Tag Archives: google

Business Ethics in ‘Eastern Europe’ – Further Opportunities for Mischief

Business ethics in the former Socialist Republics of ‘Eastern Europe’ have evolved, by and large positively, over the last 25 years, but from a deplorably low base. Oligarchs, corrupt civil servants, politicians, judges and policemen, you can find them all on the beaches of the Riviera, even if nowadays you might also find a few honest businessmen.

luxury

In two previous posts I’ve written about the moral vacuum of the early ‘Wild East’ days that followed the collapse of a socialist utopia where all were equal losers, and I’ve outlined the opportunities that sadly still exist for the exploitation of business partners, competitors, and employees. These misdemeanours, though practiced with an easier conscience in Eastern Europe, aren’t at uncommon in the rest of the world either, especially those related to tax.

Ethics and Business – ‘Eastern Europe’ after the Revolutions

Business Ethics in ‘Eastern Europe’ -Everyday Misdemeanours

There are many other kinds of victim. Let’s continue….

Suppliers.

Unfortunately suppliers, too, like to be paid for what they supply you with or do for you. They, too, have designs on your money. What can you do to avoid this?

  • One option is simply not to pay them.
  • Another is to screw them in terms of the demands you make, and the prices you force them to accept.
  • But best of all, is to be them, so that when you do pay them you’re actually paying yourself.

When large state companies were broken up in the early 1990s one common trick was to set yourself up as the owner of an essential supplier of the larger company you worked for. You might even arrange to buy a spun-off supplier at a knockdown price. You could then arrange for attractive deals to be done with the company that you own.

I believe you must treat suppliers fairly. One of our earliest multinational customers was Johnson & Johnson. They make consumer goods, medical devices and medicines. They’re generally a delight to work for, reasonable in their demands, and prompt in their payments. In each of their offices they place their Credo on the wall where staff, customers and suppliers can see it. Amongst the usual blah-blah about customer care and quality (which, of course, they do take extremely seriously) was something that I was pleased but surprised to see – a sentence that goes something like this: ‘We will treat our suppliers reasonably and we understand that they must make a fair profit.’ This is not an understanding common to all businesses. For most, the game is one of ‘screw the supplier’ as if the contract is a zero-sum game. A supplier’s profit is the customer’s loss. We’ve recently seen Tesco in the UK criticised for this approach.

My company, LLP Group, is fortunate in dealing with international companies, who are, by and large reasonable (we haven’t yet worked for Tesco) but I know that Eastern European companies abuse their suppliers with relish. In one instance, one of Russia’s oil majors abandoned their efforts to implement the software we’d sold them for their subsidiary in Romania, and simply chose not to pay us the 50,000 EUR they owed us, with complete impunity. There was nothing we could do about it. Lawyers are too expensive and, anyway, it would have taken at least three years for the case to come to court.

In running LLP Group I take the view that one must pay one’s suppliers promptly according to agreed terms, unless there are very good reasons not to. It is a moral duty as well as a legal duty.

Tax Authorities.

No one pays their taxes eagerly, but in most countries there’s at least a modicum of trust between the taxing and the taxed. We recognise, reluctantly, that the taxman and woman represent the country’s real interests, and whether we quibble or not about refugees and benefits, there are roads to be built, armies to sustain, and hospitals to run. In Eastern Europe there is no such consensus that Governments tax justly and spend sensibly.

Just the other day, I was offered the opportunity to wriggle out of the 15% withholding tax that I must pay on dividends I pay myself from the company.

‘I think 15% is reasonable,’ I said. ‘I’d pay much more tax if I lived in the UK.’

‘You wouldn’t think it reasonable if you knew how much the Government steals, or wastes,’ was the reply.

There are always two ways of reducing your tax bill. There’s the legal way, which is called avoidance, and the illegal way, called evasion. The practice isn’t peculiar to Eastern Europe, and I’ll refer to some Western businesses to illustrate some of the most common tricks.

Now, avoidance is fun. It’s a creative art. There are probably as many ways of avoiding tax as there are tax laws multiplied by the tax consultants who can help you circumvent them.

These are some of the obvious scams. They’re immoral even if they’re not illegal and they’re used by some of the largest and most successful companies in the world, such as Google and Starbucks.

  • You can ‘Google’ (a new meaning for the word) your intellectual property to a tax-efficient location and siphon your profits away from higher-tax locations (we were once advised to register the ‘LLP’ brand in Luxembourg and then bill all our subsidiaries for its use)
  • You can ‘Google’ your invoices from a tax-efficient location and claim that that’s where the sales took place

The fact is that Google and Starbucks aren’t actually breaking the law. If they were, prosecutions would have been brought. If they’re making deals with the tax office and paying a little more into the public coffers, it’s only for PR purposes (for the benefit of both parties) rather than any admission that they’ve filed their tax returns incorrectly.

Google defiantly claim to make its sales, and therefore, its profits, in Ireland. But what makes a sale? What establishes the physical location and the tax jurisdiction of a sale? Is it a matter of where goods and services are received? Or the location of the company that’s paying? Or where the bill is printed and booked? Or the location from which the goods and services are delivered? These are difficult questions.

Should taxes be levied on sales value at the customer’s location (as Lord Lawson has recently suggested) or on ‘profit’, something that international companies, especially in the service sector, find it easy to manipulate. Place some intellectual property (such as the Starbucks logo and methods) in a low-tax jurisdiction such as Luxembourg and you can get away with charging around 7.5% of revenue to your subsidiaries for their ‘use’ of the corporation’s branding. That takes care of most of a company’s taxable profit (who makes much more profit than 10% of revenue?).

I don’t see an easy solution to this problem. Taxing sales, on the basis of the location of the recipient of goods or services, would be very cumbersome to administer and an impediment to economic activity. My company, for example, would find itself paying taxes in more than fifty countries each year? How could those states audit the correctness of our calculations?

So, there’s the ‘sales location’ scam that suits companies, such as Google that deliver intangible items and there’s the intellectual property licensing scam that suits companies such as Starbucks where operations are delivered by a subsidiary but ‘designed’ elsewhere.

And there are countless other scams, such as the insurance scam. A large international company can set up an insurance agency in a low-tax jurisdiction and charge large premiums to subsidiaries elsewhere. Profits are thereby transferred. All of these acts of tax avoidance are immoral, but they’re not usually illegal.

But is tax actually a moral issue? In their defence, managers of these large international companies cite their duty to shareholders to maximise distributable profit, as if ethics are irrelevant. But ethics are important, and it is left to the owners of small companies such as mine, answerable only to a small group of shareholders, to make moral choices when it comes to tax avoidance. In my view it is wrong to avoid tax through clever, energetic, distorting manoeuvres. Somehow tax law needs to build on our sense of what is ‘appropriate’ and ‘natural’ when it comes to tax. We all know when people are being evasive, and we all know when companies are being evasive. But how to capture that in definitions that will ensure a level playing-field, as the law does?

Tax harmonisation, of course, would solve some of these problems, since one country couldn’t outmanoeuvre the others by offering the incentive of lower taxes, but even so, a large international company could still obtain economies of scale by placing all of its administration and tax affairs in one place rather than in many.

Next time, we’ll look at evasion.

Taxing Times -Google and Tax

Google will pay 130 Million GBP in back taxes to the UK Government, in settlement of any potential dispute as to whether it should have paid more in the past. Whether Google has thereby established a new tax rate for the future I’m not sure. But if it has, it amounts to a derisory rate – about 3% on the real profit it obtains from its UK sales, some say.

Taxgoogle

Large multinationals, especially those providing software or services, take enormous and conscious advantage of the lack of clarity surrounding concepts that we too easily take for granted – such as the concept of a sale.

I am no tax expert, but I would presume that the idea of corporation tax, the tax on a company’s profits, is to tax economic activity in the country where that activity is carried out. This is fair recompense for the physical infrastructure, legal protection, and military protection that the taxing government provides.

But how do you define economic activity and its location?

In determining profit, there is on the one side revenue (usually a company’s sales) and on the other side there is cost. In general a company will want to record its revenue in the most lenient tax jurisdiction it can find.

So that’s why, if you’re a British entity you may well find that when you buy services from Google, you are actually buying them from Ireland. You will receive an invoice from an Irish company, and you will pay to an Irish company (let’s put aside the issue of whether an Irish company can run a bank account in the UK – that’s probably another complex matter, but we won’t go into it here). Your contract for the provision of services (an agreement that services will be supplied in return for money) is with an Irish company. This means that revenue is booked in Ireland. Google will then subtract costs and pay tax at a relatively lenient corporation tax rate on the difference.

In some circumstances you can imagine that Google needn’t even run a company in the UK. It might operate entirely in Ireland, and its forays into the UK might be confined to the occasional salesman’s visit. Indeed some companies operate in this way. They simply provide goods or services from another country. If you buy contact lenses, for example, from a Czech company and receive them in the UK, the Czech company’s costs will amount only to delivery costs, but even these would be contracted with a logistics firm in the Czech Republic. Fair enough? Possibly.

But of course Google does incur costs in the UK, and some of these, one might argue, are related to the services it ‘sells’ from Ireland. There may be a marketing, or sales department based in the UK, whose job is to cajole British companies into using Google’s services. And I would imagine that Google does indeed offset these costs against Irish revenue, by subcontracting ‘marketing and sales’ services from the Irish entity to the UK one, with a mark up on costs for the UK company. Thus a small profit is made in the UK on services provided by the UK entity to the Irish one. But the main profit is made in Ireland where customer revenues are booked, and where tax is lower.

But I also know for a fact that Google does incur other costs, such as marketing costs, in Ireland. I regularly receive calls from Czech (and also English) speakers based in Ireland who explain to me that by spending more on Google’s Adwords services I will sell more of my own company’s software and services.

The conceptual difficulty lies in the definition of a sale and where it takes place.

The Shorter Oxford English Dictionary (the 8,000 page version) defines a sale as:

  1. the action or an act of giving or agreeing to give something to a person in exchange for money

Putting aside ‘agreeing to give’, a stage in the process (signing a contract) which doesn’t allow a company to book revenue, this definition is woefully inadequate for our purposes. Whilst it does cover the giving of goods (as in a shop), services (‘giving’ consulting, whether at a client’s offices or remotely) and the granting of a right to use software, it doesn’t help us to clarify where the ‘act’ takes place.

Many companies regard the ‘act’ as simply that of printing a bill (an invoice). Even if vast costs are incurred in the UK by sales representatives, in marketing, and so on, the ‘act of sale’ happens in another country because that is where the bills are created (and you could even imagine that these bills might be created by accounting clerks in the UK using software running on UK-based servers). In the end what it comes down to is that the ‘act’ is often generously defined solely in terms of the legal location of the company into whose accounts the bill will be booked.

If you broaden the concept of the ‘act’ to include all the surrounding precursor activities, such as marketing, business management, warehousing, even manufacture, then you might go a long way, with some kinds of company, towards capturing a larger taxable profit.

But take Amazon. Amazon does, indeed, do many of these things in the UK, but it’s one of those large international companies currently under scrutiny for its low taxable profit.

In any case, this approach doesn’t work well with software companies such as Google or Microsoft, or any of those whose marketing, products and delivery mechanisms are all digital. It isn’t easy to say where the ‘acts’ of sale occur. Underlying software (including its development), databases, support teams, even marketing teams, may be located outside the jurisdiction of the companies that are buying the company’s services. So, where should profit be taxed?

It’s not easy. If you go so far as to say that a company should be taxed in the country where its customers are you open up a Pandora’s box of complexity. My companies, LLP Group and systems@work, sell software and consulting services in seventy or so countries around the world. How would we go about declaring profits in each of these?

Some of these countries, it is true, charge a withholding tax on invoices we send to our customers. So, if we bill 100 to Albania, we might receive only 80. This mechanism, I suppose, is designed to prevent the movement of profit from Albania to the Czech Republic, and if we furnish proof of this payment to the Czech tax authorities, we can reduce the profits we pay here. But this mechanism is generally and rightly regarded as obstructive and most countries abandon it when they are fully integrated into the global economy. It is a huge disincentive to business, and more often than not simply results in fees being uplifted by the selling company to compensate for the frequent failure to make all the paperwork work.

It isn’t easy to set policy, but certainly something needs to be done. It seems obvious to the man in the street that Google ‘acts out’ its invoices in Ireland to reduce its tax bill in the UK.

But does the solution lie in the harmonisation of tax policy, or in taxing sales activity using a broader definition, one that reaches as far as the location of the customer?

Sorry, it is a dull topic, but it’s a hugely important and difficult one, and it concerns billions in taxes.

Compare and Contrast – Microsoft and Google

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Last weekend we held a company conference in Visegrad, Hungary. It was a mixture of instruction, inspiration, and a drink called Jagermeister.

We are not a large group (LLP Group) but we managed to assemble around 70 of our marketing, sales and consulting staff from seven of our European branches at a pleasant hotel in Visegrad on the Danube for two full days of talks and discussions. Most of our presentations were about ourselves and what we do, but we decided also to step back from the day to day and contemplate the future. So we invited Microsoft and Google to present their visions of how the world will look in two consecutive formal sessions. We were lucky, I suppose, that both took us seriously enough to send a representative.

comparecontrast

Whilst the worlds of Microsoft and Google overlap in some areas (their interest in cloud computing, in desktop tools (spreadsheets, word processing, etc.), in mobile technology (Windows Mobile and Google Android), and in search tools (Bing and Google)), what was surprising about these two giants of the tech-world was how different they are, to some extent in substance, but enormously in style.

First to go was Microsoft. A man in a dark suit from Microsoft’s Dynamics business software division talked about the ‘cloud’. This wasn’t enormously interesting. The future of computing is the cloud, he said, and it sounded like a dull future. It was the usual business PowerPoint presentation, heavily branded with the Microsoft logo, corporate and unremarkable.

The young lady from Google, by contrast, started with a picture of herself and her family and went on to present her ideas (and perhaps also Google’s) in an engagingly idiosyncratic, and almost entirely ‘unbranded’ way. ‘No brand’, it appears, is the Google brand. Be personal, individual, unusual, and cool, is the theme. Bring your family to the ‘table’. Life and work are a continuum. It’s the same message, I suspect, for both internal and external consumption, but we shouldn’t be fooled into thinking it isn’t calculated.

She spoke about how the nature of IT is changing, how devices assail us (well, that’s probably an old-fashioned way of putting it!) in all sorts of ways all day, everyday and everywhere, but that predominantly it’s the mobile device that is determining the way we work and play. IT, even business IT, must live up the expectations of the new generation who spend their time on mobiles. If IT isn’t easy to use it will be forgotten.

I asked her afterwards how she thought this would affect the world of business software. It’s hard to see SAP or accounting systems on mobiles, I suggested. Maybe, she said, but young people don’t want to join corporations any more, they don’t want to be working with heavy-duty old-fashioned ERP, so business software must adapt. Young people have individual, creative, even ‘moral’ aspirations. Google the ‘anarchists’, it seems.

There’s a little truth in this, perhaps. The young are always idealistic. But the business software juggernaut will nevertheless roll on, adapting slowly and painfully to the easier-to-use styles of consumer software. The fact is that business systems become ever more complex, and will always take man-millennia to write and adapt. Complexity isn’t easy to fit into a mobile device.

You might as well say that literary authors must write novels of pamphlet length if they’re to be taken seriously by the next generations. Let’s make things easy, if that’s appropriate, but let’s not dumb down.

So the differences between Google and Microsoft are more about style than substance. Both are, in fact, highly organised and enormous business, juggernauts themselves. The first presents itself as anarchic and individualistic, the second as more sober and business-oriented. Both have been creative (occasionally) but neither can seriously pretend to be anything other than a large well-organised multi-national corporation, disciplined and deliberate.

And neither can Apple. All three of these are highly competitive and meticulously calculated in their moves, Microsoft perhaps driven more by business, Google more by the consumer, but both slaves to their respective markets. True, the consumer and the business worlds nowadays overlap, but there are still some things each company does that are unique. We’re tempted by Google’s cloud-based desktop tools, but they don’t yet have an answer to MS SQL.

When it comes to style, consumer-facing companies need a different image from business-facing companies and both must be careful when they need to face in both directions (note that Skype, largely consumer-facing, isn’t heavily branded by Microsoft as a Microsoft product). But I don’t strongly believe that the capacity of these companies for innovation is a function of their presentation style.

That said, during a separate presentation that I gave on our own systems@work products, I asked my colleagues what devices and what browsers they use. The majority use Android, and the majority use Chrome, so in that respect (and I was surprised), it’s 2-0 to Google. But then we all use Windows on our PCs, and SQL servers for our business applications, and Google doesn’t even compete with these.