Group finance companies in Luxembourg are ‘quite common’, and are there to take advantage of a new low rate of UK corporation tax, says PwC’s head of tax
The OECD needs to consider how to get ‘tax and profits in the right place’, Kevin Nicholson, PwC’s head of tax, told the Commons public accounts committee yesterday.
MPs were questioning the heads of tax at the big four accountancy firms on tax avoidance.
G20 finance ministers will meet in Moscow on 14 February. ‘The OECD’s work is vital in helping to promote a better way of dealing with profit shifting and the erosion of the corporate tax base at the global level, and it will be reporting to the G20 finance ministers on progress in February,’ exchequer secretary David Gauke said in a Commons debate on tax avoidance last month.
Yesterday MPs challenged Nicholson’s statement that PwC did not design ‘tax products’. The big four firms had, PAC chairman Margaret Hodge suggested, ‘shifted to what you call much more personalised schemes’.
Nicholson accepted that while each multinational is different and its affairs are complex, there is some ‘commonality’ of issues.
‘So finance – where you hold your finance company. Currently, under the new corporate tax reforms in the UK, in order to take advantage of the low tax rate that’s offered you have to have an overseas finance company, otherwise it won’t work,’ he said.
‘So many businesses will set up a finance company in Luxembourg. That’s quite common, and that’s to take advantage of the new regime for the UK offering the low rate of tax.’
When the transfer pricing rules were created, Nicholson said, they were very beneficial to countries like the UK because OECD principles placed value where functions were carried out and where risks and capital were located: ‘The UK was then a capital exporter – it was very favourable for us.’
He added: ‘Now we are seeing a lot of discomfort, unrest, unhappiness around the fact that businesses are selling a lot in the UK but [the UK is] not seeing the profit. The rules were designed for different purposes, and one of the debates that we need to have now – at the G8 or the OECD – is around, in the modern world, where is the best place to apportion value. How do you get tax and profits in the right place.’
Hodge said change could take up to 20 years to negotiate. ‘In the meantime here you are, head of tax in PwC, having worked with a leading, UK-parented pharmacy group, where you’ve given them a “tax-efficient exit mechanism”. You’ve deliberately taken them offshore – and I think you use Switzerland probably more than the others – so that they don’t pay their fair share of tax here in the UK. And that stinks.’
Nicholson replied: ‘I don’t agree, obviously. I think we are giving the best advice that we can to businesses that are competing internationally …’
‘Best advice to them or to the collective good?’ Hodge asked.
‘We’re giving the best advice to the client on options that they have, which is legal and fully disclosed to HMRC and open to challenge. I don’t see anything wrong with that,’ Nicholson said.
Conservative MP Richard Bacon said there was clearly a spectrum, with ‘sensible tax planning at one end, evasion at the other, and avoidance somewhere in the middle’.
He added: ‘Avoidance is defined by HMRC as gaining an advantage that parliament never intended.’
He asked Jane McCormick, UK head of tax at KPMG, how her firm drew ‘the line’ between legitimate planning and avoidance. ‘In your guidance, you state: “We will interpret legislation in a purposive way in line with the court, we will not advise clients to enter into transactions with the main purpose of securing a tax advantage clearly contrary to the intention of parliament.”’
McCormick replied: ‘That is one of our tax principles. They were originally written in 2004, precisely to deal with this problem because there is this grey area. We have difficulty in definitions,’ she said, citing a recent paper published by Oxford University’s Centre for Business Taxation.
That paper, written by three tax academics including professor of taxation law Judith Freedman, who was a member of Graham Aaronson’s GAAR study group, argued that transactions and behaviour that reduce taxation ‘either by using legislation that offers certain opportunities or by relying on the structure of the international taxation system’ had been described as avoidance but did not involve ‘exploitation’ of defects in legislation.
KPMG had chosen to set out principles, which had been updated from time to time, McCormick said. The latest revision was made in December, in contemplation of the introduction of the general anti-abuse rule.
HM Treasury published a formal consultation on a GAAR targeted at artificial and abusive tax avoidance last June. It published a response document, draft legislation and draft guidance on 11 December.
McCormick said there was ‘no appetite’ for artificial avoidance among clients that she deals with. ‘They are looking for a sustainable tax position that supports their business.’
Some tax avoidance schemes, Liberal Democrat MP Ian Swales argued, were in breach of the spirit of company law. All four heads of tax said they drew attention to, or had regard to, the terms of section 172 of the Companies Act in advising their clients on tax issues.
Swales noted that the provision required directors to have regard, among other things, to ‘the likely consequences of any decisions in the long term, the impact of the company’s operations on the community and the desirability of the company maintaining a reputation for high standards of business conduct’.
In response to questioning on the use of tax havens, Nicholson told the committee that parliament ‘has the power to change how international tax works’. Companies that are competing with other companies ‘will follow the incentives that have been created’, he added.
John Dixon, head of tax at Ernst and Young, said the effect of current OECD principles was that ‘as far as the in-bound part of the supply chain into the UK is concerned, a small amount of the profit is currently allocated to that activity’.
He added: ‘That’s what the OECD needs to address.’
Group finance companies in Luxembourg are ‘quite common’, and are there to take advantage of a new low rate of UK corporation tax, says PwC’s head of tax
The OECD needs to consider how to get ‘tax and profits in the right place’, Kevin Nicholson, PwC’s head of tax, told the Commons public accounts committee yesterday.
MPs were questioning the heads of tax at the big four accountancy firms on tax avoidance.
G20 finance ministers will meet in Moscow on 14 February. ‘The OECD’s work is vital in helping to promote a better way of dealing with profit shifting and the erosion of the corporate tax base at the global level, and it will be reporting to the G20 finance ministers on progress in February,’ exchequer secretary David Gauke said in a Commons debate on tax avoidance last month.
Yesterday MPs challenged Nicholson’s statement that PwC did not design ‘tax products’. The big four firms had, PAC chairman Margaret Hodge suggested, ‘shifted to what you call much more personalised schemes’.
Nicholson accepted that while each multinational is different and its affairs are complex, there is some ‘commonality’ of issues.
‘So finance – where you hold your finance company. Currently, under the new corporate tax reforms in the UK, in order to take advantage of the low tax rate that’s offered you have to have an overseas finance company, otherwise it won’t work,’ he said.
‘So many businesses will set up a finance company in Luxembourg. That’s quite common, and that’s to take advantage of the new regime for the UK offering the low rate of tax.’
When the transfer pricing rules were created, Nicholson said, they were very beneficial to countries like the UK because OECD principles placed value where functions were carried out and where risks and capital were located: ‘The UK was then a capital exporter – it was very favourable for us.’
He added: ‘Now we are seeing a lot of discomfort, unrest, unhappiness around the fact that businesses are selling a lot in the UK but [the UK is] not seeing the profit. The rules were designed for different purposes, and one of the debates that we need to have now – at the G8 or the OECD – is around, in the modern world, where is the best place to apportion value. How do you get tax and profits in the right place.’
Hodge said change could take up to 20 years to negotiate. ‘In the meantime here you are, head of tax in PwC, having worked with a leading, UK-parented pharmacy group, where you’ve given them a “tax-efficient exit mechanism”. You’ve deliberately taken them offshore – and I think you use Switzerland probably more than the others – so that they don’t pay their fair share of tax here in the UK. And that stinks.’
Nicholson replied: ‘I don’t agree, obviously. I think we are giving the best advice that we can to businesses that are competing internationally …’
‘Best advice to them or to the collective good?’ Hodge asked.
‘We’re giving the best advice to the client on options that they have, which is legal and fully disclosed to HMRC and open to challenge. I don’t see anything wrong with that,’ Nicholson said.
Conservative MP Richard Bacon said there was clearly a spectrum, with ‘sensible tax planning at one end, evasion at the other, and avoidance somewhere in the middle’.
He added: ‘Avoidance is defined by HMRC as gaining an advantage that parliament never intended.’
He asked Jane McCormick, UK head of tax at KPMG, how her firm drew ‘the line’ between legitimate planning and avoidance. ‘In your guidance, you state: “We will interpret legislation in a purposive way in line with the court, we will not advise clients to enter into transactions with the main purpose of securing a tax advantage clearly contrary to the intention of parliament.”’
McCormick replied: ‘That is one of our tax principles. They were originally written in 2004, precisely to deal with this problem because there is this grey area. We have difficulty in definitions,’ she said, citing a recent paper published by Oxford University’s Centre for Business Taxation.
That paper, written by three tax academics including professor of taxation law Judith Freedman, who was a member of Graham Aaronson’s GAAR study group, argued that transactions and behaviour that reduce taxation ‘either by using legislation that offers certain opportunities or by relying on the structure of the international taxation system’ had been described as avoidance but did not involve ‘exploitation’ of defects in legislation.
KPMG had chosen to set out principles, which had been updated from time to time, McCormick said. The latest revision was made in December, in contemplation of the introduction of the general anti-abuse rule.
HM Treasury published a formal consultation on a GAAR targeted at artificial and abusive tax avoidance last June. It published a response document, draft legislation and draft guidance on 11 December.
McCormick said there was ‘no appetite’ for artificial avoidance among clients that she deals with. ‘They are looking for a sustainable tax position that supports their business.’
Some tax avoidance schemes, Liberal Democrat MP Ian Swales argued, were in breach of the spirit of company law. All four heads of tax said they drew attention to, or had regard to, the terms of section 172 of the Companies Act in advising their clients on tax issues.
Swales noted that the provision required directors to have regard, among other things, to ‘the likely consequences of any decisions in the long term, the impact of the company’s operations on the community and the desirability of the company maintaining a reputation for high standards of business conduct’.
In response to questioning on the use of tax havens, Nicholson told the committee that parliament ‘has the power to change how international tax works’. Companies that are competing with other companies ‘will follow the incentives that have been created’, he added.
John Dixon, head of tax at Ernst and Young, said the effect of current OECD principles was that ‘as far as the in-bound part of the supply chain into the UK is concerned, a small amount of the profit is currently allocated to that activity’.
He added: ‘That’s what the OECD needs to address.’
