Home > Financial arcana > On tax and Tesco

On tax and Tesco

I don’t know the detailed substance of the Tesco/British Land sale and leasebank transaction that the Guardian is exposing with glee as a sign of Great Evilness. But I do know some basic things about UK company and tax law, which suggest that the claim that Tesco will be able to avoid paying non-trivial amounts of tax on the profit from the deals is simply nonsense.

If you are a company domiciled in the UK, you have to pay tax at corporation tax rate on all repatriated profits (i.e. all dividends paid to the parent company by foreign subsidiaries). The only way in which you can get the profits from transactions made abroad into the hands of your shareholders is by repatriating the money to the parent company. At which point, the repatriated money is considered to be taxable profit by the Inland Revenue, and hence you have to pay corporation tax on it.

So if Tesco, or anyone else, were to set up a subsidiary in the Cayman Islands and make a stupendous amount of money tax-free, then while Richard Murphy would doubtless be sent into a state of apoplexy, it wouldn’t make a blind bit of difference to the money received by the UK government – Tesco’s shareholders can’t see any of the money (and the payment of dividends to shareholders is the whole point of a plc) until HMRC has taken its cut.

Don’t get me wrong – there are plenty of ways of using different international tax regimes to avoid paying various sorts of tax. If you’re a company based somewhere with lower corporation tax than the UK, you’ve got an incentive to keep your profits here lower than they really are – crudely, by ensuring your UK subsidiary pays higher prices than it should for goods it buys from other group companies [*]. Some once-British plcs have avoided paying UK tax on profits earned abroad by moving their domiciles from the UK to tax havens. And if you own a private company, you can easily pay random amounts of money from the company to blind trusts in the Caymans that you happen to control, to keep your UK profit and hence tax liability at zero [*].

But with very few exceptions, any action abroad which makes a UK-domiciled plc more profitable will, in the long term, generate tax revenues for the UK government at the standard corporation tax rate. And amusingly, that includes avoiding tax that would otherwise be incurred in higher-taxed foreign countries… [**]

[*] literally doing the starred activities in the way that they’re expressed above is illegal, but there are plenty of ways of achieving a similar result.

[**] in most cases profit isn’t double-taxed, so profit remitted from a country where 10% corporation tax has been paid to a country where the corporation tax rate is 30% will be taxed at 20% by the home country. But you don’t get a refund on profit remitted from a country where 40% corporation tax has been paid, so it’s in the UK taxpayer’s interest for British firms to minimise the tax they pay in such places…

Categories: Financial arcana
  1. Luis Enrique
    March 1, 2008 at 2:08 am | #1

    John,

    Do you know what the advantage to Tesco is of structuring the sale and leaseback via the Caymans?

  2. March 1, 2008 at 2:25 am | #2

    As I understand it, none at all – rather, it's for the benefit of the BA pension fund (which wouldn't face tax under normal circumstances, but would if it were doing this particular JV with British Land and there were no offshore component). That's based on a plausible sounding explanation in Grauniad comments, though, not on my own analysis of the deal.

    Like I say, though, even if Tesco were deriving some short-term cashflow benefits from this, it can't avoid paying up in the long run. Unless it's hoping that an incoming Tory PM will declare a US-style amnesty on dividends from abroad, I suppose…

  3. Luis Enrique
    March 1, 2008 at 2:37 am | #3

    Thanks John. This, and your Northern Rock posts, should be required reading for journalists.

  4. March 1, 2008 at 2:45 am | #4

    Also, most civilised European countries just exempt dividends from foreign subsidiaries (in non-tax haven countries), the UK is unusual in this regard.

  5. March 1, 2008 at 5:42 am | #5

    Cheers Luis. This is why I gave up being a journalist in favour of professions where the ability to understand things correctly and explain them unbiasedly is actually an advantage.

    Well, that and the enormous shedloads of money.

  6. PreachyPreach
    March 3, 2008 at 7:11 am | #6

    Sadly, the comment was mine. I do that kind of thing for a day job, you know…

    The one thing I will add, which seemed a tad gittish to actually say in the comments on the post, is that a man whose CV lists almost 30 years of tax experience, should have been able to come to the same conclusion as me with a bit of thought. It's not exactly relying on obscure bits of case law or lacunae in the legislation. [1].

  7. PreachyPreach
    March 12, 2008 at 11:11 pm | #7

    http://www.guardian.co.uk/theguardian/2008/mar/12

    Ah, they've had to apologise for the PFI article they ran a few days later…

  8. PreachyPreach
    March 13, 2008 at 6:33 am | #8

    I'm taking a perverse interest in Richard Murphy's bluster now. His latest, voluminous, blog post essentially boils down to:-

    a) They sold 50% of the economic value of the properties to a third-party. Had they done this in a particularly stupid fashion, they'd have had to pay tax as if they'd sold 100% of the properties' economic value. They didn't, and so have paid tax only on the 50% economic interest disposed of. Put like this, it's not really the most startling of revelations.

    b) SDLT may have been avoided. This wouldn't have been paid by Tesco in any case, and certainly wouldn't have gone anywhere near the tax number in the accounts.

  9. August 18, 2008 at 11:56 pm | #9

    http://news.idealo.co.uk/news/2633/tesco-online-s

    I find it amazing that there are (at least) 2 sides to Tesco, one where they offer great deals and online shopping and loyalty cards etc, the other where they are tax evasion masterminds. Im no genius on tax, but it does seem like they have an internal workings philosophy and an external one that seem to be polar opposites.

  1. March 19, 2008 at 4:27 pm | #1

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