Jul 27 2011

Virgin Enterprise off to Geneva to shirk tax

Posted by: Nick Shaxson in: Thoughts

From The Telegraph:

“The company that owns the rights to the Virgin brand around the world is planning to relocate from London to Geneva in the coming weeks in a move that will reduce its tax bill. . . . A source said the decision had been made to maximise “tax efficiency”.

Shifting a brand offshore is a classic abusive transfer pricing move to avoid tax. Here’s what happens.

First, the offshore subsidiary that owns the brand charges huge fees to other parts of the company – fees that it’s very hard for Revenue authorities to challenge (just how much, exactly, is Virgin’s brand worth?). Next, that offshore subsidiary makes huge profits, by virtue of charging those huge fees. But because it’s in a tax haven, it pays little or no tax on those profits. And as for the ‘onshore’ subsidiaries in high-tax countries: well, they can then offset  those huge fees as costs, against tax, cutting their tax bill.

Hey Presto! A tax bill evaporates!

Overall, nobody, anywhere, has produced a better, more efficient air service, record company, widget or whatever. All that’s happened here is that money has been transferred away from hard-pressed taxpayers, to people like Richard Branson and his fellow shareholders. And pressure is put on countries to lower their tax rates to stay ahead in this awful race to the bottom. (If you don’t believe that, just look at the tone of that Telegraph story, or the Daily Mail story that followed.) Britain’s already large deficits get that little bit wider, creating additional risks in an already precarious situation. Smaller competitors get killed, for no good economic reason, on account of a tax subsidy that is available to bigger players, but not to them. Markets are made less efficient on account of the costs of expensive tax advisers, lawyers, bankers and so on.

This is bad, harmful, egregious stuff that’s happening.

How important is this kind of abusive tax practice to the Virgin empire? Well, it’s hard to know exactly, but in 2002 Branson was quoted in this way:

“Virgin’s offshore status has been crucial to its development: it allowed money to move from business to business without massive tax liabilities. “If we had not done it the way that we did, Virgin would be half the size that it is today,” argues Branson.”

So overall the rich get richer, the poor get poorer markets get distorted, and there is no net benefit to the world of any kind. Quite the opposite.

People like Branson get awards all the time. No doubt he’s a good businessman in some ways. But this stuff counts as a serious, serious black mark against his name, during these times of national strife.

What is interesting about this is the comments under the Telegraph story – readers are generally a right-wing bunch, but most of the ones, at least at the top, are unremittingly hostile to Branson’s move. Perhaps that comes more from feelings of patriotism than anything else, but still, it’s interesting.

Oh, and as for that term ‘tax efficiency’ – see TJN’s dictionary of offshore obfuscation.

6 comments so far

kim bjorkland 7th July, 2011 5.03 pm

Your post lays it out quiet factually. Let’s say the amount of money that Virgin saves on taxes is $X. The choice that we all have to make is, who do we want to give $X to?

Option 1. $X goes to Virgin and it’s shareholders. That way Virgin can employ 25,000+ people globally (instead of 12,500), and can provide quality trains, planes, and products for us (instead of just trains and phone service).

Option 2: $X goes to the treasury, where our feckless politicians can waste it on NHS IT scams, fund the illegal invasion of Iraq, Afghanistan, and Libya, and fund countless other bureaucratic wet dreams.

I posit that most rational people prefer option 1 over option 2.

Nick Shaxson 7th July, 2011 10.00 am

Kim, this company is getting, in effect, a subsidy, which its smaller competitors can’t get. Let’s double the subsidy, and it will employ 50,000 people. No, tell you what, let’s give it two dollars – no, five dollars – as a subsidy for every dollar they make in profit. We can solve the unemployment problem, just like that! Brilliant! Why hasn’t anyone thought of this before? And yes, the private sector, of course, is always, always, better than the public sector, isn’t it? Let’s start with Enron and Northern Rock, move on to Lehman Brothers and AIG, and keep going, shall we? Let’s just increase those deficits, shall we? Let’s stop government building roads, and let private individuals all chip in to pay for their stretch of roadway, shall we?.

It is just libertarian fantasy to say that all government is feckless and hopeless and the private sector will always do it better. May I make a suggestion? That you watch this video. It’s very short but quite instructive, actually.

Oh, and you will find, that people actually have done these sorts of polls, about whether or not big corporations should be allowed to avoid tax. And the results are clear – and strongly so. People don’t like it. And for very good reason.

pjl20 8th August, 2012 5.31 pm

Well done Sir Richard! Tax Avoidance is not illegal especially for an organisation with so much business overseas as Virgin has. However Tax Evasion is illegal – surely this is not being levelled against him?

Nick Shaxson 8th August, 2012 3.03 pm

Sigh. Yes, apartheid was not illegal in its day, nor was slavery. Not to link the two sides, but to make the point that legality is one (important) thing; abusive is another. There is a big overlap but they’re not the same. Cameron and Osborne have both come out against aggressive tax avoidance, calling it wrong – and the large majority of the British public thinks so too.

[…] This blog from Nicholas Shaxson tells us that Virgin Enterprises, the company the sells the Virgin brand to other companies, so they can pose a fully-fledged Virgin companies, moved its operations from London to Geneva. How important is this kind of abusive tax practice to the Virgin empire? Well, it’s hard to know exactly, but in 2002 Branson was quoted in this way: […]

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