Corporation Tax: The ‘Fair Share’

With the taxation system seemingly taken advantage of, the government are introducing new scheme after new scheme to combat multinationals ‘avoiding’ the tax they rightly owe. SBT goes back to the source of the problem, looks at the attempted resolutions and asks the question: what is fair tax?

A tax on company profits has existed ever since 1937, and since then things have changed fairly dramatically. The complexity of the system is now making for some fairly large complications within businesses across the country – and allowing for some pretty large loopholes at that, which multinationals seem to have taken advantage of.

The UK corporation tax system is based on profits from ‘economic activity’ rather than sales and currently the vast majority of UK businesses are paying 20%. However, this rate has recently been exposed as a far more voluntary or changeable rate than it was ever intended to be – but only for those who can afford it. The likes of Google, Amazon, Facebook and Starbucks, despite making profit in the millions, have been exposed as not paying their ‘fair share’ of corporation tax. Starbucks, for example, had sales of £400m in the UK last year, but paid no corporation tax. Amazon had sales in the UK of £3.35bn in 2011, yet only reported a ‘tax expense’ of £1.8m. Google’s UK turnover was £395m in 2011; only paying £6m to the Treasury in the same year.

Understandably, these reported figures have caused outrage in the business community, with words like, ‘fair’, ‘just’ and ‘moral’ shooting through the air at speed.

We spoke to Simon Bulteel, Director, Cooden Tax Consulting for his thoughts on the issues that have arisen recently. He said: “When an argument descends into Ethics, which Tax Avoidance has, you probably find two entrenched views: the morally outraged and the morally indignant. And you end up where we are today with Tax Shaming.”

Accusations have come fast and hard, but what has actually been happening behind closed doors at these multinational companies? What are the underlying issues, and whom should we be pointing the finger at?

At the Federation of Small Businesses (FSB) policy conference in London last month, the Chancellor of the Exchequer, George Osborne, was challenged after the news of Google’s tax avoidance had recently come to light. Mr Osborne didn’t help the case by seemingly agreeing with a deal that allowed the tech giant to pay around 3% tax on its billions of pounds worth of profits; a deal apparently agreed between HMRC and the heavyweight multinational itself.

At the conference, George Osborne came up against Antonio Falco, the regional FSB chairman for Surrey and West Sussex, who called for a ‘level playing field’, along with the voices of hundreds of other small and medium sized business owners, and tax payers. He explained:

“What Mr Osborne is trying to do is extremely difficult. He’s trying to keep businesses and everyone happy at the same time. However, the playing field also needs to be kept level.”

He added:

“It is frustrating when companies do everything in their power to be good corporate citizens, only to see others openly flaunt and find loopholes in the law. We have to exist together, so companies need to look at themselves too and think whether it is a clever PR move to carry on doing what they are doing. There should be an element of self-policing and they need to be thinking about morality.”

A report from the House of Commons Committee of Public Accounts published in 2013 looked into Google Ltd and the way that it distributes its profits. The report highlighted that, in order to avoid UK corporation tax, Google relied on the deeply unconvincing argument that its sales to UK clients took place in Ireland, despite clear evidence that the vast majority of sales activity takes place in the UK. Matt Brittin, Google’s Vice President for Sales and Operations in Northern and Central Europe, remained static in this argument, but the evidence suggested otherwise.

So the question is, why didn’t HMRC do something about this? Could they even do anything?

Over the last decade, HMRC has been instrumental in introducing several specific anti-avoidance measures in the UK to try and combat the problems that arise from our overly complex and loophole-filled taxation system. Various measures have been introduced in order to make sure all parties are aware of new avoidance schemes that may occur, and HMRC has maintained over the years that these measures have had a significant impact on tax avoidance in the UK. But, the public eye has clearly now seen a different story. Are these measures in fact simply not applied to companies with ‘big bucks’?

Andrew Watters, Director at Thomas Eggar explained:

“A multinational business can organise itself within the laws of relevant jurisdictions to minimize profits in high tax jurisdictions. In the UK, it is the job of HMRC to challenge the profits declared by a UK entity where they believe UK rules may not have been correctly applied. Given the complexity of the rules, there is sometimes scope for disagreement. In an enquiry, after both sides have had the chance to consider the arguments of each other, they may agree as to what the ‘correct’ amount of tax is. If they cannot agree, the matter will be litigated before the courts.”

Andrew added:

“If parliament believes the laws are being abused or are not working correctly, they can legislate for change. However, it is not always easy to get the result one may want.”

The report conducted in 2013 found that HMRC had not been sufficiently challenging of multinationals’ manifestly artificial tax structures. Given the overwhelming disparity between where profit is generated and where tax is paid, it’s pretty unbelievably that HMRC has not been more challenging of Google’s corporate arrangements. It’s even more unbelievably that HMRC would not even be aware of such things, given that journalists and whistleblowers have picked up on the activity. HMRC has never challenged an internet-based company in the Courts on the question of its permanent establishment, and this is something which needs to start happening – and soon.

Simon Bulteel commented: “I am sure HMRC are looking at the cost benefit analysis of spending millions of pounds investigating and prosecuting these companies for tax avoidance and using non-commercial arrangements to save tax, against negotiating with these companies and coming up with the so called ‘sweetheart’ deal that has seen Google pay a reported £130m for tax over the last 10 years.”

The issue seems to be a lack of solid proof as to where the profits do indeed originate from. The digital economy has put a strain on the clarity of these situations and companies can now argue that there is trading activity in the UK, but no proof of a permanent establishment carrying out the trading activity – the internet has no bounds.

Mr Osborne himself recently suggested the same: “This is not an easy issue to deal with when it comes to physical goods but clearly the Internet has made it much more challenging.”

So, this is not so much an issue with HMRC, or even with the multinationals themselves, but a more deep-seated issue within the taxation system when applied to the modern, technologically advanced world in all its complexity.

George Osborne added: “There is a challenge. The tax laws used to tax multinational corporationswere devised   in the 1920s and they didn’t keep pace with not just the growth of the global economy and all the trade that has happened since then, but also the growth of the Internet. We have been trying to get international agreement to change those laws and that international agreement is coming.”

Andrew put into perspective the complexity of the system and suggested a means of reducing the confusion:

“A recent estimate suggests that the UK has 10,000,000 words on over 17,000 pages dedicated to tax legislation. This number does not include the words and pages of guidance. Based on those numbers, the simple answer is to make the code more simple – a task put to the Office of Tax Simplification in 2010. In spite of the creation of the OTS, Budget after Budget, Finance Bill to Finance Act all introduce more legislation and guidance, rather than reduce or simplify what exists.”

Mr Osborne recently proposed and introduced a new measure: diverted profits tax. This measure introduces a new tax on diverted profits, tackling the issue of non physical goods or profits. His aim? To simplify. In reality however, as Andrew points out, is this simply adds to the complexity. Simon also suggests a simpler, ‘bigger picture’ approach to the issue: “The complexity comes when you stretch the example over multiple countries and why you might see company’s headquartered in Ireland where there is a low tax rate on trading profits but have their interest bearing loans coming out of a company in Luxembourg or Lichtenstein and their trade marks and patents being held in a Dutch company or buying products from a company in Switzerland.”

He adds: ”In order to solve the problem, it will take a concerted effort by all of the countries in the Western World to solve it, which is why the work being performed by the Organisation for Economic Co-operation and Development (OECD) is often referred to and is so important. The only real solution is for countries to come together like they have under the auspices of the OECD to act as one, to solve the problem of the taxation of multinational companies. It won’t be an easy problem to solve, as at the end of the day it all boils down to that rather nasty word: Capitalism.”

The European Commission recently announced that it would present new measures against corporate tax avoidance for all 28 EU countries in their Anti-Tax Avoidance Package. The new proposals include legally binding measures to block the most common methods used by companies to avoid tax; a recommendation to Member States on how to prevent tax treaty abuse; a proposal for Member States to share tax-related information on multinationals operating in the EU; actions to promote tax good governance internationally; and a new EU process for listing third countries that refuse to play fair.

The aim of these measures is to collectively hamper aggressive tax planning, boost transparency between Member States and ensure fairer competition for all businesses in the Single Market. And this is what businesses in Britain are calling for.

Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs for the EU, said:

“Billions of tax euros are lost every year to tax avoidance – money that could be used for public services like schools and hospitals or to boost jobs and growth. Europeans and businesses that play fair end up paying higher taxes as a result. This is unacceptable and we are acting to tackle it. Today we are taking a major step towards creating a level-playing field for all our businesses, for fair and effective taxation for all Europeans.”

The House of Commons report also recommended that a series of anti-avoidance measures for the shorter term should also be implemented to tackle the various companies that seem to be coming out of the woodwork as ‘morally scandalous’, including: regulating tax advisers; penalising users of failed tax avoidance schemes; enforcing a requirement on companies with large operations in the UK to publish a summary of their corporation tax returns, so as to bring about greater transparency. They also recommended that HMRC should be better resourced to deal effectively with the tax affairs of complex and well-resourced multinationals.

However Simon, and many others with him, remains unconvinced on some of these ‘resolutions’, in particular the suggestion that tax advisors should be regulated: “I don’t think it would make a shred of difference to the large multinationals, who are working with Qualified Accountants and Tax Advisors, who would be regulated. The work they are performing for the multinationals is not illegal, so any regulator wouldn’t be able to censure the advisors.”

We still have a long way to go. It’s clear that, due to the complexity of tax at this point in time, adding more legislation will only complicate it further. Plus, the way in which multinationals have spread their profits and intellectual property means the unraveling process may be just as complex, especially under new legislation. Andrew explained: “Governments will need to co-operate on an international scale to change existing legislation. This process will not be straightforward as it will involve rules which are controlled outside national parliaments. The process will be further complicated by the varying terms of double tax treaties negotiated between various countries.”

An overriding question is whether this issue in fact is ‘morally outrageous’ or simply clever companies implementing clever strategy. How much does it really affect smaller businesses? Perhaps this is much less of a legal, logistical or even systematic debate, but one more of human nature and justice?
Simon concludes:

“One thing to bear in mind is that, if you have a pension scheme, it is likely that some of your assets will be benefitting directly from these multinational businesses minimising their tax liabilities. because lower tax means more money to invest and hopefully future higher profits or more money that can be distributed to shareholders. So most peoples’ personal wealth in later life is dependent on the profitability of these companies. However, the counter to that is that everyone is also dependent upon the tax raised from these companies for future State Pensions, as well as investment in infrastructure, education, welfare and the NHS today and into the future.”