Radical stuff from the European commission: it is proposing a tax on the revenues of large digital companies operating in the EU, to be levied at 3%. The idea breaches the basic principle that corporate taxes should be charged on profits, not turnover, and thus will cause conflict with the US and probably a few EU countries too. But Brussels deserves support.
No measure to date has halted the massive under-taxation of global technology firms. A crude local revenue tax, intended to operate until an international solution can be agreed, is better than the current state of affairs.
Digital businesses pay an effective average tax rate of only 9.5%, compared with 23.2% for bricks-and-mortar firms, according to the commission. We know why. The global tax system was designed for a different age and it is too easy for large technology firms to shift intellectual property and profits to low-tax territories. The contortions are legal (mostly) but the result is a skewed system that is a tech subsidy by another name. Other taxpayers are obliged to fill the inevitable tax shortfall.
The commission calculates that a 3% tax on local revenues from tightly defined digital activities would raise €5bn (£4.36bn) annually. Spread across 150 qualifying large companies – including Apple, Facebook and Google – the sum cannot be described as punitive. Nor can the tech titans really have believed their free lunch would last forever. When challenged over elaborate tax arrangements, executives have tended to argue that they play by the rules as they find them, and that if politicians want a different system they should change the law. Now the commission is inviting EU governments to do exactly that.
The UK Treasury, perhaps surprisingly, has itself flirted with the attractions of a revenue tax. Here is a proposal it can support – before and after we leave the EU.
Aviva: picking the wrong battle?
Aviva’s hard-charging chief executive, Mark Wilson, gets plaudits for restoring financial discipline to the FTSE 100 insurer, but sometimes he needs to slow down. Since declaring last week that Aviva was generating excess cash and that the moment had arrived to have some “fun”, he has walked into a unfunny City row.
At one level, the quarrel is merely technical. The dispute is over Aviva’s claim that it is entitled to cancel £450m worth of “irredeemable” preference shares at their par value of 100p. Since the coupon, or annual interest rate, on these shares is 9%-10% (they were issued a couple of decades ago), the market price was much higher – about 170p. Shareholders are understandably furious that their investment has plunged in value by a quarter. They thought they owned something more like a fixed-income bond.
Aviva says it is pursuing financial efficiency. Regulators have decreed that preference shares will no longer count as core capital from 2026. Plus, the company would save £38m annually by paying to cancel at par, which would be a good trade for ordinary shareholders.
Even if Aviva’s lawyers have triple-checked the legal basis (the Financial Conduct Authority wants the details), the manoeuvre smells completely off. Try explaining to Joe Punter why it is fair to call something irredeemable and then declare that cancellation doesn’t count as redemption under section 641 of the Companies Act. Every private investor group in the land, and the big battalions of M&G, Legal & General and Prudential, is opposed.
Aviva hasn’t yet put a formal proposal on the table, so its bald “may we remind you of our legal rights” approach may be the opening position in a negotiation. But it is aggressive, will cause maximum aggravation and cannot be good for the company’s reputation.
The insurer’s other news last week was only slightly less awkward. Wilson has accepted a non-executive post at BlackRock, the world’s largest fund manager and thus surely a direct competitor to Aviva Investors. Does Wilson – and Sir Adrian Montague, chairman of Aviva, for that matter – stop to think about how these things look?
Spotlight on audit watchdog
The surprise in the latest Carillion hearings wasn’t that a partner at PricewaterhouseCoopers can charge £865 an hour for his time: there is no real competition at the top end of the consultancy market, especially in cases when half the rivals are tainted by past association with the fallen firm.
Rather, the revelation was that the business secretary, Greg Clark, is about to order a review of the Financial Reporting Council, the audit watchdog. It is unclear whether he suspects the FRC lacks powers or is simply feeble at using the ones it has. Either way, an investigation is overdue. Even before Carillion, faith in the auditing of UK companies was low and falling.
