An end to confidentiality and other tax verities?

The Google controversy has many parallels with the US election: much heat, little light and mutual incomprehension. Yet again, there was a demand for (at least corporate) taxpayers’ tax returns or computations to be made public, as if publication of those figures would magically reveal whether HMRC had correctly assessed the relevant Google entities. And yet again, Parliament voted (by 299 to 271) against publication. 

 

What was interesting were the answers given the day before that vote by John Whiting (tax director of the Office of Tax Simplification), John Cullinane (tax policy director, CIOT) and Richard Murphy (director, Tax Research LLP) to the Treasury Committee, not just on taxpayer confidentiality. All agreed there was a debate to be had about whether some disclosure was needed or could be made: ‘[JC] The amount of public interest and concern in tax issues has developed out of all proportion. The position of a large multinational is not totally comparable to that of an individual’; and: ‘[JW] we need to understand the implications. Would this mean disclosure of commercially sensitive information?’

 

Personally, I believe commercial clients might become willing to provide some information (not necessarily complete tax returns) if they thought that this might ease public concern. After all, they will be providing information under country by country reporting at least to tax authorities, while if EU proposals are implemented, these would be for public disclosure. 

 

However, the concern remains that if more information was available it would be misinterpreted (particularly by those unwilling to accept that the sales figure does not equate to the profit assessable to corporation tax); for example, the furore over a utility reducing its effective tax rate by capital allowances. This is perhaps summed up by: ‘[RM] Just dumping a pile of information in front of people from which they cannot extract anything useful is not necessarily a solution.’

 

 

This concern linked back to the unanimous conclusion, despite all the work on BEPS, that the current corporation tax system is not sustainable in the long term. The expert witnesses shared the author’s view that the underlying tax base needs review, partly because some countries, in effect, have outsourced the design of their tax base to the IFRS standard setters. However, it could be said that IFRS methodology is unsatisfactory, as providers of capital ‘[RM] do not need information on taxation.’ 

 

Further, particularly under IFRS, fair value movements may produce significant fluctuations in apparent profitability and consequently the tax base, suggesting some deviation from IFRS based accounts might be necessary to provide a sustainable and predictable tax base. The expert witnesses also identified that tax competition, at least pre-BEPS, is not helpful: ‘[JW] If we have countries trying to steal a march on others, you cannot blame companies for wanting to push profits in that direction.’

 

To reduce concerns over tax competition, they suggested that if the rate of tax is low enough, you can simplify corporate tax regimes by abolishing reliefs, because the cost to those affected when rates are low is more manageable: ‘[JW] We are looking at a rate of 20% and coming down further. The value of these many adjustments is just much less. Is it really worth it?’ ‘[JC] If … the UK wants to introduce a particular incentive, then perhaps there should be scope for that, but it would be very clear what the adjustment was and why.’ And, finally: ‘[JC] I would look in detail at respects in which the UK tax system may still be a little bit more generous than the pack of western countries … Things like interest deductions are on the table … Are the reductions in rate that are projected totally necessary to remain competitive?’

 

One other issue is that the factors that contribute to profitability and that establish nexus, and the values to be attributable to those factors, are harder to establish when those activities are more ‘virtual’ and mobile. This discussion led on to the CCCTB proposals and varying degrees of acceptance that getting agreement among all countries to adopting the same test for profit allocation might be challenging. ‘[JW] I am not convinced that the [formulae] within the CCCTB are sensible, or would operate, partly because of manipulation, but I would certainly be looking at that and other routes to possibly reforming our way of taxing business.’ 

 

It could be said the Google debate illustrates that we have both a principled and pragmatic HMRC, but also a fisc destined to be criticised because it cannot defend itself and yet protect taxpayer confidentiality. 

 

 

No commentator has the full picture, but one can speculate that this was principled because HMRC probably concluded, perhaps reluctantly, under the litigation and settlement strategy (LSS) that it had a less than 50% chance of establishing that the relevant Google entity had a permanent establishment. 

 

Accordingly, if the matter was ‘a genuinely all or nothing dispute where HMRC believes it is unlikely to succeed, [the LSS indicates] it will usually concede’. While the LSS reserves HMRC’s right to ‘proceed to litigation despite believing it is unlikely to succeed, where it believes that clarification of the law is necessary’, would it be appropriate for HMRC to pursue an argument that it expected to lose in a few years’ time, just in the hope of a taxpayer conceding for non-tax reasons? The pragmatic view might have been taken that if HMRC had a sustainable position on transfer pricing, other companies that had perhaps sought to minimise their UK profits would also be likely to pay additional amounts of tax that could be justified on similar methodology.

 

 

With concepts as uncertain as those underlying profit allocation and in particular transfer pricing, and hence attribution of profits, the tax base is rather less certain than voters and the public might have expected or been led to believe. Indeed, without an explanation of a particular profit attribution or transfer pricing methodology, almost bound to reveal information of interest to competitors, commentators will be no wiser. So disclosure is unlikely to be the full answer in the long run.