PFM Board
Medium Term Expenditure Framework => The Revenue Framework => Topic started by: John Short on November 13, 2012, 17:12:56 GMT
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PAC Hearings Nov 12 2012 - might be available on BBC I-Player - amusing at times but excruciating as well!
http://www.guardian.co.uk/politics/2012/nov/12/amazon-google-starbucks-tax-pac
“We pay all the tax we are required to pay” Google CEO UK Mark Britten
“We are not accusing you of being illegal. We are accusing you of being immoral.” Mrs Hodge replied.
What is a Tax Code for?
Discuss
Also to add to the debate
http://uk.news.yahoo.com/john-lewis-chief-makes-tax-plea-210919778.html
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The politicians may well have been incredulous, but it's not as though we haven't known about these issues for quite some time. Transfer pricing is old hat, as is the use of offshore shipping of profits. If the tax code can't protect the exchequer from such behaviour then of course it is encouraged. It will be interesting to see what happens next. What is the legal basis for suddenly charging these companies millions or billions as the Grauniad suggests? Immorality isn't a crime by law.
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I doubt it if there is any legal basis. If they cannot come up with a solution to transfer pricing - what about a (modest) turnover tax on UK trading? Where there are double taxation agreements it would not reduce their total tax payment but relate it to where the "profit" is generated. Crude, and sins against a good tax code but a good tax code is about collecting tax that "should" be due!
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Why not get rid of corporation tax and collect more tax on dividends? What are the pros and cons?
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Burden of tax? Tax on dividends are paid by individual shareholders - corporation tax by the company as an entity. Impact on pensioners who rely on dividends? May encourage retained earnings? There are probably tomes written on this somewhere.
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But presumably dividends could be higher, offsetting the increased tax burden?
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I had that Vito Mirlees and his mate Jim Tanzi in my cab this evening. Said they'd never heard of the MPF board. Said they'd done the tomes, but had never made the bestseller lists. We had a chat abaht getting codes/policy/research findings into twit. budget/text constraints, lots of larfs, but they left before we got beyond "expenditure taxes are really..."
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Well Polly Toynbee ratchets up the debate indicating how trusts manage to protect the money of the elderly and avoid inheritance tax etc. What was interesting for me though, was the assertion that HMRC could refuse to accept these (Starbucks, Amazon et al) accounts!!! And then John Lewis are complaining about an unfair playing field competing with Amazon - but why don't they just go ahead and copy Amazon's tactics - because they are more moral? Less global?
Anyway - anybody out there know what it means if HMRC refuses accounts? Surely Starbucks are bang to rights if they charge a 20% markup for doing nothing by their co. in Luxembourg or wherever. Sting 'em for this for starters on the UK imports of coffee.
http://www.guardian.co.uk/commentisfree/2012/nov/15/britain-tax-havens-close-to-home-amazon
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Reg, it’s great to see you are still with us – I feared that you may have retired in one way or another. The tomes of the Mirlees/Tanzi twins are referenced in these pages so well done there in reminding us all, but one question for you.
Did they give any clue as to why successive governments do not follow their advice in making tax rules simple and allowing all these loopholes that the fancy accountants exploit?
A further question – do you take your break in a Caff or do you go to the ones that are being targeted for boycott? If you do, that fella Harnett will increase the cost of your coffee as I can’t see a unilateral tariff increase being imposed on a single or few coffee importers as that is bad policy, and if it comes in from an EC member? Well free trade and all that in a Common Market. Oh, with all the rugby types in town, if you get one as a fare, see if you can pick up 10 tickets for the next Ireland – England game in February next. We want to inject some excise tax into the Irish economy – the place where that Captain Boycott made his name so to speak.
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Found the video!
http://www.parliamentlive.tv/Main/Player.aspx?meetingId=11764&st=15:23:30
Wonder if some PR types at a "Fulfilment Centre" advised them to wear poppies?
PAC 10 Google 10 Starbucks 0 Amazon sent off without scoring!
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On a related area of tax avoidance just published by the NAO
http://www.nao.org.uk/publications/1213/tax_avoidance.aspx
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Given the pessimistic prognosis in the attached – what should be announced in the December 6th Statement?
Addressing some of the issues raised in this forum would seem to be a good starting point but not in a knee jerk way.
“In next week’s Autumn Statement the Chancellor may have to abandon one of his fiscal targets – that debt should be falling in 2015–16. He may also need to announce yet more spending cuts or tax increases for the next parliament in order to continue to meet his other fiscal target. This is the headline conclusion of a new report published today by researchers at the Institute for Fiscal Studies. The analysis adjusts the Office for Budget Responsibility’s (OBR’s) March 2012 forecasts for the economy and the public finances in the light of new developments over the last few months. It takes account of the now weaker outlook for the UK economy (as implied by independent forecasters) and the disappointing trend in tax revenues seen over the last seven months.”
http://www.ifs.org.uk/pr/Autumn_Statement_2012
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Interesting contribution by Richard Murphy a founder of the Tax Justice Network and director of Tax Research LLP: “The corporate tax debate is a Marmite issue: there’s no room for politicians to sit on the fence”.
http://www.taxresearch.org.uk/Blog/
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PAC Report issued today
http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/716/71602.htm
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Government response to invest in HRMC seems proportionate and sensible. The main problem is lack of resources in HMCE rather than the regulations themselves. PAC may seem like good theatre but I wouldn't go beyond improving the detailed segmental information in MNC financials - which; at least from my perspective would still be challenging due to transfer pricing.
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I think the ability to challenge the "fairness" of the transfer pricing regime is at the heart of this. As you say the investment in appropriate resources to do this is key (separate announcement from the PAC report today). It is also interesting that Starbucks is "unilaterally" reconsidering its transfer pricing so reduce its transfer to Holland - I suspect this is a response to the threat to its market share from the negative publicity. Perhaps the morality that PAC Chair Margaret Hodge talks about may be filtering down - I doubt if the term exists in Tax Law/Statutes, but the market may work in that regard. Remember Gerald Ratner! Both Margaret Hodge and Danny Alexander (Sec. to Treasury) were interviewed on this morning’s Today Programme on BBC Radio 4 at about 08.10 which should be available on BBC Player.
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Interesting how this is panning out. I took revenue law as a given when I trained as an accountant in the 1980's. The balance between the poachers (in the accounting firms) and gamekeepers in HMRC was always a challenge but broadly they seemed evenly matched. Now it would appear that the resources are heavily skewed in favour of the corporate giants. Interesting too how the likes of Starbucks "are looking" at their transfer pricing policies....what will be the knock on effect in Holland for example?
Taxation always seemed to be more of a science than an art when I was a lad.
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I agree with atseacliff on the need to bolster HMRC capacities.
Anecdotal I know, but a recent conversation with an accountant (ex HMRC) revealed the following:
- Swathes of older and more experienced inspectors chopped out (and now working for tax advisors!).
- Massive reduction in risk-based tax audits of individual clients (not seen as 'fair'!).
- Severing of direct relationship between an individual inspector and his/her case-load of clients (try talking to 'your' tax inspector nowadays!).
- No-blame culture introduced, so that everyone and no one is responsible for errors.
In the end, HMRC has great deal of discretion to challenge dodgy looking arrangements, but it can't exercise this discretion if its human capacities and organisational arrangements are not up to it.
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Starbucks has announced it is now planning to pay more corporation tax than it is obliged to, amid the row over contributions from big foreign multi-national firms.
The company's UK Managing Director Kris Engskov said: "Having listened to customers and to the British public, Starbucks in the UK will be making changes which will result in the company paying higher corporation tax in the UK - above what is currently required by law.
"Specifically, in 2013 and 2014 Starbucks will not claim tax deductions for royalties or payments related to our intercompany charges."
A company statement continued: "In addition, he is announcing a commitment that Starbucks will propose to pay a significant amount of corporation tax in the UK during 2013 and 2014 regardless of whether our company is profitable during these years."
Surely this is Starbucks making an unrequited payment to this UK Exchequer as it cannot be for Corporation Tax - or are they saying we will calculate what we want to give you and ignore the tax compilation rules? Or a misguided marketing ploy to pacify its customers - who will see it for what it is!
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May be an own goal judging from Press Comment
http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/9728630/Starbucks-20m-gift-makes-joke-of-tax-system.html
http://www.guardian.co.uk/business/2012/dec/07/starbucks-tax-offer-angers-critics?INTCMP=SRCH
http://www.ft.com/cms/s/0/d4f84a12-3fd5-11e2-b0ce-00144feabdc0.html#axzz2ENbew100
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It appears that these voluntary contributions can be offset again future tax liabilities should they ever arise!
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http://www.guardian.co.uk/global-development/2012/dec/10/uk-aid-africa-tax-haven-mauritius
On the subject of avoiding taxation how about this!!!!!!
"More UK aid channelled via investment funds in tax haven of Mauritius
Extent of privatisation of aid budget and increased routing of aid through Mauritius revealed in War on Want report
The African island of Mauritius is known for its secrecy, negligible corporate tax rates, and for being a favoured conduit for wealthy individuals and multinationals wishing to avoid tax on African and Asian profits."
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I thought this might appeal ;D
http://www.blipfoto.com/entry/2544952
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Ah well - no retail interface with the punters to force the situation!
http://www.huffingtonpost.co.uk/2012/12/13/googles-ties-to-tories-attacked-as-eric-schmidt-says-he-is-proud-of-tax-avoidance-_n_2291438.html?ncid=GEP
http://www.independent.co.uk/news/uk/home-news/google-boss-im-very-proud-of-our-tax-avoidance-scheme-8411974.html
http://www.telegraph.co.uk/technology/google/9739039/Googles-tax-avoidance-is-called-capitalism-says-chairman-Eric-Schmidt.html
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The OECD has published a major new report on corporate taxation, entitled Addressing Base Erosion and Profit Shifting.
http://www.oecd.org/ctp/BEPSENG.pdf
See also commentary on
http://taxjustice.blogspot.co.uk/2013/02/oecd-report-on-corporate-taxation.html
Article in Guardian "Big UK tax avoiders will easily get round new government policy”
http://www.guardian.co.uk/commentisfree/2013/feb/15/uk-tax-avoiders-wont-stop-new-policy
See also posting of 31 January Charitable Donations
“Tax avoidance being discussed at the PAC today
http://www.parliamentlive.tv/Main/Player.aspx?meetingId=12458”
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The Public Accounts Committee publishes its 29th Report of this Session which, on the basis of a Report by the Comptroller and Auditor General, evidence was taken from HM Revenues and Customs, Tax Trade, Future Capital Partners and Ingenious Media on marketed tax avoidance schemes.
Report: Tax avoidance: tackling marketed avoidance schemes (PDF)
http://www.parliament.uk/business/committees/committees-a-z/commons-select/public-accounts-committee/news/tax-avoidance-tackling-marketed-avoidance-schemes/
Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:
“Promoters of ‘boutique’ tax avoidance schemes like the one brought to our attention by the case of Jimmy Carr, are running rings around HMRC.
"They create schemes which exploit loopholes in legislation or abuse available tax reliefs such as those intended to encourage investment in British films, and then sign up as many clients as possible, knowing that it will take time for HMRC to change the law and shut the scheme down.
"Their clients can then take advantage of this window of opportunity to make a lot of money at the expense of the taxpayer, while the promoter simply moves on to a new a scheme and repeats the process. It is a game of cat and mouse and HMRC is losing.
"It has allowed a system to evolve where the die are loaded in favour of the promoters of tax avoidance schemes. The complexity of tax law creates opportunities for avoidance, there are no penalties to stop people promoting these schemes, and HMRC is ineffective in challenging promoters who are deliberately obstructive or deliberately sell schemes they know do not work. Promoters pocket their fees whether their schemes work or not.
"There is also a lack of transparency that makes it very hard to find out who is involved in marketing or using these schemes. HMRC publicizes details of schemes that do not work but does not name the promoters or the clients. We have seen how public anger and consumer pressure can influence large companies, such as Starbucks, to behave more responsibly.
"HMRC should publically name and shame those who sell or use tax avoidance schemes in order to discourage such activity.
With at least £5 billion lost to tax avoidance each year, HMRC has got to get much more robust in its approach.
"The requirement that promoters give early notification to HMRC of new schemes has resulted in the swift closure of some. But the Department does not know how many promoters simply choose to ignore the requirement.
We are also alarmed to hear that promoters are getting off paying fines for not disclosing their schemes by pleading that, in the opinion of a QC, they have a ‘reasonable excuse’ for non-disclosure. HMRC is right to explore how to make it more difficult for this tactic to work.
"The number of cases HMRC takes to court is tiny compared to the overall caseload. It must make use of the additional resources it has been given to act much more urgently to investigate and close down new schemes and to bring more cases to court.
"Since our hearing, the Government has announced that it is consulting on draft rules designed to allow departments to ban tax-avoiding businesses from being awarded government contracts. This is a welcome move but we will want to monitor closely how any such rules are applied in practice.”
Margaret Hodge was speaking as the Committee published its 29th Report of this Session which, on the basis of evidence from HM Revenue & Customs, Tax Trade, Future Capital Partners and Ingenious Media, examined marketed tax avoidance schemes.
Tax avoidance
Tax avoidance—using tax law to gain a tax advantage not intended by Parliament—reduces the money available to fund public services and is completely unfair to the majority who pay the tax due. HM Revenue & Customs (HMRC) estimates that in 2010-11 the tax gap due to avoidance was £5 billion. HMRC further estimates that the present total tax at risk from avoidance over time is £10.2 billion.
There is a proliferation of contrived schemes which exploit loopholes in legislation and abuse available tax relief schemes. Promoters are currently winning what appears to be a game of cat and mouse with HMRC and deliberately taking advantage of the time lag between the launch of a scheme and the closure of the scheme by HMRC.
Promoters and providers sign up as many clients as possible before HMRC changes the law and shuts the scheme. They then move on to a new scheme and repeat the process. Far too much public money is lost through avoidance and HMRC needs a much more robust approach.
HMRC has allowed a system to evolve where the die are loaded in favour of the promoters of tax avoidance schemes. The complexity of tax law creates opportunities for avoidance, there is no effective deterrent to stop people from promoting avoidance schemes, and HMRC is ineffective in challenging promoters who obstruct its attempts to investigate.
Scheme creations
All too often Government introduces new policies through tax incentives to stimulate economic activity and the design of these policies become an opportunity for tax avoidance providers and promoters to create a new set of schemes. Promoters collect their fees even when the schemes are found not to deliver a tax advantage. Few schemes are covered by mis-selling regulations, even though people might be put off buying them if they fully understood the risks. We welcome HMRC’s consultation on applying the model of financial services mis-selling to tax avoidance.
Those who promote a tax avoidance scheme are required to notify HMRC of the scheme to comply with its disclosure regime. This has allowed HMRC to act quickly to close some schemes down. However, HMRC does not know how much avoidance is not disclosed but should be and has only issued 11 penalties for non-disclosure of a scheme.
A small number of promoters appear determined to avoid disclosure and refuse to engage with HMRC. It is alarming that some QCs’ opinions are being used by promoters as a “reasonable excuse” for non-disclosure which prevents HMRC from applying a penalty.
Measures used elsewhere
HMRC could learn from the variety of measures used in other counties to deter and tackle tax avoidance. In Australia, promoters have to get clearance for schemes before they introduce them. An advance ruling system of this type could deter contrived avoidance schemes and increase certainty in the tax system. Australia has also introduced powers to fine those who promote schemes that could not reasonably be expected to work or comply with the advance ruling system. We encourage HMRC to look seriously at whether these and other measures could be effective in the UK.
Government influence
Government needs to use its influence wherever possible to deter tax avoidance. HMRC needs to consider whether by naming and shaming those who promote tax avoidance schemes, it could harness public opinion and reduce the appetite of companies to promote or use avoidance schemes. Major banks, accountancy firms and leading lawyers all play their part in supporting and advising on tax avoidance schemes.
The Government should examine ways to combat this. Government can influence behaviour by refusing to do business with those who promote tax avoidance or fail to pay their fair share of tax. We welcome the announcement that HMRC and the Cabinet Office will be consulting on how Government should change its procurement rules to deter tax avoidance and evasion, and will watch the outcome closely.
HMRC
HMRC has a lot more work to do to successfully tackle tax avoidance. It needs to know how much it spends on anti-avoidance work and properly evaluate the effectiveness of its strategy. It needs to get a stronger grip on the large number of avoidance cases it is investigating and find a way to reduce them. The number of cases it litigates is tiny compared to the number of enquiries.
HMRC needs to build its capacity and capability to take on avoidance in the courts, especially as we heard from one company that in light of previous successes, having taken and won two cases in the courts, it makes sense for scheme users to litigate. HMRC also needs to investigate cases quickly to deter more people from using them and reduce the advantage to those who do.
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Latest PAC report on Tax avoidance. From the discussions on the Today programme BBC Radio 4 around 06.15 some of the points re accountancy firms disputed vigorously, but desire for simplicity agreed though vested interest cited.
Quotes from Summary
"HM Revenue & Customs (HMRC) appears to be fighting a battle it cannot win in tackling
tax avoidance. Companies can devote considerable resource to ensure that they minimise
their tax liability. There is a large market for advising companies on how to take advantage
of international tax law, and on the tax implications of different global structures. The four
firms employ nearly 9,000 people and earn £2 billion from their tax work in the UK, and
earn around $25 billion from this work globally. HMRC has far fewer resources. In the area
of transfer pricing alone there are four times as many staff working for the four firms than
for HMRC.
We were pleased that the four firms agreed with us that international tax rules are out of
date and need to change to reflect the reality of modern business. Modern communications
mean companies need as little as a computer and a handful of staff to set up a place of
business in a tax haven. Under current tax rules, this can be enough to establish that they
can pay their tax there, rather than where the business activity takes place. This is unfair to
responsible companies based in the UK who do pay their fair share of tax. We welcome the
Government’s commitment to reforming international tax laws, but this will be a lengthy
process and, until it happens, we are concerned that companies will continue to find ways
to avoid paying tax where they actually do business.
We believe that simplicity is key to fighting tax avoidance. The four firms agreed with us
that tax law is too complex and a simpler system is in everybody’s interests. It is
disappointing that HM Treasury’s Office of Tax Simplification is working with fewer than
six full time staff and as a result has so far focused on abolishing unused tax reliefs, rather
than being able to take a more radical approach to simplifying tax law. Removing unused
reliefs may be good housekeeping, but it does little to tackle the problem of complexity and
does not prevent the continued abuse of some tax reliefs, such as those to encourage
investment in films or donations to charity. We intend to examine those tax reliefs that are
widely used and may be subject to abuse at a future hearing."
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Also on the today programme.....Interesting to note that HMRC is so short of staff that they employ consultants from large accountancy firms to assist in drafting regulations, who then go back to their firms and advise the multinationals on how best to be tax efficient - gamekeeper turned poacher!!!
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I think I heard the former head of HMRC describe this policy as part of a 'constructive engagement with stakeholders' or some such words. Seemed naive at the time...still does!
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The scale of the 'sweetheart' deals made between major corporate tax payers and HMRC is coming to light through a combination of whistle-blowing and submissions to the Public Accounts Committee:
http://www.guardian.co.uk/politics/2013/apr/29/sweetheart-tax-deals
Is it a pragmatic solution to cut deals with these big international companies and thus avoid protracted legal disputes or does the apparent unfairness have longer-term consequences by undermining the credibility of the system?
HMRC seem to have introduced a new concept, 'bespoke governance'! A euphemism for a not-so-level playing field (to be filed along with the term 'economical with the truth') or a practical response to the realities of extracting tax revenues from global companies?
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More searching questions - perhaps?
http://uk.finance.yahoo.com/news/exclusive-britain-quiz-google-auditor-060403793.html
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The Empire Strikes Back
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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.
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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?
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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.
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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.
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More dynamic grilling today!
http://www.parliamentlive.tv/Main/Player.aspx?meetingId=13138
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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.
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SHAMrock to Apples
http://uk.finance.yahoo.com/news/irish-loophole-behind-apples-low-012233140.html
and
http://uk.finance.yahoo.com/news/apple-enjoyed-irish-tax-holiday-135211386.html
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Hi, Fitz;
it seems that your idea is gathering wind.
See https://theconversation.com/country-by-country-reporting-is-a-victory-for-citizens-over-companies-14654
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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
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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?'
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Interesting that David Hartnett, former head of HMRC, has now joined Deloittes. Very cosy!
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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'
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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
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Not sure if it is Ireland as it has already been bailed out!
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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
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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.
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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
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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."
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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
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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.
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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.
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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.