The PAC, which last month grilled representatives of Amazon, Google and Starbucks over their UK tax affairs, released a report today which detailed its findings on HMRC’s accounts for 2011-12.
PAC chairwoman Margaret Hodge MP, who spoke exclusively with International Tax Review last week to pledge her support for country-by-country reporting, said legislative changes must not be ruled out and also called for greater cross-border cooperation between authorities in different countries.
“The drive to make these companies live up to their obligations will have to be conducted on a number of fronts. These include possible legislative changes within the UK and efforts to increase international cooperation,” said Hodge.
In today’s report, Hodge claimed that both HMRC and large companies operating in the UK are failing the British public and falling short of expectations as well as their moral obligations.
“The hearings we held showed that international companies are able to exploit national and international tax structures to minimise corporation tax on the economic activity they conduct in the UK. The outcome is that they do not pay their fair share. We believe this practice is widespread and that HMRC is not taking sufficiently aggressive action to assess and collect the appropriate amount of corporation tax from these multinationals. Both HMRC and corporate taxpayers are failing to meet the legitimate public expectations from the tax system.”
“We consider that paying an appropriate amount of tax in the country in which profits are made is not only a matter of basic economics, it is also a matter of morality. The UK should be taking the lead on this point,” said Hodge.
The report specifically criticised Amazon, Google and Starbucks for “immorally” minimising their UK tax bills, while also accusing the companies’ representatives of being not only “unconvincing” and “inconsistent” but also “evasive” in their earlier appearances before the PAC.
The report was widely critical of HMRC, attacking the tax authority’s approach and processes as well as its commitment to pursuing taxes owed by large multinationals. It also pointed out the knock-on impact that the actions of companies such as Starbucks have on other, smaller companies, as well as the precedent they set.
“HMRC had not carried out any analysis into the effect high-profile cases of large companies avoiding tax could be having on the compliance rate of individuals and small and medium companies. Multinationals appear to be using transfer pricing, payment of royalties for intellectual property or franchise payments to other group companies to artificially reduce their profits in the UK or to remove them to lower tax jurisdictions. We were not convinced HMRC has the determination to robustly challenge the practices of these companies.”
However, other bodies – including the Institute of Directors (IoD) have laid the blame at the feet of politicians.
“It is very frustrating for many companies who pay large tax bills that some multinationals are able to avoid doing so. The solution must be simplifying the tax system, not simply hectoring from Westminster,” said the IoD’s director general, Simon Walker. “If these firms are immoral to take advantage of tax loopholes, then politicians are surely immoral for creating the loopholes in the first place.”
Similarly, in response to Starbucks’ announcement that it will make additional tax payments to the UK, action group UK Uncut has criticised the government for not reforming the tax code to close down loopholes.
“Starbucks’ announcement is a blatant admission of guilt that they have intentionally avoided tax in the UK for years. It is not up to Starbucks to promise it will pay a bit more tax when it suits them, it’s up to the government to force companies to pay their fair share,” said UK Uncut spokesperson Jane Harvey. “The government’s next step must be to close the loopholes that Starbucks and other companies use to avoid paying billions in tax to the UK.”
Autumn Statement preview
With the PAC report coming at the start of a week which will also see Chancellor of the Exchequer George Osborne reveal his Autumn Statement (on Wednesday December 5), some tax advisers are speculating that announcements will be made regarding avoidance measures.
“The Chancellor has hinted that his Autumn Statement will contain measures to counter immoral tax avoidance by multinationals by profit-shifting to tax havens,” said Ashley Greenbank of Macfarlanes. “It is not thought that these measures will include new tax laws to prevent erosion of the UK’s corporate tax base.”
Despite Greenbank’s view, ITR believes the Autumn Statement could bring the unveiling of the UK’s version of the US Foreign Account Tax Compliance Act (FATCA).
Aside from the possibility of a UK FATCA, though, it is expected that Osborne will not be drastically changing any other existing laws this week, but will instead provide an extra £77 million ($124 million) a year to HMRC to improve its enforcement capabilities.
“This may signal a more aggressive approach to transfer pricing than that taken so far by HMRC in their dealings with multinationals such as Google, Amazon and Starbucks. As regards new laws to make multinationals pay more corporation tax in the UK, the Chancellor made a joint call with German Finance Minister Wolfgang Schauble at the last G20 meeting for concerted international cooperation to strengthen international standards for corporate tax regimes,” said Greenbank. “The two finance ministers backed the OECD’s work on identifying possible gaps in those standards as a first step in promoting a better way of dealing with profit-shifting and the erosion of the corporate tax base at the global level.”
Law firm Berwin Leighton Paisner (BLP) has offered Osborne some advice ahead of Wednesday’s mini-budget, saying he must “adopt a more mercenary attitude to winning business investment into the UK while taking a firm stand on tax leakage orchestrated by big businesses headquartered elsewhere”.
BLP is calling for a speed-up of the reduction in the corporate tax rate to further improve UK competitiveness, and is also calling specifically for a change in the rules governing royalty payments, to stop multinationals using transfer pricing to take tax revenue away from the UK.
This is likely to have been prompted by the fact that Starbucks revealed that one reason for its low tax rate in the UK was that it pays a royalty fee of 6% of all sales to the company’s regional headquarters in the Netherlands.
Other announcements expected to be revealed in the Autumn Statement include tax reliefs for investment in gas-fuelled energy production.
In addition, Britain, Germany and France have given the OECD's tax-base erosion and profit-shifting initiative a total of €450,000 ($590,000), which signals a certain level of commitment to tackling the issue.
