Saturday, 10 November 2012

Dealing with corporate "tax dodging"

Rather amusingly, Margaret Hodge, Taxfinder General chair of the Public Accounts Committee and outspoken critic of big business paying little corporation tax in the UK, has been the subject of an article in the Telegraph revealing that she owns a chunk of her large family company that pays little corporation tax in the UK. This is in advance of the likes of Google, Amazon, Starbucks, eBay, and Facebook getting a grilling by the PAC on their tax arrangements.

The issue is not companies avoiding tax but the media, the public, and staggeringly, the people who make the tax laws not understanding the tax laws. I can forgive the first two to an extent but there's no excuse for MPs not to get to grips with the basics - I don't profess to be an expert on international taxation but I'm more than capable of reading up on something complex and distilling it into something more simple. With the aforementioned companies, their low or non-existent corporation tax liabilities can be explained by two things:

1. The European Single Market - this allows a company to set up in one country and trade with all other members without any barriers or restrictions. Any corporation tax liability will arise in country where the company is located, which is not necessarily where its customers are. Using Google as an example, Google Ireland Ltd, based in the Republic of Ireland, sells internet advertising to companies in other countries like the UK. Any profits will be taxed where the sales were made which in this case will be Ireland. Google UK Ltd doesn't sell to the public; it only sells services to Google Ireland Ltd and Google Inc.

2. Transfer Pricing - the Starbucks issue is down to transactions with other group companies and whether or not these have been conducted on an "arms length" basis, that is to say that the cost of the transaction would be comparable to that of one between unrelated parties. This is to stop profits being shifted to lower tax jurisdictions by using artificially inflated transactions. Starbucks in the UK has been paying royalty fees to cover use of the brand, new product development, and marketing as well as loan interest to its parent in the US. In addition it buys its coffee beans from a related company in Switzerland and then pays to have them roasted in the Netherlands, again to a related company. These payments, combined with operating costs like wages and rent, mean Starbucks in the UK is loss making and therefore doesn't pay any corporation tax. They have gone on record in stating that they were investigated on the issue of transfer pricing by HMRC and no further action was taken. There are guidelines on transfer pricing set by the Organisation for Economic Co-operation and Development (OECD) agreed by the members, of which we are one, that HMRC would have referred to when investigating Starbucks.

Ultimately what we are seeing here is exactly what the laws and guidelines intended; no one is try to evade or even avoid tax. To haul a bunch of companies who invest a hell of a lot in this country in front of a committee to barrack them for complying with the law is not only ridiculous and ignorant, it's damaging to future investment.

If you want to change things then you are looking at an end to the Single Market, corporation tax harmonisation across the EU, and unpicking longstanding agreements with multiple countries. On the other hand, you could drop your corporation tax rate as because Ireland is well aware, 12.5% of lots is better than 24% of fuck all.

Update on 10/11/12 - Link to Telegraph article updated as they inexplicably changed it.

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