Thursday, March 10, 2016

Samsung in the UK and Ireland: where’s the outrage?

The ongoing debate over corporation tax has seen a lot of attention focused on US companies such as Apple, Google, Facebook etc.  It hasn’t been exclusively about US companies but has been predominantly so.  It can be hard to find non-US comparators for the likes of Google of Facebook but for Apple we can look at one its rivals in the consumer electronics market: Samsung Electronics from South Korea.

Samsung Electronics operates in the UK and Ireland through its subsidiary Samsung Electronics (UK) Ltd.  This company’s 2014 accounts state that:

During the year the company’s (the ‘company, being Samsung Electronics (UK) Limited) principal activities were as follows:

  • Importer, distributor and lessor of electronic and electrical goods
  • European head office
  • Purchase and sale of components and capital equipment
  • Provision of research and development services to the ultimate parent company
  • Importers and distributors of telecommunications systems

All of the above operations are UK based with the exception of two small research and development facilities in Israel and Finland and a branch office in Ireland.

How much revenue is generated by these activities? Quite a lot actually. 

Samsung Revenue

Samsung Electronics (UK) had revenue of £3.423 billion in 2013 and £2.605 billion in 2014 with almost all of this associated with activities in the UK and Ireland.  The reports states that:

The principal drive for the decline in turnover has been the performance of the company’s Mobile Phone division.

Samsung Electronics is a massive company that generates substantial profits.  Here is its consolidated income statement for 2013 and 2014 (in US dollars).

Samsung Consolidated Income

Profit before income tax was 16.8 per cent of revenue in 2013 before falling to 13.5 per cent of revenue in 2014.  The performance of Samsung Electronics (UK) is consolidated into the above income statement but if we look at the accounts for Samsung Electronics (UK) we can get its income statement.

Samsung UK P&L

Here we can see how the £3 billion or so of revenue transfers into profit. Profit on ordinary activities before taxation was £59 million in 2013 and £72 million in 2014.  This profit was 1.7 per cent of revenue in 2013 and 2.8 per cent of revenue in 2014. 

If you want to do silly things with the level of income tax reported you can say that tax was 0.4 per cent of revenue in 2013 and 0.6 per cent of revenue of in 2014.  That, of course, would be meaningless as tax is paid on profits not revenues.  But still the frothing at the mouth that Apple and Google have recently generated seems somewhat absent in the case of Samsung.  This can be seen with internet searches of [Apple tax UK] and [Samsung tax UK].

Is Samsung getting a “special deal” to allow it to pay £15 million of corporate income tax on £3 billion of revenues in the UK and Ireland?  No, this is the way corporate tax works.  By far the biggest cost for Samsung Electronics (UK) is buying the products it wholesales and retails in the UK and Ireland. Samsung UK doesn’t make the phones and other consumer electronics devices it sell; it has to buy them centrally from Samsung. And Samsung must charge Samsung UK the same price it would charge if it was selling them to a third party. 

Hence the largest cost for Samsung Electronics (UK) is cost of sales which is equal to about 80 per cent of turnover.  Is this transfer price right? I don’t know.  But it is what it is, a transfer price.  Where does it end up?  It goes where the value is added which in the case of Samsung is in offering a phone that people want to buy. 

Importing, distributing and wholesaling are not high-value-adding activities.  Designing and branding a phone that people want to buy adds value. If Samsung, presumably, does most of this in South Korea then most of the tax due on its profit is owed to South Korea.  Just like most of the tax that Apple and Google owe is due to the US. The fact that the US has a system that allows these companies to defer the payment of this tax, sometimes indefinitely, is a related but different matter.  The taxing right is the US’s to choose what they want to do with it.

Under the present system countries can tax the value-adding activities that take place in their jurisdiction.  And should go to all reasonable lengths to ensure that the right tax is paid on these activities – but this can only be under the rules as they stand.  There is no merit in complaints on the basis of sales or global profit margins.  But there have been plenty of complaints against Google and Apple on these bases.  But why the relative silence on Samsung? 

One reason is that to argue that companies are getting “special deals” you have to be selective in who you shout about.  If you start shouting about everybody then it must be that your beef if with the system and not the individual companies.  And that would be fair enough.  But that is not what is happening.  The complaints are usually along the lines of:

Google has £4.5 billion of sales to UK customers; Google has a profit margin or 20 per cent so it makes £1 billion of profit from these sales and therefore it should be paying £200 million of corporation tax to the UK (one source).

or

Apple has £10 billion of sales to UK customers; Apple has a profit margin of 20 per cent so it makes £2 billion of profit from these sales and therefore it should be paying £400 million of corporation tax to the UK (one source).

These then are used to declare that the amount of tax paid by these companies is “wrong” and that they are getting some form of special treatment.  If they were presented as an alternative way of determining corporate income tax liabilities that would be fine but they are presented as something that the companies should be doing and that HMRC should be enforcing.  But it cannot be enforced because it is not in existing law.  Location of customers and global profit margins are simply not features of corporation tax law.

So by all means present these approaches as an alternative but using them to suggest that tax payments under the existing system are wrong is misleading –at best!  And, of course, while these alternatives might bring in more tax from companies who sell to customers in the UK there would be offsetting losses of tax from UK companies who sell to customers outside the UK.  What is the balance of the two?  And small countries with successful companies would be absolutely battered by this system.  And you cannot have a system that picks and chooses which approach to use based on the nature of the company.

Anyway the main point is why don’t we hear the following:

Samsung has over £3 billion of sales to UK customers; Samsung has a profit margin of 15 per cent so it makes around £500 million of profit from these sales and therefore it should be paying £100 million of corporation tax to the UK.

Where is the outrage that Samsung are only paying one-sixth of that?

1 comment:

  1. it would be such a impressive impact with income tax on £3 billion of revenues in the UK and Ireland. thanks to bring this kind of informative post.







    Umbrella company IR35 solution for nurses in UK | hire uk tax advisers

    ReplyDelete

Printfriendly