Menu
Tax Notes logo

Fearless Ambition: Virgin Atlantic Wants a Bailout

Posted on May 11, 2020
Robert Goulder
Robert Goulder

Sir Richard Branson is the living embodiment of the self-made billionaire having too much fun for his own good. These days, he spends his spare time kitesurfing in the Caribbean with supermodels. As a younger man, his idea of fun involved far riskier stuff. He had a knack for attempting intercontinental journeys by hot-air balloon, often resulting in dramatic rescues at sea. Combined with his multiple boating catastrophes, Branson has survived about a dozen near-death experiences. Fearless in entrepreneurship, and fearless in his extracurricular pursuits. The personality traits go hand in hand.

Earlier this year, Forbes estimated Branson’s net worth at $4.2 billion. The privately held Virgin Group Ltd., which Branson founded, is active in a wide range of endeavors. The more noteworthy pieces of his empire include airlines (Virgin Atlantic and Virgin Australia), retail (Virgin Megastores), travel and leisure (Virgin Hotels and Virgin Holidays), commercial space travel (Virgin Galactic and Virgin Orbit), a cruise line (Virgin Voyages), telecom (Virgin Mobile), banking (Virgin Money UK), and high-speed rail (Virgin Hyperloop One).

All told, the group is involved in hundreds of projects. It claims 71,000 employees spread across 35 countries. Many of these entities are privately held, though a few are publicly traded. Shares in Virgin Galactic began trading last fall. The company hopes to send thrill-seeking clients on suborbital space flights for $200,000 per ticket. I hope that includes cocktails.

Branson has his hands in the charitable sector through Virgin Unite, his philanthropic foundation. After sharing a meal with Al Gore, he’s even become a convert to the environmental movement. He also pours money into advocacy for treating drug addiction as a medical condition rather than a criminal offense. His recent good deeds include shuttling several planes full of medical supplies and personal protective equipment from China to London, to support the National Health Service’s battle against COVID-19. There’s a bit of irony in the gesture, since Branson’s Virgin Care (a for-profit healthcare provider) recently sued the NHS over the awarding of a £82 million contract for childcare services in Surrey. Virgin Care and the NHS reached an out-of-court settlement in 2018.

You may have noticed Branson’s name in these pages recently, for separate reasons. First, he’s asking the U.K. and Australian governments for loan assistance to support his airlines, which have experienced heavy losses from the pandemic.1 The request has been shadowed by the fact that Branson has been a tax resident of the British Virgin Islands for more than a decade. This criticism rekindles the debate over economic patriotism. It also obscures the distinction between the persona of a famous entrepreneur and the businesses he or she cultivates. It can be hard to discern where one stops and the other starts.

Second, Branson is co-founder of a nonprofit policy organization known simply as the B Team, dedicated to achieving net-zero carbon emissions across the global economy. The other co-founder is Jochen Zeitz, acting president, CEO, and chair of the board of Harley Davidson Inc. The B Team has staked out a favorable position on the work program of the OECD’s inclusive framework.2 I have no idea why Branson would choose to get involved in multilateral efforts to curb profit shifting and base erosion, although it’s a proposition to which I’m sympathetic. Clearly, he’s not intimidated by complex challenges or the fear of failure.

For better or worse, Branson’s personal wealth and status as a tax exile will color how we regard his recent actions. But let’s not be too quick to judge him. These aren’t ordinary times.

Virgins at Business

Branson’s path to wealth and fame was an unlikely one. He admits to being a bad student and struggling with dyslexia as a youth. In 1966, at the tender age of 16, he dropped out of school and began publishing a lifestyle magazine. A few years later he launched a mail-order record company, after growing frustrated with the high price of rock-and-roll albums. His business model was to sell records through the mail at a fraction of the price charged by storefront shops, circumventing the industry’s strict rules for retail pricing.

Ironically, Branson soon found himself a proprietor of one of those retail shops. In 1970 he and business partner Nik Powell (who died last year) opened Virgin Records and Tapes on Oxford Street in London. The shop specialized in progressive rock bands, like early Genesis and Pink Floyd. Branson often relied on gimmicks to fill the store, like serving free vegetarian food. The store’s unusual name was a reference to Branson and Powell’s inexperience in operating a conventional business. “We were virgins at business,” he wrote in his 1998 autobiography.3

He soon found himself in conflict with tax authorities. Sensing an arbitrage opportunity, Branson began selling discounted inventory that had been originally designated for the export market and was therefore exempt from the national purchase tax, imposed at the exorbitant rate of 33 percent of wholesale cost. To facilitate his pricing scheme, Branson would travel to the port of Dover to get his export forms stamped by customs officials, and then return to London without shipping the product overseas.

The snag with this strategy was that it was illegal to sell export stock to domestic customers.4 Technically, it was a form of tax fraud. Branson’s bogus export scheme was eventually discovered, resulting in him being hit with a tax assessment and fine of £70,000. His parents were forced to mortgage the family home to come up with the money to pay off the tax debt.5

Branson learned there were handsome profits to be reaped from the music business, but little of it trickled down to retail establishments. Ambition pushed him up the musical supply chain, coupled with a stroke of sheer luck. In 1972 he stumbled upon a demo tape of some experimental music composed by Mike Oldfield. He was struck by the track called “Tubular Bells” and encouraged a colleague who worked for a large record company to sign Oldfield and release the track. When the big boys declined, Branson decided to form his own record label. Virgin Records Ltd. was formed with Oldfield as its first signing.

Branson had no idea what he was doing. But he knew there was more profit in making records than selling them. Conveniently, the tune that initially drew his attention was featured in the horror film The Exorcist and became an international hit. Virgin Records was suddenly in the spotlight, and Branson’s talent for self-promotion made sure it stayed there.

Taking full advantage of London’s punk scene, Branson signed musical acts that were too controversial for major labels, including the Sex Pistols. The risk paid off when many of Virgin Records’ new wave bands became staples on the fledgling MTV cable network. Album sales went through the roof, and by the mid-1980s Branson had bought his first airline, which he immediately rebranded as Virgin Atlantic. He was just getting started.

My Kingdom for a Loan

Operating an airline can be a tricky business. Virgin Atlantic ran into financial trouble in the early 1990s, eventually causing Branson to sell his interest in Virgin Records to EMI to raise rescue funds. Forced to choose between his music company and his airline, Branson choose the latter. In hindsight, it was probably the right decision. After Napster, the music business isn’t what it used to be.

Virgin America, with hubs in San Francisco and Los Angeles, also experienced problems. The U.S. carrier was absorbed into Alaska Airlines in 2018. That left Branson with two airlines, Virgin Atlantic and Virgin Australia. Both are now in trouble.

The Virgin Group holds a controlling interest (51 percent) in Virgin Atlantic. It sold the remaining stake (49 percent) to Singapore Airlines for £600 million in 1999 — again, because it needed the influx of cash. Delta Air Lines later acquired the same minority stake for £224 million, less than half of the original price, showing industry valuations to be highly unstable.

The COVID-19 pandemic has translated to huge losses across the airline sector, including Virgin Atlantic, which has reported an 85 percent drop in total flights. Cash is going out the door, but none is coming in. Branson doesn’t want to sell another stake in the company, because doing so would further dilute the Virgin Group’s ownership to less than 50 percent. That leaves debt and bankruptcy as the remaining options.

Given the number of U.K. jobs at stake, Branson wants the U.K. government to lend him the funds necessary to keep the business afloat. That would be £500 million in credit, partly secured by a mortgage on Necker Island, his personal hangout in the British Virgin Islands. It’s doubtful the island is worth anything close to that much. Its luxury resort was destroyed by Hurricane Irma in 2017. Employees at Virgin Atlantic already agreed to austerity measures, forgoing eight weeks of salary spread over a six-month period that extends into the fall. That’s a stopgap measure. If the public doesn’t start traveling soon, it’s game over.

Down Under, the news is even worse. Virgin Australia entered voluntary administration in April, after having the Australian government repeatedly turn down its requests for a rescue loan. The reorganization is being overseen by Deloitte, which seeks a $129 million loan to keep a handful of flights running with a skeleton crew. There’s no doubt the airline will be sold to a third party. Deloitte prefers to convey the business as a whole, rather than chop off the separate assets for sale to rivals. Bids are due by later this month. Likely suitors include BGH Capital and Indigo Partners, according to industry sources.6 Branson wants to retain some degree of involvement in the airline, but it’s unlikely the new owners would agree to his ongoing participation.

The optics of Branson’s U.K. loan request are troubling to a lot of people. I confess that I’m not among them, mostly because my years in the tax profession have caused any innate sense of moralistic outrage over such matters to evaporate. I’m not suggesting the U.K. government would be wrong to deny the loan, merely that I can’t blame Branson for making his best sales pitch and laying it out before the public at large. We are living through an era of unprecedented taxpayer-funded bailouts. I’d find it remarkable if someone with Branson’s persona didn’t seek public assistance in this manner. Also, I’m unconvinced that shareholder wealth (individual or collective) is a sound basis for rejecting the loan requests. Given that the loan eventually needs to be repaid, the income-earning potential of the borrower seems like a non-trivial thing.

Yes, Branson is filthy rich and lives a charmed life. Yes, he’s a resident of the British Virgin Islands, which imposes no income tax whatsoever. Branson and his wife admit to not having paid U.K. income taxes for the past 14 years. He maintains homes in London and Oxfordshire, but never spends more than 183 days in U.K. territory during any calendar year.

Is that behavior so sinful? The U.K. tax code provides detailed rules for determining tax residency, and individuals are free to plan their economic lives accordingly. It’s hard to see what Branson is “getting away with” so long as he complies with the statutory scheme expected of U.K. expats. Having been knighted by Prince Charles, it may look odd that he pays no U.K. taxes — but he’s not alone in that regard.

He could be accused of lacking economic patriotism, but that strikes me as an archaic construct. There are but two categories of taxpayers: the compliant and the noncompliant. Patriotism has nothing to do with it. If the U.K. government wanted to, it could adopt measures to dissuade U.K. nationals from becoming tax exiles. Note the contrast between the United Kingdom’s use of residence-based taxation and the United States’ use of citizenship-based taxation.7 U.S. nationals can become tax exiles, too. They’d need to renounce their citizenship and suffer the statutory exit tax. If they’re willing to pay that steep a price, then so be it.

Corporate entities have always wielded power and influence. They seek massive favors from governments all the time; that’s par for the course, especially during times of sudden economic decline, as is the case now. To that point, the EU is temporarily suspending strict enforcement of its state aid doctrine to facilitate just this kind of relief. That’s because state assistance, delivered through the tax code or otherwise, doesn’t seem like an affront to public policy when the stakes are this high. The body politic has given bailouts a green light. It’s game on.

The fairest outcome we can hope for, practically speaking, is that any assistance will be doled out evenly — that is, without the state picking favorites. Selectivity may be a greater concern than the fact that a bailout has occurred, which raises the matter of British Airways (BA), Virgin Atlantic’s oldest and fiercest competitor.

My first thought on reading Branson’s open letter to employees was that he suspects BA is poised to receive its own government support, and he doesn’t want Virgin Atlantic to be the odd man out. What our eyes behold as shameful self-interest might just be a push for parity with larger rivals.

Air France has already secured a $7 billion rescue loan from the French government. In Germany, government officials have pledged to provide similar relief for Lufthansa. KLM has obtained a $3 billion loan from the Dutch government. Across Europe, state support for airlines already tops $30 billion. Can state aid for BA be that far behind?

For its part, BA opposes any form of government support in response to the pandemic. That’s not a matter of self-sacrifice, their opposition extends to the U.K. aviation sector as a whole. In January BA asserted its influence to prevent the government from offering an aid package to Flybe, a small regional airline owned by a consortium headed by Virgin Atlantic.

Branson has long eyed Flybe as an important feeder service that adds value and flexibility to Virgin Atlantic’s network of existing routes. BA would rather see Flybe forced out of business by COVID-19 than survive to assist its rival. BA got their wish. Flybe entered administration in March, shortly after having their loan request denied.

In March, BA CEO Alex Cruz circulated a memo to staff warning of possible reductions in head count. The Guardian has reported that up to 12,000 jobs are on the chopping block. Yet BA continues to oppose government support, as if it perceives mass downsizing as a strategic opportunity. You can connect the dots and see what’s happening. No loan for BA effectively means no loan for any other U.K.-based airline, especially Virgin Atlantic.

BA thinks it can weather the economic shutdown better than Virgin Atlantic, because of its larger size and capacity for cost-cutting. The flag carrier’s objective is to harm Virgin Airlines, even if that invites industrywide carnage. One less competitor is the endgame. A spokesperson for an airline employee union described BA’s tactic as “a brutal act of smash and grab opportunism.”8

It’s tempting to view Virgin Atlantic’s loan request solely in terms of whether Branson is the kind of rich guy who deserves public support. Clearly there’s a lot more going on. Ultimately, the decision on offering the loan comes down to how much home-grown competition is desirable in the aviation sector.

Transparency, Anyone?

The better critique would look beyond Branson’s individual tax status, to focus on the transparency of his companies. Alex Cobham of the Tax Justice Network describes Virgin Group’s structure as complex and opaque. It is headquartered in central London, but its parent company, Virgin Group Holdings Ltd., is organized in the British Virgin Islands, which holds the top ranking in the Tax Justice Network’s corporate tax haven index. Branson owns 100 percent of Virgin Group Holdings, which owns 100 percent of Corvina Holdings Ltd., which in turn is the sole managing member of Virgin Group Investments LLC, a Delaware entity. The structure is clever and tax-efficient, but not exactly transparent.

This column has repeatedly argued for public country-by-country reporting, in which multinationals disclose how much tax their separate business units pay and where they pay it. This kind of disclosure doesn’t prevent corporate profit shifting or stateless income, but it means that affected firms would be tasked with explaining away their numbers. That’s sound policy. I believe all publicly listed companies over a specific size should be engaging in public CbC reporting as a matter of good governance. Some companies are already doing this voluntarily. Ideally, the practice should be required by applicable tax rules and regulations.

Here’s what Branson should do to facilitate a sizable loan for Virgin Atlantic: Commit to public CbC reporting for the Virgin Group and its many subsidiaries and affiliates around the world. It should do so despite the fact that many of these companies are privately held. That would remove any stigma associated with some of these entities being based in tax havens. Branson claims that his companies already pay income tax in the jurisdictions in which they operate. Public CbC reporting would confirm that’s the case.

It would be easy for the Virgin Group to take this step, particularly given Branson’s leadership role in the B Team, which promotes inclusive capitalism and seeks to redefine business as usual. One of Branson’s own books is titled Screw Business as Usual. Come to think of it, committing his business empire to public CbC reporting would be a bold and flashy thing to do. You might even call it Bransonesque.

FOOTNOTES

1 Sarah Paez, “Billionaire Airline Owner Defends Call for U.K. Bailout,” Tax Notes Int’l, Apr. 27, 2020, p. 465.

2 Stephanie Soong Johnston, “OECD Global Tax Overhaul Key for Inclusive Economy, B Team Says,” Tax Notes Int’l, May 4, 2020, p. 587.

3 Richard Branson, Losing My Virginity: How I Survived, Had Fun, and Made a Fortune Doing Business My Way (1998).

4 Jordan Weissmann, “A Portrait of the Billionaire as a Young Tax Cheat,” Slate, May 27, 2014. The purchase tax was repealed in 1973.

5 Branson, supra note 3.

6 Andrew Curran, “Virgin Australia Seeks $130 Million to Remain Operational,” Simple Flying, May 5, 2020.

7 Robert Goulder, “FATCA Turns 10 … And Europe Still Hates It,” Tax Notes Int’l, Apr. 20, 2020, p. 383.

8 Gwyn Topham, “COVID-19 Crisis Opens Doors to Leaner but Meaner British Airways,” The Guardian, May 1, 2020.

END FOOTNOTES

Copy RID