UK House of Commons debate on corporate tax avoidance
The tax avoidance debate in the UK is gaining traction. This week saw debate in the House of Commons (HoC) with a warning that the UK tax system is under serious threat in the international business environment. Paul Wilmshurst of Charles River Associates provides an overview of the discussion.
Events last year, including the Public Accounts Committee (PAC) investigation of Starbucks, Amazon and Google, brought about a dramatic increase in public and political awareness of multinationals’ transfer pricing practices in the UK. In response, a debate on corporate tax avoidance was held in the House of Commons on Monday.
The debate was led by a backbench Member of Parliament (MP) and member of the PAC, Ian Swales.
Swales opened the debate by observing that the government is borrowing more than predicted, especially because of lower than expected corporation tax receipts. He stated that there is “a growing crisis of our national tax system operating in an international business environment” and called for radical action.
Much like the US Senate hearings conducted in late 2012, issues of morality and the line between tax evasion and avoidance came up a number of times during the debate.
Some MPs noted that tax avoidance is legal and one noted that it should be a matter of law and not moral persuasion. Another indicated that companies choosing to avoid tax simply reflect rational behaviour. Concern was expressed that investors might begin to view the UK tax system as becoming more arbitrary and governed more by the news cycle rather than the law.
Several also said the tax system is too complex and uncertain, though it was also noted that a simpler system would not necessarily reduce opportunities for avoidance.
A number of MPs emphasised the need for greater transparency on the part of multinationals, and also on the part of HMRC in terms of its dealings with taxpayers.
Transfer pricing was a central issue throughout the debate.
Some of the statements made still reflected a tendency evident in the media last year to measure taxes by reference to company revenues rather than profits. Also, to associate multinationals’ staff numbers and physical infrastructure more closely with profits than, say, the contribution made by intangibles.
One MP, Nick Gibb, made a specific reference to the OECD’s project on the transfer pricing aspects of intangibles and the statement in the interim draft that not all intangibles deserve separate compensation, or give rise to premium returns. He interpreted this as meaning that “the OECD is coming to the view that the huge royalty payments that some international groups make their overseas subsidiaries pay to their home country, or to tax havens, may no longer be allowable against tax in the overseas jurisdictions.”
A number of ideas for action were floated about how the UK tax system could be changed, through international consensus or otherwise. These included:
· Requiring companies to publish how their taxable and accounting profits are linked, for example, by requiring large corporates to file their tax returns along with their annual accounts at Companies House.
· Requiring multinationals to disclose all of their cross-border transactions with related parties, for example, listing the royalties and management fees they pay to each jurisdiction.
· Setting maximum royalty and management fees, and disallowing them as a deduction if they are disproportionate to profits, for example, via an ability-to-pay test so that such payments do not wipe out UK profits.
· Further scope for disallowance of foreign interest payments to related parties.
· Disallowance of intra-group payments unless they go direct to the country where the relevant value was generated, potentially with the automatic disallowance of payments to tax havens.
· A review of the UK’s role and relationship with crown dependencies, including clarifying the net benefit they bring to the UK.
· Proper enforcement of the 1997 EU code of conduct on business taxation, in particular in relation to the ability of member states to provide tax deals to give lower tax rates and incentives for activities that are isolated from the domestic economy of a given country.
· Requiring companies seeking government grants or contracts to reveal the tax structure of their UK entities.
There were also several references to the need for country-by-country reporting, together with comments on the value of a narrowly-drawn GAAR to be introduced later this year versus embodying a general avoidance principle in UK law.
Many MPs also commented on the significant overall reduction in HMRC staff in recent years, though it was recognised that HMRC needed more specialist resources. Also, HMRC should not be treated as a cost centre, given its potential for revenue generation.
A closing statement from David Gauke, the Exchequer Secretary to the Treasury and the Minister with direct policy responsibility for the issues debated set out the government’s position. He said the vast majority of UK taxpayers pay the tax due and that approximately half of all UK corporation tax paid by large businesses in 2011-12 was from foreign-owned companies. However, he also said avoidance is damaging to public finances, the perception of fairness in the tax system and competition.
The Minister recognised a general concern about whether the tax rules adequately capture the profits generated by multinationals in the jurisdictions where their economic activity is located, noting the potential for shifting profits to lower-tax rate jurisdictions. Also, that reform needs to be pursued internationally, particularly through the OECD, which is to report on its progress to the G20 finance ministers in February this year.
Gauke said the further £77 million of new investment announced in the pre-budget report last year - to expand its anti-avoidance and evasion activity - would mean an increase of 2,500 staff. As a result the government expects to see additional revenues, rising to £22 billion per year by the end of 2014-15, from the £13 billion per year generated when the coalition came into office.
In conclusion, whilst this was a backbench debate with limited attendance (around 20 MPs) it represented a significant development in the level of the political discussion in the UK related to transfer pricing and its role in potential tax avoidance.
Its function was to offer MPs a platform to articulate the issues from their perspectives and it should be viewed as an important opening step in a longer political process.
There was general, cross-party agreement amongst the MPs that there is a significant issue that needs to be addressed, especially given the UK deficit. There was less agreement on the steps that should be taken, but it is significant that there is a cross-party consensus: corporate tax avoidance through transfer pricing will remain a hot topic until at least the next election.
Further scrutiny and action can be expected from Parliament and the UK government and it will be interesting to see whether any new measures are included in the budget on March 20 that were not announced in the pre-budget report.