Businesses contribute more than a quarter of all tax revenues and underpin virtually all taxes. They paid around £163 billion ($216 billion) in tax (corporation and other taxes) in 2010-2011 - a quarter of the total tax take, roughly equal to the combined health, education and police budgets.
Businesses also collect a large amount of tax on behalf of the government, such as income tax through PAYE [pay as you earn]. Virtually all taxes, such as income tax, employees’ national insurance contributions and VAT depend on the successful operation of business.
The fact that many of the world’s largest multinational companies are based in the UK significantly boosts our economy. In fact, corporation tax revenues here are dominated by the multinational groups, whether UK or foreign-owned (42% and 45% respectively). Tax revenues from multinational corporations are essential to economic growth and to support our public services.
However, how much tax multinationals are or should be paying in the UK must not be considered purely in the context of national borders.
Global nature of business
The way business operates has changed dramatically over the last couple of decades. Multinational corporations are now truly global with groups organised around the world. When competing for investment from multinational groups, the UK must resist the temptation to claim taxes that may belong somewhere else by acting unilaterally. This would risk:
· undermining our competitiveness:
· causing tension with other countries; and
· having a detrimental effect on the UK’s economy.
Instead, the government needs to collaborate internationally to achieve a consistent approach to how taxing rights should be allocated globally. And with a substantial amount of world trade occurring inside multinational groups, getting transfer pricing rules right internationally should be the UK’s number one goal.
Transfer pricing complexity
The purpose of transfer pricing rules is, of course, to ensure that companies within a group that transfer goods or provide services to other companies within the same group pay a price which is based on the arm’s-length principle.
This ensures that as far as possible profits earned in different jurisdictions reflect a multinational’s business operations. More importantly, the rules also determine how international transactions within a group must be priced to ensure each country receives an appropriate share of tax.
However, any multinational group’s tax department knows that transfer pricing is inherently complex. For example, it can be difficult to compare pricing of transactions between companies in a multinational group and those between unrelated parties. As seen in the recent OECD’s consultation, transfer pricing of intangibles such as intellectual property is even more challenging. That’s why both taxpayers and tax administrators often name transfer pricing as the leading source of tax risk.
International coordination is the only way to go
Not surprisingly, and rightly so, one of the OECD’s top priorities for the next few years continues to be transfer pricing, and in particular how to address intangibles. Reaching consensus on different aspects of transfer pricing and then developing and implementing a consistent and manageable set of guidelines is not a quick and easy task. But in a world where business is truly global, this is the only way to go.
The UK should be at the forefront of actively encouraging such international cooperation. This is our best bet to achieve a system which is consistent, gives certainty to businesses and, importantly, ensures that the UK receives its fair share of tax.
Richard Woolhouse, Confederation of British Industry’s head of tax and fiscal policy
