In the Spotlight - Diageo gives Government a taxing headache
Diageo cannot rule out overseas move
Diageo CEO Paul Walsh has fired another warning shot across the bows of the UK Treasury, insisting that high tax rates could force the drinks giant to relocate. just-drinks examines the fallout.
This story has been rumbling along for some time. Since 2008, when the UK Government announced it would start taxing overseas operations of UK-based companies, there has been disquiet in the corridors of 'UK Plc'.
Disquiet has snowballed in the economic downturn as Governments look to recoup unimaginable sums of money for bailing out banking systems. We have seen bankers, threatened with a super-tax on bonuses, warn that they may vacate the City of London for some as-yet-to-be-defined tax haven paradise, where at least someone is grateful for their contribution, thank you very much.
Diageo CEO Walsh said at the group's results conference yesterday that a 50% tax rate on high earners is making it hard to recruit top people to work at its global headquarters in the UK. Added to this, corporate tax, he said, is much less favourable in the UK than it was. If this trend continues, Diageo will "consider its options", he said.
Unilever has chimed in with similar comments this week.
With a general election set to take place in the UK before June, some have attributed the complaints to a spot of electioneering.
Rather than faint promises to cut tax, "the chief executives seem to want something stronger – like a concrete commitment to cut and a firm timetable", wrote Nils Pratley in the Guardian newspaper.
Others believe that the Government should call Diageo's bluff (though quite how they would do that is unclear).
"We should treat the warnings of companies such as Diageo with the same scepticism that wiser heads reserved for the dire predictions we have heard about thousands of fund managers leaving the City," wrote David Prosser of the Independent newspaper.
The rightwing Daily Mail newspaper talks of companies having "fled" the UK tax regime, as if seeking asylum.
Personal finance website, financialadvice.co.uk, takes a more considered view: "While some businesses are expressing concern about the short term tax outlook, the truth is that businesses leaders are likely to be looking for concessions in the medium to longer term once the economy has settled down and moved back into a growth phase."
The UK cannot compete with everyone on corporate tax. Switzerland's Zug region, which is recently understood to have approached Diageo, has one of the lowest corporate taxes in the world and offers a best rate of sub-10%. Not to mention endless supplies of Swiss mountain air and Raclette cheese, no doubt.
If this were simply a case of maths, why would anyone stick around paying over the odds to the treasuries in Washington, London and Paris?
Of course, it is not simply about maths; there are also political, public relations and social implications.
Companies play a continuous game of cat-and-mouse with the taxman, with some of the best accountancy minds employed by both sides.
Diageo is suggesting that the scales are tipping and that it may exit the game. Taxing overseas operations is likely to be a particular bone of contention. More than two thirds of Diageo employees are located beyond UK shores and around 90% of the company's annual profits come from outside of the UK.
Whatever the company's motive, the UK Government of the day appears to be locked in an increasingly dangerous game of poker. In early 2009, Diageo claimed to bring in around GBP3bn in revenues for Treasury - money that the Chancellor can ill-afford to lose.
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