Author Topic: Starbucks roasted by PAC, Google asked searching questions and Amazon outmuscled  (Read 1211 times)

John Short

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John Short

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The Empire Strikes Back

 

FitzFord

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John, petagny and other tax experts,

This is a major, important issue (or set of issues) that seems to have been carefully underplayed and diverted by international companies for fairly obvious reasons. Interests in the US have - mostly successfully - played this issue as a route to lobbying for beneficial tax treatment in a system that is beyond the ken of citizens and representative groups who do not happen to be international (or even local) tax experts. A case may be readily made for much greater knowledge and transparency on this issue across the world. It seems to me that the equivalence of a tax wikipedia would be a major positive contribution to a very wide range of people around the world. Any ideas on how to get a project of that nature underway? A useful start may include the difference in the structure of the Australian, EU and proposed UK systems and the economic efficiency of these approaches?

Fitz.

John Short

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It would not surprise me that one of the big global accountant companies would do this - the E&Y report is probably a first step.  KPMG - as reported elsewhere in the Revenue Framework under international comparisons examine different income tax and social contributions around the globe.  I imagine that this work is done for client and not public policy reasons so what is being suggested by Fitz could only done under the auspices of an international organization - OECD or IMF – for example.  Or perhaps the PFMBoard, with members from currently 186 countries, could organize a member in each county to supply a synopsis of corporate tax law and some university could have some postgraduate thesis developed using the data.

But what is being suggested would certainly provide interesting information.  However, unified corporate tax regimes alongside a common currency?  What would the politicians have left in the armory to deflect from spending bribes if they lost tax competitiveness as well?

petagny

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Alternatively, scrap corporate income tax altogether, the arguments being that it's a mess, it's volatile, it's not clear who ultimately bears the burden and it's possible to raise the revenue from taxing higher distributed profits, i.e., dividends, and higher capital gains on shares where profits are retained.

FitzFord

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John,

In keeping with the Wikipedia theme, I like the idea of inviting members of the PFMBoard to post information from their countries and invite universities' postgrads to do their thesis using the data. Of course, if the OECD or IMF want to muscle in, what would be our objection?

petagny,

Your proposal is so diabolical that I would fear for your life if it were adopted and actually implemented...

Fitz.

John Short

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FitzFord

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To paraphrase a US phrase: look at them Apples:   http://nyti.ms/10IB6ll   Always the innovators... no wonder they have become the most valuable stock in the world.

John Short

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« Last Edit: May 23, 2013, 17:59:00 GMT by John Short »

Napodano

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harnett

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And here's a bit of intellectual underpinning from Mr. Stiglitz

http://www.guardian.co.uk/commentisfree/2013/may/27/globalisation-is-about-taxes-too


petagny

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To which country is Stiglitz referring when he says: 'Why should German taxpayers help bail out a country whose business model is based on avoidance and a race to the bottom?'

petagny

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Interesting that David Hartnett, former head of HMRC, has now joined Deloittes. Very cosy!

Napodano

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The Chair of Tanzania's Public Accounts Committee writes a letter to UK PM Cameron

http://taxjustice.blogspot.co.uk/2013/05/to-david-cameron-letter-from-africa.html
http://taxjustice.blogspot.ch/2013/05/new-report-illicit-financial-flows-from.html

'Over the past three decades, Africa has functioned as a “net creditor” to the rest of the world, the result of a cumulative outflow of nearly a trillion and a half dollars from the continent'

harnett

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Petagny

I presume in this case it's Ireland!!  Here's a short video to illustrate how Apple avoids tax by way of an unlimited company in Ireland...

http://www.guardian.co.uk/technology/video/2013/may/29/apples-dirty-little-tax-secret-video

John Short

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Not sure if it is Ireland as it has already been bailed out!

petagny

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Harnett,

That was my guess too!

Napodano,

The Chairman of the Tanzanian Public Accounts Committee is probably also aware that generous tax exemptions in Tanzania are undermining domestic revenue collection efforts there. One estimate is that tax expenditure has risen from 2.2% of GDP in 2009/10 to 3.8% in 2011/12. The British taxpayer might be justified in asking why he/she should be supporting the Tanzanian budget when national tax exemptions appear to be headed in the wrong direction.

There have been some interesting articles by Paul Collier in Prospect magazine on the issue of cross-border taxation of multinationals. Apparently he has been advising David Cameron on the issue. He seems to think that things are beginning to move in the right direction. Lets' see what comes out of G8.

http://www.prospectmagazine.co.uk/magazine/tax-avoidance-paul-collier-david-cameron-g8/#.UbG6R0CTgmk

John Short

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The Public Accounts Committee published its 9th Report of this Session which, on the basis of evidence from Matt Brittin of Google and John Dixon of Ernst & Young, and from HM Revenue and Customs, examined tax avoidance by large companies.

The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:
“Google generates enormous profits in the UK. But despite an $18 billion turnover between 2006 and 2011 it paid the equivalent of just $16 million in taxes to the UK government.
“Google brazenly argued before this committee that its tax arrangements in the UK are defensible and lawful. It claimed that its advertising sales take place in Ireland, not in the UK.
“This argument is deeply unconvincing and has been undermined by information from whistleblowers, including ex-employees of Google, who told us that UK based staff are engaged in selling. The staff in Ireland simply process the bills. Google also conceded at this second hearing that its engineers in the UK are contributing to product development.
“The company’s highly contrived tax arrangement has no purpose other than to enable the company to avoid UK corporation tax.
“Google’s reputation has been damaged by these revelations of aggressive tax avoidance. That damage will not be repaired until the company arranges to pay its fair share of tax in the country where it earns the profits from the business it conducts.
“Confidence in HMRC has also been weakened. It is extraordinary that the department did not challenge Google over the complete mismatch between the company’s supposed structure and the substance of its activities.
“This is not specially to single out Google or indeed Starbucks and Amazon who had previously given evidence to us. The tax avoidance activities of these multinational companies are illustrative of a much wider problem.
“The Government clearly needs to act to strengthen HMRC and to simplify the tax code so that there are fewer loopholes. The Government should also consider greater transparency so that the public knows whether companies are paying a fair share. It should toughen up its proposals on public procurement to deny contracts to aggressive tax avoiders.
“The Government has declared that it will use its presidency of the G8 to promote the tackling of aggressive tax avoidance. This is a welcome recognition of the need for multilateral action to thwart the tax dodgers.
“This committee has vigorously condemned the activities of the big UK accountancy firms in helping their clients find loopholes in legislation and establish highly artificial tax structures. These firms must recognize that the public mood on tax avoidance has changed and that the time has come for them to advise their clients responsibly.”
Margaret Hodge was speaking as the Committee published its 9th Report of this Session.
Summary
To avoid UK corporation tax, Google relies on the deeply unconvincing argument that its sales to UK clients take place in Ireland, despite clear evidence that the vast majority of sales activity takes place in the UK. The big accountancy firms sell tax advice which promotes artificial tax structures, such as that used by Google and other multinationals, which serve to avoid UK taxes rather than to reflect the substance of the way business is actually conducted. HM Revenue & Customs (HMRC) is hampered by the complexity of existing laws, which leave so much scope for aggressive exploitation of loopholes, but it has not been sufficiently challenging of the manifestly artificial tax arrangements of multinationals. HM Treasury needs to take a leading role in driving international action to update tax laws and combat tax avoidance.
Conclusions and recommendations
1. The UK is a key market for Google but the enormous profit derived is out of reach of the UK’s tax system. Google generated US $18 billion revenue from the UK between 2006 and 2011. Information on the UK profits derived from this revenue is not available but the company paid the equivalent of just US $16 million of UK corporation taxes in the same period. Google defends its tax position by claiming that its sales of advertising space to UK clients take place in Ireland—an argument which we find deeply unconvincing on the basis of evidence that, despite sales being billed from Ireland, most sales revenue is generated by staff in the UK. It is quite clear to us that sales to UK clients are the primary purpose, responsibility and result of its UK operation, and that the processing of sales through Google Ireland has no purpose other than to avoid UK corporation tax. This elaborate corporate construct has damaged Google’s reputation in the UK and undermined confidence in the effectiveness of HMRC.
Recommendation: Public confidence in Google will only be restored when it establishes a corporate structure that ensures Google pays tax where it generates profit. This should be addressed as a matter of urgency by Google and other companies with a similar corporate structure—the Committee will continue to pursue this issue over the course of the Parliament.
2. HMRC has not been sufficiently challenging of multinationals’ manifestly artificial tax structures. We accept that HMRC is limited by resources but it is extraordinary that it has not been more challenging of Google’s corporate arrangements given the overwhelming disparity between where profit is generated and where tax is paid. Inconsistencies between the form of the company’s structure and the substance of its activities only came to light through the efforts of investigative journalists and whistleblowers. Any common sense reading of HMRC’s own guidance and tests suggests HMRC should vigorously question Google’s claim that it is acting lawfully. In contrast to evidence given to us previously, Google has also conceded that its engineers in the UK are contributing to product development and creating economic value in the UK We note that HMRC has never challenged an internet-based company in the Courts on the question of its permanent establishment.
Recommendation: HMRC needs to be much more effective in challenging the artificial corporate structures created by multinationals with no other purpose than to avoid tax. HMRC should now fully investigate Google in the light of the evidence provided by whistleblowers.
3. International tax rules are complicated and have not kept pace with the way businesses operate globally and through the internet. While we are concerned about HMRC’s effectiveness in tackling tax avoidance, we also acknowledge that it has to operate within the constraints of complicated UK tax laws and international tax treaties. As we have reported before, it is far too easy for companies to exploit the rules and set up structures in low-tax jurisdictions, rather than pay tax where they actually conduct their business and sell their goods and services. We are also particularly concerned about the out-of-date tax frameworks covering international internet based commerce which rely on a fully automated process. We expect the UK government to take a leading role in modernising international tax law and welcome the government’s emphasis on tackling aggressive tax avoidance under the UK’s presidency of the G8.
Recommendation: HMRC and HM Treasury should push for an international commitment to improve tax transparency, including by developing specific proposals to improve the quality and credibility of public information about companies’ tax affairs, and use that to information to collect a fair share of tax from profits generated in each country. This data should include full information from companies’ based in tax havens.
4. The reputation of the big accountancy firms in the UK has suffered from their substantial role in advising their clients on corporate structures and tax planning which serve only to help them avoid UK taxes. In becoming more involved in constructing complex tax arrangements for their clients, the big accountancy firms are increasingly seen as being part of the problem of corporate tax avoidance, rather than the solution. In providing tax advice and reaching audit judgements on their clients’ UK operations and structures, the big accountancy firms need to focus on the substance of the enterprise, rather than on artificial structures which serve only to avoid tax. The worldwide concerns about artificial tax arrangements will not go away and the big accountancy firms have the opportunity to play a leading role in promoting and enabling transparency in their clients’ tax structures and payments.
Recommendations: We expect the big accountancy firms to recognise that the public mood on tax avoidance has changed. They should provide responsible advice to ensure that corporate arrangements reflect the substance of transactions and operations in the UK and enable their clients to be more transparent about where they make profits and pay tax.
The professional bodies of the accountancy profession should emphasise the importance to accountancy firms of behaving responsibly in selling tax advice to clients, and in reaching audit judgements on the substance of their clients’ UK operations and structures.


Napodano

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Some actions from the G8 on the issue:

- G8 countries said they should make multinational corporations disclose the taxes they pay on a country-by-country basis. (FT.) Country by country reporting is now officially endorsed, at the highest level.
- Tax authorities should automatically share information to fight evasion. This should be "the global standard." (FT.)
- Companies should know who really owns them and tax collectors and law enforcers should be able to obtain this information easily. (statement)
- G8 countries have “a duty” to help developing countries improve their capacity to enforce tax laws.  (FTC)

More info at http://taxjustice.blogspot.co.uk/2013/06/g8-and-tax-havens-helpful-beginning-but.html

John Short

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Action Plan on Base Erosion and Profit Shifting
 
"Taxation is at the core of countries' sovereignty, but in recent years, multinational companies have avoided taxation in their home countries by pushing activities abroad to low or no tax jurisdictions. The G20 asked OECD to address this growing problem by creating this action plan to address base erosion and profit shifting. This plan identifies a series of domestic and international actions to address the problem and sets timelines for the implementation."

John Short

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Corporate tax avoidance by multinational companies damages the economy and undermines trust in the tax system, a committee of peers has concluded.
 
The Economic Affairs Select Committee said it was “not clear” that reforms proposed by the OECD would be sufficient to end the practice of shuffling money through different jurisdictions in a bid to cut tax bills within a planned two-year period.

SUMMARY
________________________________________________________________________________
The UK faces a serious problem of avoidance of corporation tax, due in part to the complexity of the tax regime in the UK, but mainly because the international tax system gives multinational companies opportunities to shift profits between countries in ways that reduce their liabilities in the UK. This damages the economy and undermines trust in the tax system.
Under the present international framework of corporate taxation, companies operating globally can make their taxable profits arise in low- rate jurisdictions, such as Ireland and Luxembourg, even when their customers are in the UK or elsewhere. The amount of corporation tax a company pays in any one country, such as the UK, can be determined by how aggressively the company seeks to shift its profits to other lower-taxed countries. The effect is to make corporation tax payments in a given country largely voluntary for multinational companies. Starbucks’ volunteering of extra payments in the UK after bad publicity is an example. 
The UK and the G8 support the Organisation for Economic Cooperation and Development (OECD)’s Action Plan to tackle base erosion, published on 19 July 2013. It sets out a two-year programme to address the most egregious forms of tax avoidance. But it is not yet clear how effective the proposed solutions will be or whether they can be achieved within the timescale. In the meantime, the UK faces the prospect of losing much-needed revenue through avoidance of corporation tax. There are also distortions in the market place: there is no level playing field between , say, a UK-based retailer which has to pay corporation tax in this country and a global rival selling here but paying corporation tax somewhere else at a lower rate.
Public concern about avoidance of corporation tax by multinationals, some of them British-based, has been heightened by a steady stream of stories in the media about companies paying little or no corporation tax in this country despite obviously doing good business here. Examples cited include the foreign-owned Google (investigated by the Public Accounts Committee of the House of Commons), Amazon and Starbucks, and the British-based Thames Water, Vodafone and Cadbury (before takeover by Kraft).
HMRC, the only public authority which sees tax returns, has not commented on these cases since bound by its duty of confidentiality to taxpayers. The only independent assessment of the performance of HMRC has been a review by the National Audit Office (NAO) of five settlements reached by HMRC. The NAO concluded that all five settlements were reasonable and successfully resolved multiple, long-outstanding tax issues. A recent court case shed some light on how a settlement was reached between HMRC and Goldman Sachs. Mr Justice Nicol said “it was not a glorious episode in the history of the Revenue.”
We decided to carry out a short inquiry to see how matters stood and to put forward proposals to help to reduce avoidance which the Government could adopt itself at the same time as it pursues agreement to reform the OECD framework governing where multinational companies pay corporation tax. We take the view that, since the Government devises, imposes and collects taxes, it is mainly for the Government to take measures against avoidance. But companies have a responsibility to pay their taxes. There are signs that some corporate taxpayers and their advisers realise that blatantly contrived avoidance is less and less acceptable to public opinion, to which the Government is accountable.
All our conclusions and recommendations are listed in Chapter 7. They are summarised below.
• We recommend that Parliament should establish a joint committee—made up of MPs and Peers—to exercise greater parliamentary oversight of HMRC and the settlements it reaches with multinationals. Like the Intelligence and Security Committee, the new Committee would examine confidential evidence in private.
• We recommend that the Treasury should urgently review the UK’s corporate taxation regime and report back within a year with proposed changes to be made at home and pursued internationally, especially through the OECD.
• On the international front, we recognise that the Treasury are already working for early implementation of the OECD’s Action Plan to tackle Base Erosion and Profit Shifting (BEPS). We recommend that the review should also consider other approaches to the taxation of multinational companies’ profits, such as a destination-based cash flow tax.
• In the UK, we recommend that the review should re-examine some fundamentals of the UK’s corporation tax regime, including differential tax treatment of debt and equity and the scope for introduction of an allowance for corporate equity.
• We recognise that the Treasury will already be working on policy initiatives against avoidance already announced by the Government, such as naming and shaming promoters of tax avoidance schemes, and self-certification of compliance with tax obligations by companies bidding for public contracts. We recommend that the review should also consider a series of anti-avoidance measures for the shorter term, such as:
(i) regulation of tax advisers;
(ii) measures to penalise users of failed tax avoidance schemes;
(iii) a requirement on companies with large operations in the UK to publish a proforma summary of their corporation tax returns, so as to bring about greater transparency.
• We also recommend that HMRC should be better resourced to deal effectively with the tax affairs of complex and well-resourced multinationals.

FitzFord

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John,
This is a very useful post. Can you and other UK members assess the likelihood of the rather clear measures suggested, being adopted? If so, how fast? I would doubt that there would be much traction for this in the US at the moment, given the political environment. What about other EU countries - (this questions is addressed to all Europeans)?
Fitz.

harnett

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Fitz

I suspect half measures all round - the solution to such issues is an international agreement which as you point out - with the USG dragging its feet on the isssue - is probably a long way off.


 

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