Tax Avoidance Can Be Morally Taxing

What started off as questions about individual’s offshore investments has swiftly moved onto corporate use of global tax bolt holes in order to avoid tax. Tax-friendly countries aren't new and international companies have been exploiting them for many years. Even the use of Luxemburg by the likes of Google, Yahoo and Amazon has been know for a long time. We wrote about the variance in VAT rates and Luxemburg loophole in late 2011 and its not as if any MP didn't know about it, as it is heavily embroiled in the whole question of VAT and EU tax standardisation. The US Sales tax debate has also been ongoing and has been well documented for years. So why has it been raised now and where is it going?

Following the appearance of Google, Starbucks and Amazon executives before a committee of UK MPs last week, UK BUSINESS Secretary Vince Cable,has now urged authorities to clamp down on the “completely unacceptable” corporate tax avoidance and called for international cooperation over any reforms. To some that is like him suddenly having a revelation when caught with his pants down and it is somewhat ironic that he calls for others to reform when he himself is in fact the ‘UK Business Secretary’.

If we look at the companies under the current spotlight we see Starbucks, which is thought to have paid just £8.6m in corporation tax since 1999, despite last year sales of £400m. Their movement of liabilities across their total business is what most would expect, but the result is now morally unacceptable to others who may not share the same ability and believe that they are being unduly penalised. The coffee cup is no better for Caffe Nero, whose parent company is based in that heavily populated and coffee shop haven, the Isle of Man. Last year they made a profit of nearly £40 million, but paid no corporation tax in the UK. Caffe Nero is not breaking the law, but are “taking advantage of the rules in place in relation to ‘capital allowances, deferred losses and interest payments’.

Another tax avoidance which has now been addressed allowed broadcaster BSkyB to mix VAT and non VAT services within the same subscription. They had been saving an estimated £30 to £40 million a year in VAT by charging satellite customers £2.20 a month for the Sky magazine, which was zero-rated for VAT. This allowed them to avoid VAT of around £3 to £4 per subscriber, which given Sky's 10 million subscribers provides revenues not to be ignored. In 2005 UK courts had ruled that cable companies were allowed to deduct VAT on "cable guide" magazines, if the customers received a product from a separate company and at a fair price. However in 2005 Sky relaunched BSkyB Publications and took production of Sky magazine in-house and also began distributing Sky Sports and Movies magazines. BSkyB Publications' accounts claimed that the majority of the income from the magazine was recycled back to Sky TV. They described it as payments for "customer data" and "support services". In 2010, the Treasury announced among a number of anti-tax avoidance measures, legislation against VAT "supply-splitting" and in 2011 BSkyB announced it would be ceasing publication of Sky Movies and Sports magazines and downsizing Sky magazine.

The question is whether the authorities will go back to BSkyB and reclaim the monies apparently due?

Apple and Google are based in Ireland and enjoy their low corporation tax benefit. Google uses Ireland for revenues that end up being costed to Bermuda where its intellectual property is registered. We then come to Amazon who like its smaller rival Kobo, have their European headquarters in Luxembourg. It begs the question if any big multinational has their European financial base in the UK? 

The Guardian claims that Amazon generated sales of more than £3.3bn via its UK website last year but paid no corporation tax on any of the profits from that income and the Security and Exchange Commission show that in the past three years, although Amazon generated sales of over £7.6bn in the UK, they paid no corporation tax on these.

However the Amazon issue is not just about the corporation tax but also about is the uneven playing field and market advantage that the 3% VAT rate of Luxemburg gives it against the 20% rate of the UK. The challenge does not just effect the UK , but any country in the EU that has a VAT rate higher than Luxemburg. Amazon effectively does not pass on this windfall benefit to the publishers, who have to cover the whole 20% VAT in their pricing negotiations with Amazon and effectively pockets 17%. This obviously gives them a clear margin benefit over their UK domestic rivals who have to pay the 20%. The EU is moving, albeit slowly, to close down this loophole but it is more than just a tax loophole but how Amazon buys and sells and makes 17% without getting out of bed!

Amazon also has challenges with its highly successful third-party Marketplace, where the VAT status of its resellers can lead to misleading prices. Depending on the reseller's VAT status, products sold on Marketplace can be listed either with or without the tax added. Some resellers don't supply the VAT receipts, that prohibits these small businesses from claiming VAT. This doesn't impact small ticket items, but can heavily impact a small company buying expensive PCs and other VAT-able goods. The current situation means non-VAT registered companies can make their items look more attractive by keeping prices below larger competitors and in effect create a false market.

However, tax avoidance is now becoming a high risk activity as the media draws the spotlight on the issues and the companies involved now face damaging their public reputations. For government ministers and civil servants to act surprised at the revelations and point fingers at each other, is perhaps indicative of the often ungoverned society we often now find ourselves. We often find ourselves in a world where the likes of twitter and Facebook can draw more attention to issues and we wait until that logic and moral tipping point. The stance and comments from the likes of John Lewis’s MD, Andy Street, and the UK Booksellers Association’s tax and lobbying messages start to raise awareness to the issues. The press has certainly raised the issue of tax avoidance, but perhaps the only real moral test is if the consumer says ‘no’ to the likes of Amazon, Caffe Nero, Starbucks. Imagine a one month ‘say no’ campaign and the impact and message that would send to shareholders of the companies.

Perhaps the greatest challenge is to harness the public opinion and convert it into concerted action. A few posters isn’t going to do it. Lots of bad press can often be weathered, but stopping the cash-flow really can send the message home. Perhaps we have to wait until after Christmas and we have bought all our presents from them and drunk their coffee to keep warm!  

Amazon Ecosystem Continues to Grow

Amazon is not just a books, music, video, games and media retailer, it is the major online 'one stop shop' for many and one that has a cross merchandise offer that is very powerful and even threatens the likes of Walmart. If we take the latest UK news that they are increasing their take on of temporary UK staff for the Christmas run-up from 3,000 to 10,000 short-term packaging jobs in just three weeks, we see not only their commitment, but also their decisiveness to do business. How many retailers can you name who are taking on such numbers? Some 2,000 of the workers will also retain their roles after Christmas and join Amazon’s  growing 56,000 full-time worldwide workforce.

Amazon have also just announced that, Amazon Studios, has optioned its first novel, the Amazon-published, Southern horror 'Seed'. The book is a Southern gothic suspense tale of an "ordinary man with a demon on his back." It was authored  by Ania Ahlborn, under Amazon’s sci-fi, fantasy and horror imprint, 47North. The book is a self-published and a viral driven Amazon ebook bestseller. By developing Amazon Studios Amazon is now becoming a content developer with multiple channels to develop, promote and exploit content. This offers authors something that is truly unparalleled within the media market and could further fuel author deals that others will not be able to match.

 Amazon Studios already claims to have optioned 10,000 movie scripts and 1,800 series pilot scripts, and although this number will reduce to a mere handful of projects such as 'Seed', the process and momentum is there for all to aspire to.

But Amazon's growth is not just driven internally and by themselves. Marketplace is further fuelling its 'one stop shop' environment and building on the realisation that books are books, be they new, old or used and being able to compare and buy from within one trusted store offers more than any simple comparison sight. Again Amazon have thought out consumer behaviour and matched their service to fit it. Many now have feed their catalogues into Amazon’s marketplace and are happy to get new sales and pay a commission on price paid and the postage incurred. This is without the many 'agents' who simply refer their sales to Amazon to fulfil.

Amazon’s growth is also being fuelled by the likes of Pogoplug who have launched an Amazon-powered cloud backup service in the US and UK. Pogoplug allows users to stream photos, music or video from their home computer to wherever they are in the world. Pogoplug mobile is a new device that allows users to access unlimited media streams from their mobile device using Amazon’s new budget cloud Glacier service for offering users low price fast cloud storage with prices around £19.99 a year for 100GB of offsite storage. Building a further trusted layer to many consumer relationships.

As Amazon continue their path to dominate many markets, they do have another side to their business face. They are giving back to one community around its fulfilment centre in Spartanburg, US by donating some 40 Kindles to the local School for the Deaf and the Blind. The students will also received $2,500 in gift cards to download resources to the new devices. The Kindles have a number of disabled-friendly features such as text-to-speech and large print and thereby obviate the need for visually impaired students to have wait for the audio book or large print edition.

Amazon is developing and creating its own ecosystem which is fuelling growth and is the only giant who not only understands the consumer but marries technology, media, retail and a thriving marketplace under one roof.

Sumo Wrestling: WalMart Vs Amazon

This week, Reuters broke the news that the world’s largest store, Walmart, had taken the decision to no longer carry the world’s largest etailor’s Kindle tablets and eReaders once the existing inventory and purchase commitments had been honoured. It was reported as being a merchandising strategy and a recognition that Amazon is a real competitor across all media content. Is more about who owns the customer, who is providing the service and whose brand is actually being built than dropping some devices?

In the physical world it was all about filling the shelf and if you didn’t have the product on the shelf everything else could simply fail. The likes of Amazon then created the virtual shelf with vitual inventory and online service and many failed to match the offer. Some even effectively gave their digital business, be it for physical or digital product, to these new virtual traders. Amazon built a significant marketplace which few have been able to emulate, where even when they didn’t get the sale themselves, it was done effectively in their name and they earned a commission on it. Amazon is no longer about books, or digital media, it is a retail virtual market. The Apple store then took this commission approach to a new level and established that doing business through their appstore , on their iPads, be it for purchases or subscriptions, warranted a hefty 30% commission payment. They even tried to force the whole digital market back into fixed pricing with them being the ‘most favoured nation.’

We have gone from digital device and format/DRM lock-ins and transaction charges to platform commission and portal charges and now have to ask what next and how many slices can the pie take?

It is somewhat pleasing to see the emergence of HTML5 as the potential great leveller, but equally interesting to see the browser positions adopted by Amazon Kindle with their Silk browser  and Apple with own browser.  Are these to become the new toll booths and open market restrictions?

If we were to  ask the consumer who is their first choice gateway for music, film, games, TV, radio, news, books, will they select one umbrella service or many separate ones? Are they now looking for a simplified access and a one stop shop and is this driven by a marketplace or merely a platform. We don’t know the answer but unless we ask we will merely assume we know the answer.  The important thing is that what once was the brand everyone thought they bought from may now be changing and the power shifting through technology to others who simple attract consumers and facilitate access.

Walmart may so no to selling Kindles but if all they devices they sell still access Amazon and they don’t have the comparable offer are they exposed to the same risk? By not stocking Kindles are they also just driving their consumers who want one to another store full stop? 

The Disipline of Market Leaders

Having worked for market leader organisations in various industries it is easy to distinguish them from the pack. Some believe that size counts and that this determines market leadership, the truth is that size often comes through market leadership but size alone is nothing but a statement at a given point in time.

Market leaders do what it says on the can ‘lead markets’. They are focused, proactive and although they recognise the short term are very much focused on the long term and creating a unique market position and differentiator. Do we have them in the publishing sector – yes but they are not who many would think of as market leaders. An interesting example is Taylor and Francis whose growth and digital strategies have been bold and delivered huge advantage when others have merely followed. The recent article in the Bookseller (25 July, ‘Jolly Rodger’) eludes to the vision and drive Rodger Horton and his team have given this publisher.

At times of fiscal constraint we often find that market leaders remain focused and plough forward, often bucking trends.

It is hard to find many examples of market leadership and easy to see many pretenders but one company clearly stands head and shoulders over the pack for the last decade – Amazon.

An industry ‘expert’ and colleague once told me that Bertelsmann and their Bol.com would crush Amazon and that their model was nor sustainable. Needless to say he didn’t understand their model, the power of positive cash flow, their relentless drive to capture market share and their global brand proposition. It was ’98 and obvious to many that they were going to dominate, but the manner in which they have set about it continues to demand respect.

They have:
Extended bibliographic record, making the book jacket obligatory on the net, introduced reader reviews. Remember where you first saw ‘Search Inside’?
Recognised that used , rare and front list are all books and that the publication date is not always top of the consumer’s agenda. Combining this and their marketplace offer was both logical and a breath of fresh air.
Captured the audiobook initiative through acquisition of first Brilliance and latterly Audible, they have taken the audio book market by the scruff of the neck. They already had the MP3 and DRM credentials but with Audible they now have both bases fully covered.
Established themselves as a digital player. Through their acquisition of Booksurge and their POD policy they have positioned themselves not only to supply POD but like others they can now also capture the bigger prize of the digital files themselves.
The Kindle may be an ugly duckling but it has many more titles than any of its competitors and more importantly belongs to a brand that is clearly associated with books. Adobe and Sony may all command trade attention today but this is not their market, is a trade only offer. In the case of Sony they can always leave as fast as Betamax or walk away like Microsoft Live Book Search or back the wrong horse as with their original BBeb ebook format.

The list goes on but we now read of Amazon’s payment gateway offer to rival PayPal and more importantly their full acquisition of ABE. This later move is very interesting and starts to potentially tie many strings together. Some thought it good that they would continue run ABE as a separate brand and company. Some would say that there is no need to join them at the customer, but join them at the inventory and sales data. Think about what ABE offer Amazon? There is rich bibliographic on titles that often didn’t have any. There is 15 years of sales data of the long tail, not just of books in print but those gems that have long been lost and forgotten. Only Alibris has similar data and there is little chance of a new entrant today. Combine ABE’s information assets, market position, the Amazon services such as Booksurge and Kindle offer and a clearly focused market leader and you have a potential offer that is both unique, extremely interesting and one to watch.

Reading Habits Protected in US

What did you buy last week or the week before? What books have you bought from Amazon?

We read about US Federal prosecutors withdrawing a subpoena asking for the identities of thousands of people who bought used books through online retailer Amazon.com. The withdrawal came after a judge ruled the customers have a First Amendment right to keep their reading habits from the government.

Federal prosecutors issued the subpoena last year as part of a grand jury investigation into prolific seller of used books on Amazon.com. Robert D'Angelo, was indicted last month on fraud, money laundering and tax evasion charges. It was claimed that he ran a used book business out of his city office and did not report the income. D'Angelo sold books through the Amazon Marketplace and the prosecutors were looking for buyers who could be witnesses in the case.

The initial subpoena sought records of 24,000 transactions dating back to 1999. Prosecutors later narrowed the subpoena, asking for a sample of 120 customers. A compromise involving sending a letter to the 24,000 customers describing the investigation and asking then to volunteer was then suggested. Finally they found the information on his PC.

The lessons are that Amazon does protect data even when under legal threat to expose it and often those searching will go to what they see as the easiest route before looking under their very noses. It’s a good job they weren’t in the UK they would have probably lost the information to a man on route..