The Untouchables

Globalisation and Technology has introduced a new breed of corporation who ‘see no evil, hear no evil and speak no evil, do no evil’, but sail very close to the wind in their approach to many moral aspects of business.

We have all heard the lengths that they go to avoid tax and ensure that they operate at maximum profit. The list of companies that play the game and operate within the tax laws but with questionable moral,s is not just restricted to the big technology companies we read about. The hall of abdication includes; Google, who have  a preferred lower rate in Ireland than the Irish companies, Amazon, who have the weird situation where they earn more out of government subsidies than they pay in taxes in the UK, Apple whose tax regime is ‘complex’. There are many others, such as the ticket company, The Trailine and UK rail operator, First Great Western, which are hardly international companies, but find it good to be based in Luxemburg.

Then we have the VAT games which apply to those who operate in lower EU tax countries and sell into higher rate countries and gain the obvious windfall VAT as a result. Of course the EU are going to fix this in 2015 but that doesn’t stop 'hay being made while the sun shines' today and traditional businesses suffering a governmental penalty for paying their appropriate tax. Most of the major digital media operators look to use the Luxemburg VAT haven; Amazon, Kobo, Nook. There should be a simple windfall tax levied against this organisations and they should be made to realise that there is a moral conduct of practice even if they can skirt around the legal one. 

All this is without the social network and technology services that are constantly pushing the privacy boundaries and being challenged by authorities and social rights groups when they make changes. Here we often see the old, 'act first and think later’ approach being adopted.

We also have CEOs who sit in front of being questioning and merely state they operate within the law. Its like listening to a suspect being questioned and them merely saying, ‘No Comment’ to every question. Some such as Google’s Schmidt have the bare faced arrogance to claim, that as they employ workers in a country and the workers’ pay tax then that should taken into consideration.

One of the biggest commercial challenges we face is the global corporate's ability to become untouchable. They want to reap the benefits of doing business in one country whilst paying their reduced dues in another. They want to have an unfair advantage over traditional and indigenous business who pay their taxes in the country they do business. They want to offset huge revenues to Intellectual Property companies sitting in some far off tax haven.  

If politicians are to earn the consumer respect they need to tackle this plague of locust before they truly become untouchable. 

Google Avoids $2 Billion in Tax?

As Starbucks make offers to the UK tax man which some suggest amount to mere ‘chump change’, the immoral tax avoidance practices of international companies continue to reach public awareness. We now discover that Google, whose European headquarters is in Ireland, managed to save some $2 billion in international income taxes in 2011. They did this by transferring some $9.8 in revenues to its shell company in Bermuda, which doesn't have a corporate income tax. As a result Google was able to save its overall tax bill by an impressive 50%.

Apple, Facebook and Google all use a technique which involves setting up two companies in Ireland, one usually registered in a tax haven and which acts as an intermediary between firms. This tax ‘game’ is perfectly legal and even allows them to avoid paying tax on its profits at even Ireland's low 12.5 % corporation tax on profits.

Perhaps its time we had a ‘name and shame’ list of those who profit, whilst their customers pay their dues, libraries close, their welfare is cut and the people put money into their pockets. The EU which is under financial pressure to find a solution to this Tax abuse and now claims that international companies tax avoidance was costing it over $1 trillion each year.

Original source Bloomberg: Google Revenues Sheltered in No-Tax Bermuda Soar to $10 Billion

Mr Osborne Stand Up Against Tax Abusers

This week, George Osborne stands in front of the UK parliament and delivers his Autumn Report. As the UK economy continues to ‘flat line’ some will say this is his most important report. It is his opportunity to make a tremendous bold moral statement on tax avoidance that will do much more for UK moral and business than tweeking the odd penny on personal taxes and duty. It will also send a clear message to those who avoid UK tax and play EU registration games, that enough is enough. We may be split over Leverson and the press solution but we are as one on the morals of some of the tax avoidance moves currently in play. We are all going through hard times and tax avoidance is fast becoming immoral and tax abuse.

When Banks and Oil companies have made massive profits in the past, they were subject to potential windfall taxes. These were often one off excess tax demands to level the playing field. So why not apply the same logic to those that have benefited significantly by raising huge revenues in the UK, but  then scurried off to hide behind the skirt of some other EU country in order to avoid paying their fair contribution to the people and country that made their wealth possible.

Luxemburg is now the ebook and digital media capital of Europe. It probably makes very little sales there but also pays relatively little in VAT there. So the larger economies of UK , Germany and France where they actually do business suffer as they have higher VAT rates and no VAT revenues. VAT is applied across the supply chain at the appropriate rate for the goods and services, but in this case it nose dives in Luxemburg. The EU promises to address the issue, but the EU is often full of promises and delayed timelines and also tax standardisation is a minefield within a Federal Europe.

So why not accept the status quo and let Luxemburg keep their 3%,  but introduce an additional annual tax on the difference as a windfall tax? This would apply to all sales and services sold into the UK from companies registered for VAT in other EU countries. In the case of ebooks it would raise excise on 17% of Amazon, Kobo and Barnes and Noble’s UK sales. There may be some countries where the their rate is higher than the UK and the company is based here, but in those cases the UK economy will still raise 20% and it will be up to others what they do.

The message this would send out to Europe may be a difficult one for some to swallow, but it would be good for the UK, UK businesses and may even help apply a brake to some of the crazy ebook discounting that some can afford to do more than others. It will certainly send a message to the EU commission that VAT is a mess.

Corporation tax is more taxing and today we have the likes of Google and Apple hiding in Ireland where they pay some 50% less than they would in the UK. We also have one coffee company flying below the radar in the Isle of Man, but making all their revenues in the UK. We have others such as Starbucks with such complex trading accounts and cross country movements that they appear to make no money and are serving coffee in the UK for nothing!

A straight forward windfall tax should be applied to corporation tax avoiders on the same basis as the VAT top up.

Some will say the UK can’t do it and the EU would block any such taxes. However, the alternative is everyone registering for business elsewhere in exploiting tax differences within a common trading community, which surely goes against the essence of the EU.

Mr Osborne, we must not just sit back and tax the tax payers but step forward and tackle the causes of tax abuse.

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!  

Coffee Latte and eBook to Go Please

When Starbucks signed up Paul McCartney and others to release their latest albums through them, it was interesting and some would agrue it made sense. They then went on to their work with iTunes through Hear now. However,‘the latte to go’ company is now teaming up with Yahoo and aim to go one step further by adding free ebooks, movies news and entertainment to its in store Internet offer. It will also offer free access to sites, such as The Wall Street Journal that are currently behind pay walls.

So is the coffee shop becoming a media retailer where previously media retailers have become coffee shops? This move is about redefining who the reseller is and who has the brand and eyeballs to capture sales. Its fair to say that tomorrow anyone anywhere can sell media and ebooks and where we see supermarkets today we could see anybody tomorrow. Who has the biggest captive audience and can they make a viable proposition tomorrow?



The one reality is that the coffee market is getting crowed as more chains compete and fast food chains start to go after the same market. Starbucks WiFi is already attracting some 30 million logins a month, so extending its offer to their captive market makes commercial and loyalty building sense.

Starbucks customers will be able to access the network via their smart phones, computer or tablets, as soon as they connect. A splash page presents the various options which include entertainment, wellness, business, careers, and "my neighbourhood." With partners such as iTunes, New York Times, USA Today, Zagat and advance book copies from publishers such as HarperCollins and Penguin, the aim is to create a compelling community portal. This by itself then becomes a pull to get customers to keep coming back and to build and extend the brand.

Interestingly the content is designed to last as long as a cup of coffee and a muffin. Five to twenty minute content chunks are being sought to consume in house or they can buy the content and download it to go. The content in store can also be book marked such that it remembers where you left off next time you visit.

Starbucks makes additional revenues on taking a share of all sales.

So are coffee shops for socialising or for playing games, reading, watching movies and other more singular pursuits? Its an interesting concept but you may have to have a serious caffeine addition for it to seriously alter your lifestyle.

Starbucks to Cull US Operations

Starbucks will close 600 stores and cut 12,000 jobs across the US. The closures will equate to close to 10% of its US operation and that is not a small number to cull. This follows on an announcement last week that they were to also reduce their in-store music offer down to just 4 CDs.

Perhaps, it’s the downturn in the economy. Perhaps, the streets and coffee market is getting over populated with coffee offers. Perhaps, its just time to draw breath, consolidate and to focus.

The sobering thing this says is that growth is not boundless and that even highly successful brands and market leaders have a bad day and have to focus. Many have seen the in-store coffee franchise as a bookstore crowd puller, but when credit squeezes everyone is chasing the same pound and the same customer.

A Year in Digital Music is a Long Time

When iTunes started to dominate the music download market it looked a forgone conclusion that their position would be sustainable and that combined with the iPod the market was sorted. A year is a long time in this digital age and now many are starting to question iTunes position with some very interesting new services which do not replicate but shift the business model in different directions. What was its strengths – the combined channel and player, plus defined price point, may yet prove its weakness.

First we had the pretenders to the iTunes crown- Sony’s Connect, MTV's Rhapsody America and Microsoft’s ‘me too’ Zune service. Interestingly these are all suffering and irrespective of their high profile backers are not matching their expectation. Perhaps merely copying a good idea is not the key?

One of the biggest shifts came from the artists who started to take control and redefine their own value chain. Prince exploded into the Mail on Sunday with Planet Earth and introduced both a new channel and new model ‘free with paper’. Radiohead told the record companies where to go, released themselves and started with an honesty box price approach. McCartney and Mitchell went to Starbucks and sold well through a new label plus retail format. Madonna bought herself out of her record company for £50 million and aligned herself with her merchandising and tour values and is now rumoured to be soon followed by Robbie Williams leaving EMI. Who would be a record company today?

Then came the rights management-free MP3s from EMI Music, Universal Music Group and a handful of independent labels. After years of fighting Napster, Kazza, and even the public, the music industry finally realised that perhaps restrictive DRM was not the answer. Something many consumers could have told them years ago and the record companies then lurched from DRM to non DRM in a heartbeat. Amazon stepped up offering DRM free, Jobs claimed it was his idea all along and the likes of Amazon jumped from nowhere to the third largest download retailer behind iTunes and emusic. It interesting to note that Amazon’s entry and achievement is without Sony BMG and Warner Music Group catalogues -who still weirdly, think that they control the music business.

Then there was the ad supported business model and the service we have written much of and admired from its concept – Spiralfrog. After much delay it finally launched in the US with all major labels and many independents onboard. The question is whether it took too long and in fact lost its own momentum? Others have now jumped on the same bandwagon and its questionable whether that delayed launch is going to be a wait too long? Slacker has jumped in and stolen much ground not only moving fast but starting its free, ad-supported customizable online radio service and following this with a portable device that uses Wi-Fi to update channels, and a subscription service tier that offers users more functionality for a monthly fee.

Now we have the likes of Nokia launching a free download model based on restricted models and service subscriptions. They certainly have the market clout and pressence and will give the iPhone and interesting race. The question in this area is where the mobile carriers or the mobile makers will prevail?

The latest service to turn our heads is IMEEM. They started effectively on one side of the fence by letting users stream free music, then when the record labels initiated legal action against the service, Imeem implemented filtering technology and an advertising system from Snocap to reward the companies every time a user played one of its songs. Interestingly it is a music centric experience and offers a different social interaction that others don’t. Will it succeed? We think so but there again the New Year beckons and 2008 is likely to see as much change as did 2007.

One More Cup of Coffee Before I go

So where is the money in the music business? Where do artists make their bucks?
Yesterday the channel was clearly defined and the money came through selling records and although the model still holds water times are clearly changing. On the artist side we have seen Paul McCartney turn his back on EMI and sell his latest album through Starbucks, Prince gave further sign of the times with his Mail on Sunday giveaway of his latest album and now we hear that Madonna wants to get out of her Warner deal, even if it costs 50 million, and line up with her tour promoters. For the major acts bums on seats and merchandising make money adding music to this make better sense that leaving with the ailing record producers.

We have also raised the question on free ad paid downloads from Sprial Frog and the growing no DRM movement. Times certainly look bleak in the traditional music houses!
Now Starbucks plan to give away 50 million free digital songs to customers in all of its domestic coffee houses to promote a new wireless iTunes music service that's about to be launched in the US. Between October 2nd and November 7th their 10,000 U.S. stores will hand out about 1.5 million "Song of the Day" cards each day. The cards can be redeemed at Apple Inc.'s online iTunes Store for 37 artists which feature songs from the first two to sign on with Starbucks' Hear Music label Paul McCartney and Joni Mitchell along with Joss Stone, Dave Matthews, Annie Lennox and Band of Horses. The first song will be Bob Dylan's "Joker Man."

Starbucks will also start selling iTunes digital release cards that allow the download of a full album and bonus material. KT Tunstall's "Drastic Fantastic" will be one of the first two featured albums to be retailed this way. Starbucks also will offer a limited-edition re loadable purchasing card that includes two free iTunes downloads when customers register their cards online.

The from October Starbuck’s icon will also light up on the Apple iPhone whenever a user is within range of a Starbucks shop's Wi-Fi signal and consumers with the devices or a laptop with iTunes software will also be able to use the signal for free to browse and buy other iTunes music. This service will be launched in Starbucks 600 shops in Seattle and New York and in San Francisco in early November with plans for it to be in a quarter of its US stores by the end of 2009.

So what does this mean to the booktrade? We may see what many believe is the inevitable – STARBOOKS. In a crowded coffee market it is obvious that these savy retailers need to broaden their offer, build further loyalty and use their muscle to offer new innovative services. Do we think books are different? Today they may be but as digital options increase then so does the threat of the new entrant. As for the artist versus the author, who would have thought Stabucks would woo artists such as McCartney and Mitchell.

http://www.starbucks.com/aboutus/pressdesc.asp?id=790

Latte and a Book to Go

When we talk about the demise of the independent bookstore we see many reasons. As we stated yesterday change happens and with every opportunity there is always a threat.

Costa coffee shops has announced that it will now do author tours, why queue in a booksops when you can get a free muffin and coffee in a coffee shop and sit and read the book at lesuire? We see Starbucks now selling books in 450 store and although this is a very limited offer it is a great and obvious way forward for them and publishers.

So where does this take us? Have bookshops welcomed coffee stores into their premises like the Trojan’s welcomed a certain wooden horse?
The reality is that this interest by coffee shops to add an extra offer into their highly competitive mix is good for business. Just as garden stores and other specialist stores sell books there is no difference. What would be different is if a coffee shop and a bookstore were to blur into one where one finishes and the other starts becomes unclear.

The interesting scenario was if Starbucks started to have a local print on demand facility after all it often takes some time to make that cappuccino and wouldn’t it be nice to have a book as well sir – freshly made too. This is not science fiction but just a case of establishing the right proposition and economics. What if they had a book vending machine in the corner, limited offer but service with no labour? What if some bright publisher forgot the tome and started selling in short stories, brand wrapped and ready to go! We also must recognise that these retailers are already wifi-ing their outlets so we can see the digital download offer could be one click away. The point is that to these retailers this is added consumer value and new money and importantly if if takes little overhead it’s a no-brainer.