MPs are considering launching an inquiry into international tax avoidance amid ‘rising political anger’ about the issue, the Financial Times reported yesterday, adding that the move will be decided ‘within days’ and could see executives from major global companies questioned by the Public Accounts Committee (PAC) over their corporation tax arrangements.
Starbucks and Vodafone executives defended their companies’ tax arrangements this week, and a tax barrister complained that assumptions behind some recent allegations of tax avoidance by multinationals were ‘ill-informed and insulting’.
Some recent reports have alleged tax avoidance on the basis of estimates of the tax that would be payable if UK tax liability was based on sales to UK customers. Earlier this month HMRC explained in an issue briefing that a company paying less corporation tax than might be expected is not necessarily engaging in tax avoidance. The UK corporation tax that a company has to pay ‘depends on what business operations it carries on here, and not on the level of its sales to UK customers’, a spokesperson said.
Mary Monfries, partner at PwC, told Tax Journal today: ‘In any democracy it must be right for debates on tax policy to be possible. Decisions on tax policy, though, have to be made in the context of international competition and a full understanding of the economic impact of policy change.
‘It is also important to distinguish a debate on tax policy from criticism of the important roles that both businesses and HMRC play in the operation of the tax system. The point has also been made by others many times this week that a focus on corporation tax alone is obscuring a large part of the picture – with other things such as VAT and payroll taxes being crucially important to stable tax revenues.’
‘Morally wrong’
PAC chairman Margaret Hodge claimed during prime minister’s questions on Wednesday that Apple, Google, Facebook, eBay and Starbucks had between them ‘avoided nearly £900m of tax’. She asked David Cameron to ‘condemn their behaviour as morally wrong’.
Cameron replied: ‘This is an international problem that all countries are struggling with: how to make sure that companies pay tax in an appropriate way. I am not happy with the current situation; HMRC needs to look at it very carefully. We need to make sure that we are encouraging these businesses to invest in our country – as they are doing – but they should be paying fair taxes as well.’
Responding on Twitter, Hodge said Cameron’s answer was ‘not good enough’.
‘Artificial devices’
Michael Meacher, the Labour MP whose ‘General Anti Tax-Avoidance Principle Bill’ has been scheduled for a second reading in the Commons today, tabled an early day motion last week noting ‘the increasing ease with which multinational corporations are shifting substantial profits from high tax to low tax jurisdictions, even to the point of eliminating their tax liabilities in countries where they make huge sales, as instanced by Starbucks which has not paid any tax on its £1.2bn UK sales in the last three periods for which accounts are available’.
The motion, whose five sponsors include the Conservative MP Peter Bottomley, has attracted 28 signatures.
It called on the government to ‘investigate systematically and in depth all such companies known to use such artificial devices to reduce tax liabilities as charging royalties and excessive interest rates on intra-group transactions or grossly inflating prices on internally-traded products to exaggerate allowable costs against tax, and to grant HMRC powers to declare null and void any such transactions which have no genuine economic purpose but are simply designed to avoid tax’.
It also called on the government to ‘seek international agreement to revise the OECD rules on taxation of multi-national companies trading so as to eliminate loopholes and strengthen enforcement’.
Last weekend a Financial Times editorial said current practice had turned corporation tax into ‘a largely voluntary gesture’ for multinationals. ‘It is all too easy to shuffle income off to low-tax jurisdictions through intra-group debt financing and the transfer pricing of intangibles such as intellectual property,’ it said. There was ‘nothing wrong’, it claimed, with high-profile public shaming as ‘a weapon in the armoury against the exploitation of [tax] loopholes’.
‘Ill-informed’
Peter Vaines, a tax barrister at Squire Sanders whose clients include multinational companies, said many of the recent claims made against multinationals implied that ‘they have been involved in some dodgy tax arrangements which have relieved them unfairly from their tax obligations or that they have done something else which is equally morally repugnant’.
Writing in today’s issue of Tax Journal, he said: ‘The possibility that in these difficult times, the company might have made significant losses which have not yet been fully recovered, or has continuing and substantial capital expenditure, are factors which do not even get onto the radar.’
He added: ‘Furthermore, a multinational, by its very nature, operates in various parts of the world and may make profit in other countries. However, it is simply assumed that if they operate in countries which charge lower taxes, the operations there must be all part of some overall plan to deprive the UK tax authority of their entitlement. Anybody would think that we do not have any transfer pricing legislation or that HMRC is completely unaware of the tax saving possibilities of transfer pricing (which the journalists naturally understand fully). That is both ill-informed and insulting.’
HMRC’s briefing had pointed out, Vaines noted, that while company accounts include references to tax liabilities it is not generally possible to identify from the accounts how much UK corporation tax has been paid.
‘This is because of the differences between the way in which profits are calculated for the accounts and the way that they are calculated for tax purposes,’ the briefing said. ‘So although an apparently low tax rate in a company’s accounts might indicate tax avoidance, it could also be the case that the business has acted entirely properly, by making use of specific tax reliefs and incentives designed, for example, to encourage capital investment or research and development.’
Bruce Braithwaite, managing director at Braithwaite Tax Recovery, told Tax Journal: ‘There was time when a loophole was an unintended consequence. The hole in loophole was a hole in the legislation that allowed companies to take advantage of a particular provision that was unintended. Now it seems that every tax deduction or tax measure is considered a loophole. The public needs some education on this.’
‘We should be encouraging debate’
However, Stuart Jones of Kendal-based 3CA Chartered Accountants said Vaines’s response to the HMRC briefing would be seen by many as ‘a defence of the status quo’.
Jones said: ‘Yes, politicians (and the media) have made mistakes in discussing the issues – but in such a complex area, are we professionals really surprised? If there is nothing to hide we should be encouraging debate, not making sarcastic comments about journalists who “naturally understand fully” transfer pricing. I only wish more people would comment.’
Little had been heard from professionals representing the small business sector despite extensive coverage of the tax avoidance issue in Tax Journal, he noted. ‘With their clients the argument isn’t about lawful conduct or unlawful conduct, it’s about fairness. They see large companies with multi-million pound turnovers paying little or no tax. Not because, as Mr Vaines says, the companies “might have made significant losses” or incurred “substantial capital expenditure” but because they have arranged their affairs to ensure they pay as little UK tax as possible. Arrangements which are unavailable to small businesses.’
Rebuttal
Starbucks chief executive officer Howard Schultz said this week, in a lengthy rebuttal of findings published by Reuters, that the group had never avoided paying taxes in the UK.
The Guardian reported last night that Vodafone's chief executive in the UK had launched ‘a robust defence of the company's controversial record on tax, saying the mobile provider is one of the country's biggest contributors to the exchequer’. It quoted Guy Laurence as saying: ‘Can you name any other industry that has contributed as much to the HMRC as mobile phone companies pay when they pay for spectrum?’
The paper noted that ‘Vodafone, whose corporation tax bill in the UK was zero last year, has been targeted by campaigners over its contribution to the exchequer’. But the company stressed that it had ‘handed over £6bn in spectrum payments to the Treasury since the 3G auction in 2000’.
Vodafone said in June that the lack of a corporation tax liability was ‘solely down to’ the deductible cost of borrowings and capital allowances. A spokesman told Tax Journal: ‘Vodafone pays tax in every country in which we operate: for every £4 we make in profit, we pay £1 in corporate taxes around the world.’
MPs are considering launching an inquiry into international tax avoidance amid ‘rising political anger’ about the issue, the Financial Times reported yesterday, adding that the move will be decided ‘within days’ and could see executives from major global companies questioned by the Public Accounts Committee (PAC) over their corporation tax arrangements.
Starbucks and Vodafone executives defended their companies’ tax arrangements this week, and a tax barrister complained that assumptions behind some recent allegations of tax avoidance by multinationals were ‘ill-informed and insulting’.
Some recent reports have alleged tax avoidance on the basis of estimates of the tax that would be payable if UK tax liability was based on sales to UK customers. Earlier this month HMRC explained in an issue briefing that a company paying less corporation tax than might be expected is not necessarily engaging in tax avoidance. The UK corporation tax that a company has to pay ‘depends on what business operations it carries on here, and not on the level of its sales to UK customers’, a spokesperson said.
Mary Monfries, partner at PwC, told Tax Journal today: ‘In any democracy it must be right for debates on tax policy to be possible. Decisions on tax policy, though, have to be made in the context of international competition and a full understanding of the economic impact of policy change.
‘It is also important to distinguish a debate on tax policy from criticism of the important roles that both businesses and HMRC play in the operation of the tax system. The point has also been made by others many times this week that a focus on corporation tax alone is obscuring a large part of the picture – with other things such as VAT and payroll taxes being crucially important to stable tax revenues.’
‘Morally wrong’
PAC chairman Margaret Hodge claimed during prime minister’s questions on Wednesday that Apple, Google, Facebook, eBay and Starbucks had between them ‘avoided nearly £900m of tax’. She asked David Cameron to ‘condemn their behaviour as morally wrong’.
Cameron replied: ‘This is an international problem that all countries are struggling with: how to make sure that companies pay tax in an appropriate way. I am not happy with the current situation; HMRC needs to look at it very carefully. We need to make sure that we are encouraging these businesses to invest in our country – as they are doing – but they should be paying fair taxes as well.’
Responding on Twitter, Hodge said Cameron’s answer was ‘not good enough’.
‘Artificial devices’
Michael Meacher, the Labour MP whose ‘General Anti Tax-Avoidance Principle Bill’ has been scheduled for a second reading in the Commons today, tabled an early day motion last week noting ‘the increasing ease with which multinational corporations are shifting substantial profits from high tax to low tax jurisdictions, even to the point of eliminating their tax liabilities in countries where they make huge sales, as instanced by Starbucks which has not paid any tax on its £1.2bn UK sales in the last three periods for which accounts are available’.
The motion, whose five sponsors include the Conservative MP Peter Bottomley, has attracted 28 signatures.
It called on the government to ‘investigate systematically and in depth all such companies known to use such artificial devices to reduce tax liabilities as charging royalties and excessive interest rates on intra-group transactions or grossly inflating prices on internally-traded products to exaggerate allowable costs against tax, and to grant HMRC powers to declare null and void any such transactions which have no genuine economic purpose but are simply designed to avoid tax’.
It also called on the government to ‘seek international agreement to revise the OECD rules on taxation of multi-national companies trading so as to eliminate loopholes and strengthen enforcement’.
Last weekend a Financial Times editorial said current practice had turned corporation tax into ‘a largely voluntary gesture’ for multinationals. ‘It is all too easy to shuffle income off to low-tax jurisdictions through intra-group debt financing and the transfer pricing of intangibles such as intellectual property,’ it said. There was ‘nothing wrong’, it claimed, with high-profile public shaming as ‘a weapon in the armoury against the exploitation of [tax] loopholes’.
‘Ill-informed’
Peter Vaines, a tax barrister at Squire Sanders whose clients include multinational companies, said many of the recent claims made against multinationals implied that ‘they have been involved in some dodgy tax arrangements which have relieved them unfairly from their tax obligations or that they have done something else which is equally morally repugnant’.
Writing in today’s issue of Tax Journal, he said: ‘The possibility that in these difficult times, the company might have made significant losses which have not yet been fully recovered, or has continuing and substantial capital expenditure, are factors which do not even get onto the radar.’
He added: ‘Furthermore, a multinational, by its very nature, operates in various parts of the world and may make profit in other countries. However, it is simply assumed that if they operate in countries which charge lower taxes, the operations there must be all part of some overall plan to deprive the UK tax authority of their entitlement. Anybody would think that we do not have any transfer pricing legislation or that HMRC is completely unaware of the tax saving possibilities of transfer pricing (which the journalists naturally understand fully). That is both ill-informed and insulting.’
HMRC’s briefing had pointed out, Vaines noted, that while company accounts include references to tax liabilities it is not generally possible to identify from the accounts how much UK corporation tax has been paid.
‘This is because of the differences between the way in which profits are calculated for the accounts and the way that they are calculated for tax purposes,’ the briefing said. ‘So although an apparently low tax rate in a company’s accounts might indicate tax avoidance, it could also be the case that the business has acted entirely properly, by making use of specific tax reliefs and incentives designed, for example, to encourage capital investment or research and development.’
Bruce Braithwaite, managing director at Braithwaite Tax Recovery, told Tax Journal: ‘There was time when a loophole was an unintended consequence. The hole in loophole was a hole in the legislation that allowed companies to take advantage of a particular provision that was unintended. Now it seems that every tax deduction or tax measure is considered a loophole. The public needs some education on this.’
‘We should be encouraging debate’
However, Stuart Jones of Kendal-based 3CA Chartered Accountants said Vaines’s response to the HMRC briefing would be seen by many as ‘a defence of the status quo’.
Jones said: ‘Yes, politicians (and the media) have made mistakes in discussing the issues – but in such a complex area, are we professionals really surprised? If there is nothing to hide we should be encouraging debate, not making sarcastic comments about journalists who “naturally understand fully” transfer pricing. I only wish more people would comment.’
Little had been heard from professionals representing the small business sector despite extensive coverage of the tax avoidance issue in Tax Journal, he noted. ‘With their clients the argument isn’t about lawful conduct or unlawful conduct, it’s about fairness. They see large companies with multi-million pound turnovers paying little or no tax. Not because, as Mr Vaines says, the companies “might have made significant losses” or incurred “substantial capital expenditure” but because they have arranged their affairs to ensure they pay as little UK tax as possible. Arrangements which are unavailable to small businesses.’
Rebuttal
Starbucks chief executive officer Howard Schultz said this week, in a lengthy rebuttal of findings published by Reuters, that the group had never avoided paying taxes in the UK.
The Guardian reported last night that Vodafone's chief executive in the UK had launched ‘a robust defence of the company's controversial record on tax, saying the mobile provider is one of the country's biggest contributors to the exchequer’. It quoted Guy Laurence as saying: ‘Can you name any other industry that has contributed as much to the HMRC as mobile phone companies pay when they pay for spectrum?’
The paper noted that ‘Vodafone, whose corporation tax bill in the UK was zero last year, has been targeted by campaigners over its contribution to the exchequer’. But the company stressed that it had ‘handed over £6bn in spectrum payments to the Treasury since the 3G auction in 2000’.
Vodafone said in June that the lack of a corporation tax liability was ‘solely down to’ the deductible cost of borrowings and capital allowances. A spokesman told Tax Journal: ‘Vodafone pays tax in every country in which we operate: for every £4 we make in profit, we pay £1 in corporate taxes around the world.’
