarchy and the government came up with some piss poor policy that ensured nothing changed for anyone and the companies continued to make massive profits.
Re: Ofwat, the same applies, to such an extent in fact that we hear virtually nothing of them. His argument about a regulator allowing someone to make 30% profits is a bit like saying I let my dog off the lead therefore it doesn’t bite. Voltaire would be proud.
His next argument is in fact an absolute confirmation of the point that we have often made in that he spends the rest of the article discussing how, according to ‘tax regulations’ the company is allowed to make deductions after operating profit based on its investment. Well I ran a company for 10 years and invested a high proportion of turnover in people etc. but for us small people that’s above the operating profit line. So that brings us back to the accounts. The fact is that the company is making a business profit of £550m. This is how much it makes after the usual revenue and costs associated with business. It is, in fact, in spite of the regulator making 30% profits. The question therefore has to be asked how much should a utility be allowed to make vs the provision of water in a supposedly developed economy such as the UK where increasingly people will suffer from water poverty much in the same way as many can’t afford to heat themselves (and age concern estimate there are over 2000 extra old people deaths from hypothermia each year, but of course this guy will have an anti-Guardian field day with that one!)
Of course people could build their own reservoirs I guess and gather rain water. Now that’s real progress…. Oh and last year we sold off the rivers and streams so we’ll have to ask whoever owns them if we want water from there… We could buy water from elsewhere but as it turns out one of those providers, Veolia, was bought by the Provincial and Morgan Stanley last year. As markets mature, they congeal and in the fullness of time our water will be supplied by banks…. and they really know how to fuck things up
Anyway, back to Mr Forbes (should we be surprised). So turns out that water companies can receive special treatment because they make big investments. In fact, companies make big investments for one reason and one reason only, to make big profits. it’s the nature of business but woo hoo for Thames Water.
Re their debts, well, what should we feel sorry for them?! They took them on, once again, to make investments to make profits. This isn’t some kind of benevolent provider to society.
Finally so we have a company making £150m taxable profits. Well there aren’t so many of those around and wouldn’t it be nice if they at least paid tax on taxable profits. It seems no however. Why? because the government can do shit all about it, because there is no competition in the market and if Thames really want to play hard ball they’ll literally turn off the taps….
This guy simply proves everything that is wrong with the system and delights in defending it. His hatred of the Guardian and the left and no doubt eco warriors and whoever blinds him to a fundamental and inescapable truth based on simple economics and market dynamics. There are going to be more people and the provision of water will be in the hands of ever fewer companies with the power to write their own tax laws. That has implications on the plight of the customer, us, and of course on democracy.
If you’re friend thinks we’re making this up then whatever. Tax avoidance last year cost £70bn, I dunno, half the health budget perhaps, more than the education budget? We’ve seen all the other names in the press. remember Starbucks probably acted within ‘the regulations’ too. That’s the point about tax avoidance, it’s legal. They paid voluntarily. The crux of the argument is not how they do it, it’s that they are able to do it and governments, which we actually supposedly vote for, have little leverage over people who increasingly control and dictate our lives, that we don’t vote for.
People get all fired up based on their bigotry and politics but this isn’t about that. This is about the evolution of the global economy in a way that one would totally expect it to happen given the way in which markets mature, globalisation and the expansion of the financial markets enabling the formation of super-corporates such as Glencore. Your friend may have seen that a Glencore exec funded a private army recently to kill off the Somali pirates. We can argue about the pirates but private armies owned by the super-corporates. one for the future, particularly in Africa. To be honest, Shell funded its own army back in the 90s to kill off protesters in Nigeria, but that’s another story.
The point is that the above dynamics do not support a sustainable market, at least, not one that caters for everyone and one in fact that will increasingly serve fewer richer people, hence Occupy talk about the 1%. It’s plain and simple pointing out the flaws in the current widely adopted economic paradigm, one that allowed bankers to fuck the western world for a good 10 years, another thing Occupy talk about. The common denominator between the two? Justice. Is it just that the people should pay for banker failure when they’re caused hardship to more people since the second world war. Is it just if monopolies and oligarchies are able to run our lives or are governments here to represent the people.
Somethings gotta give and that’s in short what Occupy is saying. What are we going to do about it?
From Tom L:
I think Clive has answered this pretty comprehensively, but there is something I’d like to add.
Tim Worstall’s patronising little article takes issue with the Guardian referring to Thames Water’s operating profits of £550m when corporation tax is paid on net profits, which were £144.9m. But even that is over 8 per cent of its turnover of £1.8 billion. In a company with such whopping debts to service (4.4 times turnover), that’s quite a handy return! Surely paying 28 per cent of it in corporation tax, or £40.6m, is perfectly reasonable, even if TW is investing as much as Worstall says it is.
He puts forward the usual weasel words about its lack of taxation being entirely legal. Nobody has suggested it isn’t, but as ever that misses the point, which is how many loopholes and legal fictions exist for big companies to get out of their taxes. According to Worstall, the main one here is the simple one of setting loan repayments against tax. But that has become very controversial since it encourages companies to borrow money; and more than anything, it is excessive debts (‘overleveraging’ in the current jargon) which lay behind the financial crash. By allowing TW to offset those huge interest payments against tax, the government effectively subsidises them to the tune of 28 per cent.
That looks like a pretty bad policy to me. It is also inconsistent. Individuals have not been able to set mortgage repayments against income tax since Nigel Lawson changed the law in the 1980s. So if you or I borrow money to buy a house or flat to live in, we can’t set the loan repayments against our tax bills. Why then should an overindebted company like Thames Water be allowed to do so? As usual, the question isn’t whether the company’s tax payments (or absence of them) break the letter of the law, but whether the law itself isn’t far too lenient with them.
All in all, I would describe Tim Worstall’s article as just another piece of silly, spoilt corporate whining.