The IT and Communications industry is highly profitable for successful companies, with the smallest and largest enjoying the greatest profitability. In the UK we spent £146B on its products which created profits before tax of around £35B in 2015: an extra 10% of that collected by UK government could help out the struggling National Health Service for instance. It’s hardly surprising there hasn’t been more criticism from market research companies of large suppliers avoiding tax as they are often our customers. The Figure shows our estimates of the pre-tax profits of leading vendors in the UK in 2015.
The elaborate way in which the biggest suppliers avoid paying their taxes is a regular topic among news papers and the potential of the UK leaving the EU is currently making it a hot topic once more. Would Brexit (the UK leaving the EU) allow HMRC to collect more taxes from multinational vendors? 38% of respondents to our recent survey thought so.
Let’s look at the numbers….. worldwide pre-tax profit for all ITC suppliers was £350B in 2015, of which £35b was in the UK . In my estimates for each vendor I’ve ascribed their declared worldwide pre-tax profit for 2015 and pro-rata’d it by estimates for their revenues in the UK. You can’t currently find a table for how much tax each of these companies pays in the UK, as apparently it’s confidential – needless to say it’s much less than you’d imagine. In 2015 a number of vendors (those to the right of the Figure) under-performed – a reason why governments should take a multi-year approach to collecting back taxes.
Let’s have a look at some of the activities of suppliers and governments:
- In January this year Apple agreed to pay the Italian government €318m in back taxes.
- At DAVOS in 2015 a lobbyists for number of major suppliers (including Amazon, Apple, eBay, Facebook, Google, HP, IBM, Intel, Microsoft, Netflix, Twitter, Uber and Yahoo) ‘launched a fierce attack on global plans to stamp out artificial corporate structures used to avoid tax’ according to the Guardian.
- Vodafone (the only British company amongst the most profitable suppliers) is well-known for avoiding paying tax in the UK. In 2013 when it sold of its share in Verizon, it was its Dutch-based holding company which took the $60b, it paid little or no tax on the taxation in its home nation.
- After talks with government Cisco pledged to spend $1b on the UK technology industry in the next 3 to 5 years- big amount, but a woolly target and payment schedule perhaps.
- In 2016 Oracle’s accounting software quickly became totally complaint with the new tax regulations in the UK.
- Microsoft stopped reporting its international, EMEA, EU or UK revenues in its financial reports years ago, making it difficult to know how its revenues are spread across countries: in 2012 it allegedly funnelled all its European Windows 8 revenues through Luxembourg.
- In 2016 Tata Consulting Services was voted one of the top companies to work for in the UK by the Top Employers Institute: of course its sister company Tata Steel has been in the news for its decision to pull out of steel production in the UK this year as well.
- In January 2016 Google agreed to pay the UK government £130m in lieu of potential back taxes since 2015.
- Amazon was reported to have paid just £4.2m in tax in the UK in 2014.
- Dell, BMC and – soon to be – EMC are private companies: as citizens we have know way of knowing what their revenues and profits in the UK might be.
- In 2013 the conservative MP Charlie Elphicke used parliamentary privilege to claim that Oracle, Xerox, Dell, CSC and Symantec paid no corporation tax in the UK despite having contracts of almost £500m from the UK public sector.
- In May 2016 the Australian government’s budget set out a tax rate of 40% for companies who attempt to move their income off-shore.
- In 2016 the Panama Paper revelations showed how many companies and individuals use tax havens and off-shore countries to avoid taxation.
- Strangely HMRC even sold off 600 of its offices to an off-shore company back in 2002 according to the BBC.
As you see there continues to be contention between big business and governments. Clever accountants in multinational companies – aided by big accountancy and consulting firms – continue to spend time in finding new ways to avoid tax, while governments across the globe have very different tax rates, attitudes to big business and (even) intentions to collect what is due.
This is not just a UK issue of course – paying more tax here means paying a lot less in other countries, including EU countries if it leaves. Our industry delivers big variations in annual profits (see the Figure for annual totals of net-profit since 2005): 2014’s $890B was much better for the industry than 2015’s$450b for instance. The forecast depends on the successes of company avoidance (and sometimes evasion) tactics versus government clamp-downs. Brexit might help us collect more tax, but then so could a more rigorous application of the current rules. The cynic in me says that many politicians and civil servants serve the interests of big business better than that of their citizens: why else would there be so many corporate ‘sweetheart’ deals when they are so aggressive in collecting tax from individuals?
From a supplier point of view this is a Corporate and Social Responsibility (CSR) issue: share holders and owners are not the only stakeholders: small retrospective payments are partially designed to pacify the public who are unaware of the huge amounts they are actually due. Companies should pay tax in every country they operate in in line with their revenues and expenses: they should also come clean on where and how much tax they pay, even if it’s only 5% of their profits. They should realise that maximizing profits at the expense of community interests will be bad for them in the long run. In Japan things are different – unlike America businesses have a duty to look after employees and communities – not just their owners. I’m not looking forward to the complexities of Britain leaving the EU, but am to the potential of the UK government (and others) collecting the tax they are due from successful vendors.