Tax experts have criticised elements of the Commons public accounts committee report, published earlier this week, on tax avoidance by multinational companies. HMRC needed to be more ‘aggressive and assertive’ in confronting avoidance, the PAC said. Responding to the report, HMRC insisted that it has been ‘very successful’ in reducing avoidance by large businesses.
► ‘Understandable misunderstandings’ have fuelled tax avoidance debate, say academics |
Judith Freedman, professor of tax law at Oxford University, told Tax Journal today that it was unfair to criticise the department: ‘HMRC staff have to work in the context set by Parliament and they are doing their best.’ In evidence submitted to the National Audit Office and published yesterday, Freedman and her co-authors had suggested that ‘the only way to tackle the way the international tax system works is through reform of that system’.
Amazon
A practising corporation tax expert said in a letter to The Times that it was right that companies should pay UK tax on their economic activities in this country. ‘But arriving at the right number is not always as simple as the [PAC] appears to believe,’ Heather Self wrote.
Self, a director at Pinsent Masons, was writing in a personal capacity as a chartered tax adviser. She is a member of the CBI tax committee and a former chairman of the CIOT technical committee.
She wrote: ‘[The PAC] report says that Amazon had £3.35bn of sales “from” the UK and that “to all intents and purposes” it has the majority of its economic activity in the UK. This is not correct: these are sales to the UK from a Luxembourg company, and much of the risk lies outside the UK: the decisions about what stock to buy, at what price, and how much to sell it for. All that is in the UK is a (very large) delivery operation, on which it is not surprising that profit margins are small.’
She was glad that ‘questions are being asked’, and welcomed additional resources for HMRC. ‘But the international principles are clear, and knee-jerk reactions based on superficial analysis and misunderstandings will do more harm than good.’
In a note published on the Pinsent Masons website, Self said a ‘lack of trust’ between the PAC and HMRC was ‘very worrying’.
Another contributor to The Times letters page wrote: ‘If the tax code allows for the avoidance, which on analysis looks and feels unbalanced, it needs changing.’
‘Hectoring’
Simon Walker, director general of the Institute of Directors, said it was ‘very frustrating’ for many companies who pay large tax bills that some multinationals ‘are able to avoid doing so’.
‘The solution must be simplifying the tax system, not simply hectoring from Westminster,’ he said in an IoD press release. ‘If these firms are immoral to take advantage of tax loopholes, then politicians are surely immoral for creating the loopholes in the first place. Taxes should be simpler to cut down on avoidance and relieve the burden our complex tax code puts on companies who do try to do the right thing.’
‘Fearful’
George Osborne has warned that the HM Treasury is ‘coming after’ tax avoiders. But some businesses are ‘privately fearful that the uproar over corporate tax planning will lead to a backlash that would make the British tax system more burdensome’, the FT reported.
Alex Henderson, tax partner at PwC, was quoted as saying: ‘Extra resources for HMRC is positive news. It should mean HMRC is better placed to ensure businesses apply the tax rules correctly and help companies themselves know better where they stand.’
But the FT noted that HM Treasury had watched the unfolding debate with frustration, as ‘MPs and media have criticised the tax authority for apparent laxness resulting in billions of pounds of allegedly uncollected tax’. David Gauke, exchequer secretary to the Treasury, had said [in February] that some of the criticism betrayed a lack of understanding about how corporation tax works.
‘The moral case’
Christian Aid welcomed the PAC report, saying that it put morality ‘at the heart of the tax debate’. The harm that ‘tax dodging’ causes to developing countries should be seen in the same light, the charity said. Christian Aid’s senior economic justice adviser Joseph Stead said: ‘The report drew welcome attention to the impact of tax dodging by multinationals in the UK, where the picture is bad enough. It is, however, a great deal worse in developing countries.’
Transparency
PAC chairman Margaret Hodge expressed support last week, during an interview with International Tax Review, for country-by-country reporting of multinationals’ profits and taxes paid.
Chris Morgan, head of tax policy at KPMG in the UK, noted that the PAC said there was ‘a complete lack of transparency’ about how much tax multinationals pay.
Morgan told Tax Journal yesterday: ‘We agree there is a need for more transparency to have a properly informed debate. We believe that corporates are going to have to embrace this trend to explain better what taxes they are paying and where they are paying them. By doing so they will also illustrate how their presence contributes to the economies in which they operate whether that be by generating employment and income taxes, sales and indirect taxes, or by paying business taxes including rates, employers’ levies or corporation tax.
‘Pulling that data together is not always straightforward but forward thinking corporations, especially in the extractive industries where this has been a focus of recent activity, are already doing so.’
However, Morgan said KPMG favoured voluntary disclosure. ‘We think transparency is best served by companies providing voluntary disclosure rather than having a one size fits all, country by country reporting, statutory regime,’ he said.
‘With improved transparency on tax, hopefully the ‘bigger picture’ of how a business-friendly tax system can attract corporates will emerge demonstrating how the UK’s ambition to create the most competitive tax regime in the G20 can play a key role in rebuilding the economy and fuelling the recovery.’
Changing the law
As Tax Journal reported on 12 October, HMRC’s role is to ‘ensure the correct tax is paid at the right time’. HMRC will not recognise any ‘avoidance’ where a company that is paying what seems to be a small amount of UK corporation tax is acting within the letter and the ‘spirit’ of UK tax law. Whether the tax system is fair is regarded as a matter for HM Treasury and, ultimately, politicians.
However, when the Commons treasury committee questioned senior HMRC officials on 31 October John Thurso, the Liberal Democrat MP for Caithness, Sutherland and Easter Ross, asked: ‘There are quite a lot of multinationals who are operating in this country, making a considerable profit by any known measure that a bank or whatever would recognise … and not paying tax on it.
‘The question is what is HMRC going to do about it? Is it something it does internally or is it something it flags and says, “ministers get to work”?’
Jim Harra, HMRC’s director general business tax, replied: ‘I think it is both. It is entirely right that we expect multinationals to pay tax in the jurisdictions where they are generating their profits through their economic activities there. That is the basis of the UK’s corporation tax system and international corporation tax systems. There are rules designed to ensure that the proportion of a multinational’s profits that are relevant to the economic activity they carry out in the UK get taxed in the UK. We have an intensive process of making sure that they stick to those rules and that where they do not we can intervene.
‘Where the rules are what we need, we are there enforcing them. If we believe that the rules can be enhanced, we would advise ministers about that.’
HMRC chief executive Lin Homer told John Mann, Labour MP for Bassetlaw, that whether multinational companies were paying a fair share of tax was a matter for MPs to discuss with ministers rather than with HMRC. She was required to give policy advice to ministers – she did not think she was required to give such advice to Parliament directly.
George Mudie, chairman of the committee, told Homer: ‘If you are content you are doing your job properly within the law, and that is how you have to operate, then it is our job to change the law to deal with this matter, and I think that is fair. If I were a minister I would be very unhappy if you were putting policy suggestions in a public committee.’
Tax experts have criticised elements of the Commons public accounts committee report, published earlier this week, on tax avoidance by multinational companies. HMRC needed to be more ‘aggressive and assertive’ in confronting avoidance, the PAC said. Responding to the report, HMRC insisted that it has been ‘very successful’ in reducing avoidance by large businesses.
► ‘Understandable misunderstandings’ have fuelled tax avoidance debate, say academics |
Judith Freedman, professor of tax law at Oxford University, told Tax Journal today that it was unfair to criticise the department: ‘HMRC staff have to work in the context set by Parliament and they are doing their best.’ In evidence submitted to the National Audit Office and published yesterday, Freedman and her co-authors had suggested that ‘the only way to tackle the way the international tax system works is through reform of that system’.
Amazon
A practising corporation tax expert said in a letter to The Times that it was right that companies should pay UK tax on their economic activities in this country. ‘But arriving at the right number is not always as simple as the [PAC] appears to believe,’ Heather Self wrote.
Self, a director at Pinsent Masons, was writing in a personal capacity as a chartered tax adviser. She is a member of the CBI tax committee and a former chairman of the CIOT technical committee.
She wrote: ‘[The PAC] report says that Amazon had £3.35bn of sales “from” the UK and that “to all intents and purposes” it has the majority of its economic activity in the UK. This is not correct: these are sales to the UK from a Luxembourg company, and much of the risk lies outside the UK: the decisions about what stock to buy, at what price, and how much to sell it for. All that is in the UK is a (very large) delivery operation, on which it is not surprising that profit margins are small.’
She was glad that ‘questions are being asked’, and welcomed additional resources for HMRC. ‘But the international principles are clear, and knee-jerk reactions based on superficial analysis and misunderstandings will do more harm than good.’
In a note published on the Pinsent Masons website, Self said a ‘lack of trust’ between the PAC and HMRC was ‘very worrying’.
Another contributor to The Times letters page wrote: ‘If the tax code allows for the avoidance, which on analysis looks and feels unbalanced, it needs changing.’
‘Hectoring’
Simon Walker, director general of the Institute of Directors, said it was ‘very frustrating’ for many companies who pay large tax bills that some multinationals ‘are able to avoid doing so’.
‘The solution must be simplifying the tax system, not simply hectoring from Westminster,’ he said in an IoD press release. ‘If these firms are immoral to take advantage of tax loopholes, then politicians are surely immoral for creating the loopholes in the first place. Taxes should be simpler to cut down on avoidance and relieve the burden our complex tax code puts on companies who do try to do the right thing.’
‘Fearful’
George Osborne has warned that the HM Treasury is ‘coming after’ tax avoiders. But some businesses are ‘privately fearful that the uproar over corporate tax planning will lead to a backlash that would make the British tax system more burdensome’, the FT reported.
Alex Henderson, tax partner at PwC, was quoted as saying: ‘Extra resources for HMRC is positive news. It should mean HMRC is better placed to ensure businesses apply the tax rules correctly and help companies themselves know better where they stand.’
But the FT noted that HM Treasury had watched the unfolding debate with frustration, as ‘MPs and media have criticised the tax authority for apparent laxness resulting in billions of pounds of allegedly uncollected tax’. David Gauke, exchequer secretary to the Treasury, had said [in February] that some of the criticism betrayed a lack of understanding about how corporation tax works.
‘The moral case’
Christian Aid welcomed the PAC report, saying that it put morality ‘at the heart of the tax debate’. The harm that ‘tax dodging’ causes to developing countries should be seen in the same light, the charity said. Christian Aid’s senior economic justice adviser Joseph Stead said: ‘The report drew welcome attention to the impact of tax dodging by multinationals in the UK, where the picture is bad enough. It is, however, a great deal worse in developing countries.’
Transparency
PAC chairman Margaret Hodge expressed support last week, during an interview with International Tax Review, for country-by-country reporting of multinationals’ profits and taxes paid.
Chris Morgan, head of tax policy at KPMG in the UK, noted that the PAC said there was ‘a complete lack of transparency’ about how much tax multinationals pay.
Morgan told Tax Journal yesterday: ‘We agree there is a need for more transparency to have a properly informed debate. We believe that corporates are going to have to embrace this trend to explain better what taxes they are paying and where they are paying them. By doing so they will also illustrate how their presence contributes to the economies in which they operate whether that be by generating employment and income taxes, sales and indirect taxes, or by paying business taxes including rates, employers’ levies or corporation tax.
‘Pulling that data together is not always straightforward but forward thinking corporations, especially in the extractive industries where this has been a focus of recent activity, are already doing so.’
However, Morgan said KPMG favoured voluntary disclosure. ‘We think transparency is best served by companies providing voluntary disclosure rather than having a one size fits all, country by country reporting, statutory regime,’ he said.
‘With improved transparency on tax, hopefully the ‘bigger picture’ of how a business-friendly tax system can attract corporates will emerge demonstrating how the UK’s ambition to create the most competitive tax regime in the G20 can play a key role in rebuilding the economy and fuelling the recovery.’
Changing the law
As Tax Journal reported on 12 October, HMRC’s role is to ‘ensure the correct tax is paid at the right time’. HMRC will not recognise any ‘avoidance’ where a company that is paying what seems to be a small amount of UK corporation tax is acting within the letter and the ‘spirit’ of UK tax law. Whether the tax system is fair is regarded as a matter for HM Treasury and, ultimately, politicians.
However, when the Commons treasury committee questioned senior HMRC officials on 31 October John Thurso, the Liberal Democrat MP for Caithness, Sutherland and Easter Ross, asked: ‘There are quite a lot of multinationals who are operating in this country, making a considerable profit by any known measure that a bank or whatever would recognise … and not paying tax on it.
‘The question is what is HMRC going to do about it? Is it something it does internally or is it something it flags and says, “ministers get to work”?’
Jim Harra, HMRC’s director general business tax, replied: ‘I think it is both. It is entirely right that we expect multinationals to pay tax in the jurisdictions where they are generating their profits through their economic activities there. That is the basis of the UK’s corporation tax system and international corporation tax systems. There are rules designed to ensure that the proportion of a multinational’s profits that are relevant to the economic activity they carry out in the UK get taxed in the UK. We have an intensive process of making sure that they stick to those rules and that where they do not we can intervene.
‘Where the rules are what we need, we are there enforcing them. If we believe that the rules can be enhanced, we would advise ministers about that.’
HMRC chief executive Lin Homer told John Mann, Labour MP for Bassetlaw, that whether multinational companies were paying a fair share of tax was a matter for MPs to discuss with ministers rather than with HMRC. She was required to give policy advice to ministers – she did not think she was required to give such advice to Parliament directly.
George Mudie, chairman of the committee, told Homer: ‘If you are content you are doing your job properly within the law, and that is how you have to operate, then it is our job to change the law to deal with this matter, and I think that is fair. If I were a minister I would be very unhappy if you were putting policy suggestions in a public committee.’
