Austerity & a tall, decaf, cappuccino
The contentious nature of austerity and coffee this Christmas
By Gaurav Sharma | Published 16:35, 18 December 12
Furthermore, Osborne also extended the age of austerity to 2018 and indicated that it would take £17 billion of extra cuts per annum to hit the current debt target. He announced that the government is sticking to its current (lack of) spending plans. After all, “we’re all in this together” said the Chancellor; “some more than others” rebutted his opponents.
Economic growth will be stunted but it’s not wretched (yet)! According to the Office for Budget Responsibility (OBR), the UK economy will see -0.1 percent growth in 2012 followed by 1.2 percent next year, then 2.0 percent in 2014, 2.3 percent in 2015, 2.7 percent in 2016 and 2.8 percent in 2017.
On the deficit front, the OBR forecasts a fall from 7.9 percent in 2011 to 6.9 percent in 2012, then 6.1 percent, 5.2 percent, 4.2 percent, and 2.6 percent, reaching 1.6 percent in 2017-18. So in announcing cross-departmental cuts, bar investment in the NHS and schools, Osborne doggedly stuck to his opinion that public sector cuts and job losses would be made up by the private sector.
To that effect, and perhaps nods of approval from CFOs up and down the country, he announced that the UK will lower its headline rate of corporation tax from 22 percent in 2013 to 21 percent in 2014. However, the government's bank levy will increase from 0.105 percent of banks' balance sheets to 0.130 percent, Osborne said. Predictably, the business lobby groups lined-up to commend the cut.
However, an unscientific snap poll of ten economists, undertaken by this humble blogger, saw majority of them opine that despite the positivity surrounding it, drawing a linear connection between a tax cut and fresh recruitment by corporations was not clear cut.
“While companies should welcome the move, those who wish to hoard cash and hold back investment will wont embark on a job creation spree just because the headline rate of corporation tax is down by 1 percent,” said one economist.
Another suggested the Chancellor’s spiel was aimed at attracting foreign direct investment which sounds logical. After all, Osborne urged investors to: "Come here, create jobs here; Britain is open for business. This would be the lowest rate of (corporation) tax for any major Western economy."
After carrying disappointing economic data in his briefcase, extending austerity until 2018 and bruising exchanges in the Commons, Osborne could well have done with a cup of strong coffee in the absence of something stiffer. If something caffeine-laden was his only option then it’s doubtful he went to Starbucks! There is something about coffee chain as the great British public have realised.
In the late-1990s romantic comedy You’ve Got Mail, Hollywood actor Tom Hanks, noted, “The whole purpose of places like Starbucks is to make people with no decision making capabilities to make six decisions just to buy one cup of coffee. ‘Short’, ‘tall’, ‘dark’, ‘caf’, ‘decaf’, ‘low fat’, ‘non-fat’ cappuccino. So people who don’t know what the hell they are doing or who the hell they are, can - from US$2.95 - get not just a cup of coffee but an absolutely defining sense of self.”
To put the price quoted by Hanks into perspective, You’ve Got Mail was released in 1998. That same year Starbucks arrived in the UK. In nearly a decade and half since, Starbucks has emerged from a low key start to an established presence on the UK High Street. Problem is they haven’t been paying too much tax on their record earnings.
One mid-October afternoon, British TV screens, newspapers and websites went berserk, when Reuters reporter Tom Bergin - the journalist who wrote extensively about the goings-on at BP in wake of the Gulf of Mexico oil spill - revealed that accounts filed by Starbucks’ UK subsidiary had racked up over £3 billion (US$4.8 billion) in coffee sales, and opened 735 outlets but paid only £8.6 million in income taxes, largely due because the taxman disallowed some deductions.
Furthermore, over the past three years, Starbucks had reported no profit, and paid no income tax, on UK sales of £1.2 billion. Starbucks was promptly hauled before the parliamentary Public Accounts Committee (PAC) chaired by MP Margaret Hodge and lectured that what it did was ‘immoral’ though not illegal.
The coffee chain admitted that the Dutch government had granted it a “special tax deal” on its European headquarters, which in turn receives royalty payments from its UK business. All coffee was purchased via a front company in Switzerland and so it went.
The PAC then called for the HMRC to be more aggressive in tackling tax avoidance. Osborne promptly gave it £77 million to do just that. Other tax avoiders, using existing legal loopholes, continued to drop out of the woodwork - Google, Amazon, Ebay, Capgemini, Accenture, Ritz Hotel and Facebook to name a few.
However, two months into the row, Starbucks became the infamous poster bearer for the tax avoiders. It even faced calls for a boycott of its shops by some. So on 7 December, Kris Engskov, managing director of Starbucks UK, took out full-page advertisements in all leading newspapers announcing that the company would pay “more” tax in the UK.
In it, he noted, “We know we are not perfect. But we have listened over the past few months and are committed to the UK for the long term. We hope that over time you will give us an opportunity to build on your trust and custom.”
However, a stern rebuke followed from Treasury secretary Danny Alexander that “tax was not optional”, Hodge sneered at the attempt and London Mayor Boris Johnson told people not to sneer. Right now, the whole issue has descended into a jolly emotive mess where rhetoric gets the headlines.
In what we describe as a European common market, getting a company which has adopted one low tax jurisdiction as a hub to then not employ additional layers of tax mitigation measures in other jurisdictions where it operates within the common market to maximise its turnover, would be very hard to enforce. In fact, Amazon and Google have already responded by saying they would not follow Starbucks’ lead and pay more tax.
Here’s hoping the Chancellor’s cut in the headline rate of corporation tax would bring these companies around to the table and a less emotive dialogue about who should pay how much tax will follow. They’ll need some pragmatic decision making at that table and maybe everyone could also do with a cup of tall, decaf cappuccino and a defining sense of self!