There is merit in exploring ‘formulary apportionment’ but an increased focus on transfer pricing is required in the short term, says PwC head of tax
Today’s Commons public accounts committee report concluded that multinationals are able to ‘exploit national and international tax structures’ to minimise corporation tax on the economic activity they conduct in the UK. ‘The outcome is that they do not pay their fair share,’ the PAC said.
As well as calling on HMRC to be more ‘aggressive and assertive’ in confronting avoidance, the PAC complained of a ‘complete lack of transparency’ about why multinationals pay so little corporation tax.
‘Global companies structure their companies in ways that are impenetrable to the public and HMRC disclose very little about their approach to collecting tax from them. This undermines public confidence in the tax system and in HMRC which could have a negative impact for wider tax compliance,’ it said.
Tax professionals have called for a balance international debate on the future of corporation tax but KPMG has said large corporates need to consider how they can be more transparent in their tax reporting, in order to illustrate the ‘bigger picture’ and prevent the debate turning into a witch-hunt.
Partners at Freshfields Bruckhaus Deringer, writing in The Times, said a consensus about allocation of taxing rights in the modern global economy was ‘the right way ahead’ and the need for a balanced debate was now ‘urgent’.
The PAC said: ‘Effective change may require international cooperation to make sure that the UK is not isolated, but there is a moral case on top of the basic economic case that taxation of economic activity should transparently reflect where that activity occurs. The UK should be in the lead in making and enforcing this case.’
The drive to make companies ‘live up to their obligations’ will have to be conducted on a number of fronts, said PAC chairman Margaret Hodge. ‘These include possible legislative change within the UK and efforts to increase international cooperation. The multinationals should be required to report their tax practices transparently.’
Salman Shaheen, editor of International Tax Review, noted on Friday that Hodge was ‘singing from a similar hymn sheet; to Richard Murphy and the Tax Justice Network. ‘Country-by-country reporting and unitary taxation both seem like really good ideas,’ she said in an interview. But she added that both reforms would take ‘for ever’ to negotiate.
Transfer pricing
Much of the recent controversy has centred on transfer pricing, an essential feature of transactions between companies in a multinational group. OECD guidelines were designed to prevent transfer pricing abuse, but according to a recent BBC Newsnight report the OECD itself has admitted that ‘things are getting a bit out of control’.
Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration, told the programme: ‘The concern is that there has been a shift towards aggressive tax planning, which may have been encouraged by the governments – let’s be fair – but which now needs to be stopped. ‘It needs to be stopped with fair rules which would be clearer and simpler, but which have to be implemented.’
David Cameron declared last month that there are ‘too many tax havens’. Next year’s G8 conference in Northern Ireland will address the ‘growing problem … that some businesses and some individuals hide their taxes away and don’t pay them fairly’.
Last week the prime minister said in a Commons written answer that G20 leaders at the June 2012 summit ‘reiterated the need to prevent base erosion and profit shifting and declared that they will follow with attention the ongoing work of the OECD in this area’. He added that at a G20 finance ministers meeting in November ‘also stated that they welcome the work that the OECD is undertaking into the problem of base erosion and profit shifting and look forward to a report about progress of the work at the next meeting’.
John Kay, a Financial Times columnist and a visiting professor at the London School of Economics, wrote last week that ‘well-conceived apportionment’ of profits was ‘the best – perhaps only – answer’ to the problem presented by businesses that operate in several tax jurisdictions.
Sol Picciotto and Nicholas Shaxson, writing in the FT on 19 November, had claimed that ‘unitary taxation’ would tax multinationals according to the genuine economic substance of what they do and where they do it, rather than ‘according to the legal forms that their tax advisers conjure up’.
Will Morris, responding in today’s FT, said: ‘Before we get too starry-eyed … policy makers might want to consider why this “simple” remedy has not already been adopted.’
Morris is chairman of the tax committee at the Business Industry Advisory Committee to the OECD. Formulary apportionment as applied in US states is ‘incredibly complex’, he said. It is also ‘far from fair’, because ‘rich countries generate higher sales, pay higher wages and have more expensive property values’ so that any mix of those three factors would ‘inevitably result in income being allocated away from poorer countries’.
Kevin Nicholson, head of tax at PwC, said there was ‘merit’ in exploring apportionment on a global or European basis. But the arm’s length principle was based on ‘the genuine location’ of activities and functions.
‘It divides profit based on the price a business would have to pay to obtain goods or services from operations in other countries. The UK, in particular, has benefited from this: it has punched above its weight in terms of the value of goods and services provided from here,’ Nicholson wrote in a letter to the FT.
‘Given the timescales involved in reaching consensus on any alternative, in the shorter term the greatest contribution the chancellor could make would be to fund more resources within HMRC to focus on transfer pricing. This would both give confidence to the public that the system is working fairly and assist businesses that want to ensure they comply fairly with the arm’s length principle.’
Taxing rights
Responding to today’s PAC report, DLA Piper partner Stephen Hoyle said the arm’s length methodology for attributing profit between associated enterprises cross-border had ‘served the developed world well’.
He added: ‘In the case of Amazon, Google and Starbucks, the US retains taxing rights although it is a matter of US policy how it taxes the non-US profits of US controlled groups.
‘The same is true for the UK. The UK should not assume that a broad change in the basis of profit attribution will have a net beneficial effect. The developing world might learn the lesson and increase its own taxation of UK controlled multinationals. Despite all its righteous indignation, the UK government realises this simple truth. Expect some change in the basis of attribution of profits in e-commerce which neatly targets certain US multinationals.’
There is merit in exploring ‘formulary apportionment’ but an increased focus on transfer pricing is required in the short term, says PwC head of tax
Today’s Commons public accounts committee report concluded that multinationals are able to ‘exploit national and international tax structures’ to minimise corporation tax on the economic activity they conduct in the UK. ‘The outcome is that they do not pay their fair share,’ the PAC said.
As well as calling on HMRC to be more ‘aggressive and assertive’ in confronting avoidance, the PAC complained of a ‘complete lack of transparency’ about why multinationals pay so little corporation tax.
‘Global companies structure their companies in ways that are impenetrable to the public and HMRC disclose very little about their approach to collecting tax from them. This undermines public confidence in the tax system and in HMRC which could have a negative impact for wider tax compliance,’ it said.
Tax professionals have called for a balance international debate on the future of corporation tax but KPMG has said large corporates need to consider how they can be more transparent in their tax reporting, in order to illustrate the ‘bigger picture’ and prevent the debate turning into a witch-hunt.
Partners at Freshfields Bruckhaus Deringer, writing in The Times, said a consensus about allocation of taxing rights in the modern global economy was ‘the right way ahead’ and the need for a balanced debate was now ‘urgent’.
The PAC said: ‘Effective change may require international cooperation to make sure that the UK is not isolated, but there is a moral case on top of the basic economic case that taxation of economic activity should transparently reflect where that activity occurs. The UK should be in the lead in making and enforcing this case.’
The drive to make companies ‘live up to their obligations’ will have to be conducted on a number of fronts, said PAC chairman Margaret Hodge. ‘These include possible legislative change within the UK and efforts to increase international cooperation. The multinationals should be required to report their tax practices transparently.’
Salman Shaheen, editor of International Tax Review, noted on Friday that Hodge was ‘singing from a similar hymn sheet; to Richard Murphy and the Tax Justice Network. ‘Country-by-country reporting and unitary taxation both seem like really good ideas,’ she said in an interview. But she added that both reforms would take ‘for ever’ to negotiate.
Transfer pricing
Much of the recent controversy has centred on transfer pricing, an essential feature of transactions between companies in a multinational group. OECD guidelines were designed to prevent transfer pricing abuse, but according to a recent BBC Newsnight report the OECD itself has admitted that ‘things are getting a bit out of control’.
Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration, told the programme: ‘The concern is that there has been a shift towards aggressive tax planning, which may have been encouraged by the governments – let’s be fair – but which now needs to be stopped. ‘It needs to be stopped with fair rules which would be clearer and simpler, but which have to be implemented.’
David Cameron declared last month that there are ‘too many tax havens’. Next year’s G8 conference in Northern Ireland will address the ‘growing problem … that some businesses and some individuals hide their taxes away and don’t pay them fairly’.
Last week the prime minister said in a Commons written answer that G20 leaders at the June 2012 summit ‘reiterated the need to prevent base erosion and profit shifting and declared that they will follow with attention the ongoing work of the OECD in this area’. He added that at a G20 finance ministers meeting in November ‘also stated that they welcome the work that the OECD is undertaking into the problem of base erosion and profit shifting and look forward to a report about progress of the work at the next meeting’.
John Kay, a Financial Times columnist and a visiting professor at the London School of Economics, wrote last week that ‘well-conceived apportionment’ of profits was ‘the best – perhaps only – answer’ to the problem presented by businesses that operate in several tax jurisdictions.
Sol Picciotto and Nicholas Shaxson, writing in the FT on 19 November, had claimed that ‘unitary taxation’ would tax multinationals according to the genuine economic substance of what they do and where they do it, rather than ‘according to the legal forms that their tax advisers conjure up’.
Will Morris, responding in today’s FT, said: ‘Before we get too starry-eyed … policy makers might want to consider why this “simple” remedy has not already been adopted.’
Morris is chairman of the tax committee at the Business Industry Advisory Committee to the OECD. Formulary apportionment as applied in US states is ‘incredibly complex’, he said. It is also ‘far from fair’, because ‘rich countries generate higher sales, pay higher wages and have more expensive property values’ so that any mix of those three factors would ‘inevitably result in income being allocated away from poorer countries’.
Kevin Nicholson, head of tax at PwC, said there was ‘merit’ in exploring apportionment on a global or European basis. But the arm’s length principle was based on ‘the genuine location’ of activities and functions.
‘It divides profit based on the price a business would have to pay to obtain goods or services from operations in other countries. The UK, in particular, has benefited from this: it has punched above its weight in terms of the value of goods and services provided from here,’ Nicholson wrote in a letter to the FT.
‘Given the timescales involved in reaching consensus on any alternative, in the shorter term the greatest contribution the chancellor could make would be to fund more resources within HMRC to focus on transfer pricing. This would both give confidence to the public that the system is working fairly and assist businesses that want to ensure they comply fairly with the arm’s length principle.’
Taxing rights
Responding to today’s PAC report, DLA Piper partner Stephen Hoyle said the arm’s length methodology for attributing profit between associated enterprises cross-border had ‘served the developed world well’.
He added: ‘In the case of Amazon, Google and Starbucks, the US retains taxing rights although it is a matter of US policy how it taxes the non-US profits of US controlled groups.
‘The same is true for the UK. The UK should not assume that a broad change in the basis of profit attribution will have a net beneficial effect. The developing world might learn the lesson and increase its own taxation of UK controlled multinationals. Despite all its righteous indignation, the UK government realises this simple truth. Expect some change in the basis of attribution of profits in e-commerce which neatly targets certain US multinationals.’
