If you ask most people whether they like paying tax, the answer would surely be a resounding ‘no’. If asked would you like to pay less tax, most would probably say ‘yes’. Evidence of this can be seen in the behaviour of individuals and of companies, as they aim to reduce their tax bill, through both legal and illegal methods.
Our tax revenues are used for many different things, ranging from the provision of merit goods to the redistribution of income, so for most people they don’t object to paying their way. However, maintaining profitability and increasing disposable income is a key objective for companies and individuals, especially in weak economic times. Some high profile names have received media coverage due to accusations of both tax avoidance and tax evasion. Starbucks, Amazon, Googe and Apple are just some of the big names that have been accused of paying millions of pounds/dollars less in taxation than they should, due to clever (and often legal) methods of avoiding tax.
The problem of tax avoidance has become a bigger issue in recent years with the growth of globalisation. Multinationals have developed to dominate the business world and business/corporation tax rates across the global remain very different. Thus, it is actually relatively easy for companies to reduce their tax burden by locating their headquarters in low tax countries or ensuring that business contracts etc. are signed in these countries. By doing this, any profits are subject to the lower tax rate and are thus such companies are accused of depriving the government of tax revenue. Apple is currently answering questions posed by a US Senate Committee, having been accused of structuring its business to create ‘the holy grail of tax avoidance’.
Many may consider the above and decide that these companies have done little wrong. After all, many schemes aimed at tax avoidance are legal and are often just a clever way of using the system. However, in a business environment dominated by the likes of Google, Apple and Amazon, the impact of tax avoidance may not just be on the government’s coffers. Indeed John McCain, one of the Committee members asked:
…Couldn’t one draw the conclusion that you and Apple have an unfair advantage over domestic based corporations and companies, in other words, smaller companies in this country that don’t have the same ability that you do to locate in Ireland or other countries overseas?
The concern is that with such ability to avoid huge amounts of taxation, large companies will inevitably compete smaller ones out of the market. Local businesses, without the ability to re-locate to other parts of the world, pay their full tax bills, but multinationals legally (in most cases) manage to avoid paying their own share. With a harsh economic climate continuing globally, these large companies that aim to further increase their profitability through such means as tax avoidance will naturally bear the wrath of smaller businesses and individuals that are struggling to get by. It’s likely that this topic will remain in the media for some time. The following articles consider some of the companies accused of participating in tax avoidance schemes and the consequences of doing so.
Is Apple’s tax avoidance rational? BBC News, Robert Peston (21/5/13)
Apple’s Tim Cook defends tax strategy in Senate BBC News (21/5/13)
Senator accuses Apple of ‘highly questionable’ billion-dollar tax avoidance scheme The Guardian, Dominic Rushe (21/5/13)
Apple’s Tim Cook faces tax avoidance questions Sky News (21/5/13)
EU leaders look to end Apple-style tax avoidance schemes Reuters, Luke Baker and Mark John (21/5/13)
Apple Chief Tim Cook defends tax practices and denies avoidance Financial Times, James Politi (21/5/13)
Apple CEO Tim Cook tells Senate: tiny tax bill isn’t our fault, it’s yours Independent, Nikhil Kumar (21/5/13)
Miliband promises action on Google tax avoidance The Telegraph (19/5/13)
Google is cheating British tax payers out of millions…what they are doing is just immoral’: Web giant accused of running ‘scandalous’ tax avoidance scheme by whistleblower Mail Online, Becky Evans (19/5/13)
Multinational CEOs tell David Cameron to rein in tax avoidance rhetoric The Guardian, Simon Bowers, Lawrie Holmes and Rajeev Syal (20/5/13)
Fury at corporate tax avoidance leads to call for a global response The Guardian, Tracy McVeigh (18/5/13)
Questions
- What is the difference between tax evasion and tax avoidance? Is it rational to engage in such schemes?
- What are tax revenues used for?
- Why are multinationals more able to engage in tax avoidance schemes?
- Is the problem of tax avoidance a negative consequence of globalisation?
- How might the actions of large multinationals who are avoiding paying large amounts of tax affect the competitiveness of the global market place?
- Is there justification for a global policy response to combat the issue of tax avoidance?
- What are the costs and benefits to a country of having a low rate of corporation tax?
- How would a more ‘reasonable’ tax on foreign earnings allow the ‘free movement of capital back to the US’?
The high street has changed significantly over the past 50 years and is likely to continue to do so over the next 50 years. Much of these changes have occurred as a result of technological developments. However, one thing that has remained largely unchanged is the telephone box. Although there are fewer of them, with the majority of people owning a mobile phone, city centre high streets still have their fair share of phone boxes.
With tastes constantly changing, products and services come in and out of fashion. But with technology constantly developing, products and services that were once needed have become obsolete, replaced by their more advanced substitutes. We’ve seen e-commerce develop, such that long-standing high street retailers have faced closure and the development of mobile phones and other communication devices have meant that the once essential phone box is now rather redundant. At least, in its traditional function. The Mayor of New York, Michael Bloomberg said:
New York is the most dynamic city in the world, and while technology has changed all around us, the city’s payphones have remained mostly the same for decades.
If we were to place the phone box on the product life cycle, it has certainly reached maturity and in many developed countries, even decline. But can extension strategies be used to create a new function for the phone box?
This is certainly happening in New York, where a reinvent challenge has been launched to help phone boxes adapt to technological innovation. Suggestions include using them as information sources, phone chargers, weather monitors and advertising boards. In the UK, phone boxes have even been fitted with defibrillators and are the first port of call for saving lives. But would this be enough to reinvent the phone box, whose numbers have fallen in New York from 35,000 to only 11,000?
Some say that the phone box is no longer relevant and while the idea of a ‘community hub’ remains appealing, the cost of maintaining them can be rather high. For others, the phone box is still essential, especially for those on lower incomes, who perhaps cannot afford what some people see as a necessity: a mobile phone. Are phone boxes, therefore, a means of ensuring access to communication for all socioeconomic groups? Also, perhaps for all age groups? As technology and tastes continue to change over the coming decades, the phone box will go in one of two directions: a revival or obsolescence. The following articles consider this.
New York phone boxes get new lease of life BBC News, Michael Millar (22/3/13)
Phone box in Ashwell is fitted with defibrillator to help save lives Rutland and Stamford Mercury (23/3/13)
Red Rutland phone box becomes 2000th life-saving hub ITV News, Pete Bearn (20/3/13)
The trashing of the iconic red phone box is one bad call Telegraph, Cristina Odone (11/3/13)
Questions
- Draw out the product life cycle. What examples of products and services can you find that fit in each stage?
- What are extension strategies? How do they help products that are in decline?
- When deciding whether or not to keep a phone box, what factors will be considered?
- How can phone boxes help to tackle inequality, especially of access?
- Are there any other products or services that fit into the decline stage? Which ones have had extension strategies applied and which have not?
- Do all products and services eventually enter the decline stage of the product life cycle? Can you think of any that haven’t? What has enabled them to survive?
In 2009, the European Commission investigated Microsoft’s practice of bundling its own browser, Internet Explorer, with new copies of Windows. It found that this was an abuse of market power and created an unfair barrier to entry of other browsers, such as Firefox.
An agreement was reached that Microsoft would include a ‘choice screen’ in which users in the EU would be given a full list of alternative browsers and asked which they would like to install. On making their selection, a link would take them to the browser site to download the installation program. This screen would be available until 2014. Between March 2010, when the choice screen was first provided and November of the same year, 84 million browsers were downloaded through it.
In May 2011, however, the screen was no longer present on new Windows 7 purchases. The Commission took some time to realise this: indeed it was Microsoft’s rivals that pointed it out. The screen reappeared some 13 months later, after some 15m copies of Windows software had been sold.
For this lapse, the Commission has just fined Microsoft €561m. Commission Vice President in charge of competition policy, Joaquín Almunia, said:
In 2009, we closed our investigation about a suspected abuse of dominant position by Microsoft due to the tying of Internet Explorer to Windows by accepting commitments offered by the company. Legally binding commitments reached in antitrust decisions play a very important role in our enforcement policy because they allow for rapid solutions to competition problems. Of course, such decisions require strict compliance. A failure to comply is a very serious infringement that must be sanctioned accordingly.
This may seem unduly harsh, given that Internet Explorer’s share of the browser market has fallen dramatically. In 2009, it had around 50% of the European market, with its main rival at the time, Mozilla’s Firefox, having just under 40%. By 2013, Internet Explorer’s share has fallen to around 24% and Firefox’s to around 29%. Google’s Chrome, which was just starting up in 2009, has seen its share of the European market rise to around 35% and is now the market leader. Partly this is due to the rise in tablets and smartphones, a large proportion of which use Google’s Android operating system and the Chrome browser.
Not surprisingly, the European Commission is investigating Google to see whether it is abusing a dominant position. Is Google’s case, it’s not just about its share of the browser market, it’s more about its share of the search market, which in the EU is around 90% (compared with around 65% in the USA). As The Economist article below states:
The Commissioner believes that Google may be favouring its own specialised services (eg, for flights or hotels) at rivals’ expense; that its deals with publishers may unfairly exclude competitors; and that it prevents advertisers from taking their data elsewhere.
Joaquín Almunia asked Google to respond to these concerns by January 31. Google delivered its suggestions on the deadline, but we await to hear precisely what it said and how the Commission will respond. It is understood that Google’s proposal is for clearly labelling its own products on its search engine.
Articles
Microsoft Fined $732 Million By EU Over Browser eWeek, Michelle Maisto (6/3/13)
Microsoft faces hefty EU fine The Guardian (6/3/13)
Sin of omission The Economist (9/3/13)
Microsoft fined by European Commission over web browser BBC News (6/3/13)
EU commissioner Joaquin Almunia announces Microsoft fine BBC News (6/3/13)
Microsoft’s European Fine Comes in an Era of Browser Diversity Forbes, J.P. Gownder (6/3/13)
Life after Firefox: Can Mozilla regain its mojo? BBC News, Dave Lee (11/4/12)
Google responds to European commission’s antitrust chief The Guardian, Charles Arthur (31/1/13)
Google May Clinch EU Settlement After ‘Summer,’ Almunia Says Bloomberg Businessweek, Stephanie Bodoni and Aoife White (22/2/13)
European Commission Press Release
Antitrust: Commission fines Microsoft for non-compliance with browser choice commitments Europa (6/3/13)
Questions
- Why did Microsoft’s share of the browser market continue to decline between May 2011 and June 2012?
- Why would it matter if Microsoft had market power in the browser market, given that it’s free for anyone to download a browser?
- In what ways might Google be abusing a dominant position in the market?
- Can Mozilla regain its mojo?
- According to the second Guardian article, the Microsoft-backed lobby group Icomp said “To be seen as a success, any settlement must … include specific measures to restore competition and allow other parties to compete effectively on a level playing field with Google in the key markets of search and search advertising.” Give examples of such measures and assess how successful they might be.
- Would “clearly labelling its own products on its search engine” be enough to ensure adequate competition?
The news in many European countries has been dominated in February by the ‘horse meat scandal’. Small traces of horse meat may be the result of faulty quality control. But the significant amount of horse found in several processed meat products suggest fraud at one or more points in the supply chain from farm to supermarket or other outlet. Indeed several specific suppliers, from abattoirs to processors are facing criminal investigation.
The scandal has put the supply chain under intense scrutiny. Part of the problem is that the supply chain is often very long and complex. As the Guardian article states:
The food and retail industries have become highly concentrated and globalised in recent decades. A handful of key players dominate the beef processing and supermarket sectors across Europe. They have developed very long supply chains, particularly for their economy lines, which enable them to buy the ingredients for processed foods from wherever they are cheapest at any point, depending on exchange rates and prices on the global commodity markets. Networks of brokers, cold stores operators and subcontracted meat cutting plants have emerged to supply rapidly fluctuating orders “just in time”. Management consultants KPMG estimate there are around 450 points at which the integrity of the chain can break down.
Then there is the huge pressure on all parts of the supply chain to reduce costs.
Supermarkets use their market power to drive down the prices of the products they buy from their suppliers and this has a knock-on effect backwards down the supply chain. This pressure has intensified as real wages have fallen and consumers have found their budgets squeezed.
At the same time, beef and other meat prices have been rising as the costs of animal feed have soared. This all puts tremendous pressure on suppliers to add cheaper ingredients. Again to quote the Guardian article:
Manufacturers add other cheap ingredients including water and fat, and use concentrated proteins to bind the water and fat in. They may appear on labels as ‘seasoning’. One of the cheapest sources of these protein additives is pork rind. It is possible that horse hide is now also being used. The widespread adulteration of cheap chicken breast with pig and beef proteins and water has been uncovered in previous scandals. The beef proteins were derived from hydrolysed cattle hides. It is not illegal to use these protein concentrates so long as they are identified correctly to the manufacturer.
It is not surprising that if cheap horse meat becomes available to suppliers, such as from old horses towards the end of their working lives, some processing companies may be tempted to add it fraudulently, stating that it is beef.
The articles look at the issues of long and complex supply chains in the processed food industry and assess why they have evolved into their current form and the difficulties in regulating them.
Horsegate: heed economics of the cold chain The Grocer, Andrew Godley (16/2/13)
Horsemeat scandal: the essential guide The Guardian, Felicity Lawrence (15/2/13)
After the horse has been bolted The Economist (16/2/13)
Slavery, not horse meat, is the real scandal on our doorstep The Telegraph, Fraser Nelson (14/2/13)
Industry must take the reins on food safety Globe and Mail (Canada)Sylvain Charlebois (15/2/13)
Supply chains changed the growth model The Economist, Richard Baldwin (15/8/12)
Supply-chain management The Economist (6/4/09)
Tesco pledges to open up supply chain after horse meat scandal The Telegraph (16/2/13)
Horse meat scandal: Shoppers who buy ‘cheapest food’ at risk The Telegraph, James Quinn, Jason Lewis and Patrick Sawer (16/2/13)
Let Them Eat Horse Bloomberg, Marc Champion (15/2/13)
Scandal shows meat supply chain must be policed heraldscotland (14/2/13)
MPs push for new powers for FSA as officials seize yet more suspect meat Independent, Martin Hickman (13/2/13)
Questions
- Why do supermarkets and their suppliers use long supply chains?
- Explain the concepts of ‘countervailing power’ and ‘monopsony or oligopsony power’? How do they apply in the processed meat supply chain?
- Identify the types of transactions costs in the processed meat industry.
- In what ways do consumers (a) gain and (b) lose from such supply chains?
- Why is the problem of fraud in processed food supply chains likely to have intensified in recent years?
- How have supermarkets reacted to the horse meat scandal? Why has it taken the scandal to make them react in this way?
- To what extent is the problem simply one of inaccurate labelling?
- To what extent is there a principal–agent problem in the processed meat supply chain?
Few people have £18bn worth of funds to spend. But someone that does is Warren Buffett and a Brazilian firm, who look set to purchase Heinz for this sum. Heinz, known for things like baked beans and ketchup already has an exceptionally strong brand and is cash rich – these are two ingredients which Warren Buffett likes and have undoubtedly played their part in securing what looks to be a tasty deal.
The company’s Board has already approved the deal, but shareholders still need to have their say and have been offered $72.50 per share. 650 million bottles of Heinz ketchup are sold every year and its baked beans, at the least in the UK, are second to none. Products like this have given Heinz its global brand name and have provided the opportunity to shareholders to make significant gains. Its Chairman said:
The Heinz brand is one of the most respected brands in the global food industry and this historic transaction provides tremendous value to Heinz shareolders.
This statement was certainly reciprocated by Warren Buffett when he spoke to CNBC, saying:
It is our kind of company … I’ve sampled it many times … Anytime we see a deal is attractive and it’s our kind of business and we’ve got the money, I’m ready to do.
The deal therefore looks to be profitable to both sides, but is there more to it? An investigation has already been launched by the Securities and Exchange Commission as to whether information about this purchase was leaked early and was used to make money. Insider trading occurs when someone is given information early about a merger such as the one described above. They then use this information, before it is made public, to buy up a company’s stock. It is incredibly difficult to prosecute and huge amounts of money can be made by hedge funds, amongst others. This is certainly one aspect of the deal to keep your eye on.
So, what does the future hold for Warren Buffett and Heinz? Buffett likes to extract extra value from companies he purchases and has in the past split up his businesses to create separate trading companies. However, given his taste for ketchup and his appreciation for strong global brands, it’s unlikely that we’ll see a change to the recipe of any of the well-known products. The following articles consider the takeover and the case of insider trading.
Will Buffet ‘squeeze value’ from Heinz BBC News (15/2/13)
Heinz-Buffett deal: will anyone spill the beans on insider trading? The Guardian, Heidi Moore (15/2/13)
Heinz bought by Warren Buffett’s Berkshire Hathaway for $28bn BBC News (14/2/13)
Traders sued over Heinz share bets Independent, Nikhil Kumar (16/2/13)
Heinz deal brings it back to its roots Financial Times, Alan Rappeport, Dan McCrum and Anoushka Sakoui (14/2/13)
Beanz means Buffet: Heinz purchased in $28bn takeover The Guardian, Dominic Rush (14/2/13)
US SEC sues over Heinz option trading before buyout Reuters (15/2/13)
Warren Buffet and Brazil’s ‘Sage’ Jorge Leman strike £18bn Heinz deal The Telegraph, Richard Blackden (15/2/13)
Questions
- What type of take-over would you class this as?
- Consider the Boston matrix – in which category would you place Heinz when you think about its market share and market growth?
- Why is a company that has a global brand and that is cash rich so tempting?
- Given your answer to question 3, why have other investors not taken an interest in purchasing Heinz?
- If you were a shareholder in Heinz, what factors would you consider when deciding whether or not to vote for the takeover?
- What growth strategy has Heinz used to establish its current position in the global market place?
- What is insider trading? Explain how early information can be used to make money in the case of Heinz.
- Explain how the share price of $72.50 is set. How does the market have a role?
