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PAC grills HMRC and Google on transfer pricing

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17th May 2013
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HMRC, Google and EY were back before the Public Accounts Committee (PAC) once again, over an ongoing dispute between MPs and Google about their low payment of corporation tax in the UK.

HMRC chief executive Lin Homer engaged in a series of occasionally heated exchanges with committee chair Margaret Hodge, who accused HMRC at one point of being "bamboozled" by large companies.

Hodge v HMRC 

Homer gave as good as she got, defending the department's record on collecting tax from multinationals and telling MPs that determining what tax needs to be collected is their remit. 

Hodge said she accepted this but didn't trust the Revenue's judgement, saying it had: "lousy judgement and the people who are taking those judgements are not fit for purpose".

While noting the recent judical review that ruled the Goldman Sachs settlement was legal, one committee member told Homer, “You are operating in the space in favour of big companies.”

Homer returned the assertion with a statement that the law is their responsibility.

The intricacies of transfer pricing occupied significant portions of the hearing. At one point HMRC director general for business tax Jim Harra told the MPs he was not sure the points they were raising made a difference to the actual tax raised under the existing rules. Hanna and Homer also sketched out the achievements of the deparment's  anti-avoidance and evasion campaign, including expanding its existing specialist transfer pricing team.

According to Homer, transfer pricing enquiries bring in around £1bn a year, comparable with HMRC's foreign counterparts. “The standard we are achiveing so far is good, and I want that on the public record,” she said, adding that tougher envorcement has an effect on business, and its behaviour.

When Austin Mitchell challenged Homer about the undue influence weilded by the Big Four - including three former representatives sitting on its board, Homer answered: “I share the committee’s view that the top of HMRC needed more tax experience. The three [external] directors mean we have a better balance of skills.”

Google and Erns & Young on the spot

The PAC hearing centred around whether Google is ‘disguising’ its sales process in order to not pay corporation tax, which the company pays from its European base in Ireland despite having “some elements” of sales in the UK.

Committee chair Margaret Hodge warned Google vice president, sales and operations Matt Brittin: “I want to remind you that it is a very serious offence to mislead a parliamentary select committee.” 

The Google executive denied he had misled the committee when he appeared before them in November 2012, despite Hodge presenting evidence to back her allegations from a number of whistleblowers, including former employees. 

Hodge alleged that the entire trading and sales process of Google took place in the UK, citing invoices signed by customers in this country.

High end clients such as Lloyds TSB, Amazon, BT and eBay are dealt with by Google staff in the UK, Brittin replied, but all billing and transactions go through the Irish base, set up around 2003 for as a gateway for European operations. 

Despite Google’s hour of questioning, however, Brittin did not relent, prompting Hodge to conclude: “You are a company that says you do no evil and I think that you do do evil in that you use smoke and mirrors to avoid paying tax.”

John Dixon, head of tax at Google's auditor Ernst & Young, refused to speak about the company's affairs, citing client confidentiality. 

He did however speak about the situation "hypothetically", saying the evidence wasn't relevant to the matter, but rather whether a multinational was trading in the UK.

“As auditors, in the context of tax, our audit processes mandate we look at whether the company we’re auditing is trading other jurdistiction in a fixed establishment,” Dixon said. 

“We look at what is going on on the ground to assess the points you have heard today - such as the intricacy between liaison versus sale, to satisfy ourselves that we don’t have a material tax liability.” 

Hodge tested her accounting knowledge against Dixon by drawing on the principle of substance over form.

“The concept entails the use of judgement on the part of the preparers of financial statements to derive a business sense from transactions of events and present them in a manner that accurately reflects them,” she said. 

Responding to the arguments that dominated Thursday's hearing, CIOT technical director Tina Riches commented: “Yet again the spotlight is being shone on the rules of transfer pricing and permanent establishment. The international corporate tax system was designed for the mid-20th century trading economy rather than modern internet world of seamless multinationals.

"The system needs to change and adapt and that is difficult for individual countries to do: it needs collective international action. We need to make sure the work of the OECD and G8 gets somewhere.” 

Replies (29)

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By AndyC555
20th May 2013 10:52

I wonder

Does Margaret Hodge think we in the UK should be taxing the profits of third world grain exporters to the UK?

Does Margaret Hodge think that the profits made on a Rolls Royce built in the UK and exported to Monaco should be taxed in Monaco?

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By hiu612
20th May 2013 11:11

I wonder

Does Margaret Hodge think? Or does she just open her mouth, and see what comes out.

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Replying to leshoward:
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By AndyC555
20th May 2013 11:34

I wonder

hiu612 wrote:

Does Margaret Hodge think? Or does she just open her mouth, and see what comes out.

I think that in a previous life, Margaret Hodge sat as a judge at the Salem witch trails. She knew a witch when she saw one.

 

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Replying to lionofludesch:
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By JackHarper
20th May 2013 11:47

Completely Barking

AndyC555 wrote:

hiu612 wrote:

Does Margaret Hodge think? Or does she just open her mouth, and see what comes out.

I think that in a previous life, Margaret Hodge sat as a judge at the Salem witch trails. She knew a witch when she saw one.

And so do I

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By stgreg
20th May 2013 11:51

AndyC555 - no but....

The profits on grain grown in the third world and exported to the UK should not be taxed in the UK. The profits on a Roller built in the UK and exported to Monaco should be taxed in the UK and not in Monaco.  But the profits on a book or a pc or a phone or whatever bought by someone in the UK and delivered from a warehouse in the UK should be taxed in the UK. Pretending that the item is sold outside the UK, that it is owned offshore, and claiming that the warehouse is not a permanent establishment  - and being able to get away with it is ridiculous. And Starbucks is just a joke - they may be able to benchmark the royalty fee but no arms length business is going to carry on year after year making no profit. And that is before you start to look at the rents that they pay and who they pay them to. But the real point is that the real point is that the legislation is not relevant to the 21st century and needs updating immediately.

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By The Black Knight
20th May 2013 12:13

Then why are warehouses exempt from transfer pricing rules?

The real problem is we have a bunch of highly paid idiots who haven't got a clue?

The argument is pointless if both sides don't know what their point is?

I think we have to accept that this is not real, just TV like Eastenders or Panorama?

I bet she still uses google and amazon because they are the cheapest? and I wonder why that is? and what would really stop it?

"would you like Amazon to pay more UK tax? " "yes yes yes"

"even if you paid more for your cheap products?" " Noo Noo Noo"

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By andrew.hyde
20th May 2013 12:22

We all need to be more specific here

Ms Hodge is accused of speaking without first engaging brain and for all I know that may be true.

But to avoid the same accusation, surely we should stay away from unsupported generalisations. Ms Riches says (and stgreg echoes) that the legislation is out of date.  Again I'm struggling to know whether I agree with that unless someone can point out which sections of which acts they are referring to.  There's quite a lot to choose from.

Moreover, the clamour for more legislation is hard to reconcile with the (occasionally) equally loud calls for simplification.  Which way do we want to go?

I realise I am guilty of just asking awakwrd questions without suggesting solutions, and I apologise for that.  But surely the point of all this is that it's easier and more fun to sit and throw brickbats at Stargle and Goobucks than it is to suggest ways to tackle the problem fairly, effectively and in a way that doesn't damage our own economy. 

Ms Hodge might say that all the PAC is trying to do here is fact-find, but the approach is not the one I would recommend if anyone were rash enough to ask me.

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By cfield
20th May 2013 12:31

Tax turnover instead

Surely the answer to this is to tax UK turnover rather than profits and treat it as an impost, so effectively it is a cost of sale. Make the percentage roughly equivalent to the corporation tax these huge companies would pay if they assessed their UK profits fairly.

It is much harder for a multi-national to disguise its UK turnover figure. It avoids all these shennanigans with management fees, royalties and transfer pricing, where quite frankly they run rings round the legislators and little can be done to counter it without international agreement.

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Replying to andy.partridge:
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By The Black Knight
20th May 2013 13:32

rank?

George Gretton wrote:

But how and why do you make the assumption that MH is a rank hypocrite, especially when that's the last thing that she comes across as being?

Previous posts on previous threads have more than intimated that MH and family interests are not averse to a bit of international and offshore tax planning themselves.

tax on turnover? Surely that would be an anti fair trade tax?

There is nothing wrong wrong with agreed transfer pricing rules...where is a multinational company to be taxed? I agree that substance over form should apply and this should not be a paperless office based in a boat shed in the cayman islands?

Where it has all gone wrong is:

1, HMRC's lack of ability in enforcing the rules or even negotiating. MH is saying that the agreement Starbucks reached with HMRC is not fair? Well get on HMRC's case then?

2, The encouragement of foreign firms to merely employ and sell to UK workers and non workers in preference to supporting our own industries. The lack of tax is a direct result of UK government policy coming home to roost? How they have the nerve to complain defeats me?

3, the Media show is just a demonstration of how well these individuals can pass the buck.

Perhaps if Obama wants us in Europe so his US companies can sell there..then he should pay the tax so we can meet the cost of belonging?

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Replying to andy.partridge:
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By vstrad
20th May 2013 15:09

MH the hypocrite

George, MH is a rank hypocrite because her family company, Stemcor, indulges in exactly the same tax manoeuvres as Google, Amazon et al. In the unlikely event of Google et al paying more tax in the UK they will then be paying less tax in Ireland, Luxembourg etc. So we can then look forward to seeing Google execs being summoned before a committee of the Dáil to be criticised for reducing the amount of tax they pay in Ireland.

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By cfield
20th May 2013 12:36

VAT exempt too

And just to avoid any VAT issues, make it an exempt transaction too.

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By Batty Girl
20th May 2013 12:41

Give people the information so they can vote with their money

As has been mentioned before part of the problem is that the way be buy things has changed.  If you go into a shop and pay the shop keeper for an item that you walk away with it's pretty obvious where the sale has taken place  - on the internet the person buying the item doesn't even know.

I'd like to see it made obvious when purchasing online "where" you are buying from.  So if I purchase an item from Google when I click to put it in my basket a big clear message should come up saying "This item will be purchased from .............".

Then the government can run a campain to make sure that everyone knows the consequences of buying from outside the UK and let the purchaser decide.  Since this first blew up I try not to use Amazon etc, but my problem is how do I know that the company I use instead isn't doing exactly the same thing.  I could spend ages researching but the point with internet shopping is it's quick and easy - I just don't have the time.  I'd rather pay a few quid more and know that UK tax is being paid and I can't believe I'm the only one, so why not have legislation that makes the location of all internet transactions transparent.

BG

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Replying to AlexThaimor:
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By Comptable
20th May 2013 13:26

place of sale - or place of purchase

Batty Girl wrote:

If you go into a shop and pay the shop keeper for an item that you walk away with it's pretty obvious where the sale has taken place  - on the internet the person buying the item doesn't even know.

If i buy something on-line I may not know where the sale takes place but I am 100% clear as to where the purchase takes place (right here where I am sitting now).

That should be where the transaction is taxed.

simples

But not so simples if I order something from a company in France, or the USA is it.

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Replying to annmd:
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By Correct Balance LLP
21st May 2013 13:20

place of sale and purchase

Comptable wrote:

Batty Girl wrote:

If you go into a shop and pay the shop keeper for an item that you walk away with it's pretty obvious where the sale has taken place  - on the internet the person buying the item doesn't even know.

If i buy something on-line I may not know where the sale takes place but I am 100% clear as to where the purchase takes place (right here where I am sitting now).

That should be where the transaction is taxed.

simples

But not so simples if I order something from a company in France, or the USA is it.

 

With All respect what you suggested it is not that simple where you actually make a transaction is not your house or chair in the UK, you are actually accessing IP address of the internet site and that is where everything is becoming complicated. As most of you know IP address is dictated by server and its localization not necessary by web address for example ".co.uk". I think that problem around this matter is actually in determining actual place of sale or transaction as we call it. Now if you think about it:

commonly known 1&1 website hosting service has got their servers in India, let say that John lives in Switzerland and opened his business there. Now I buy product on John's website. As we all agree transaction took place. Where did it take place? Firstly as common knowledge everyone will say Switzerland and John should pay his taxes there as it stands in tax law because his business is registered in Switzerland.

Second: maybe that tax should be paid in India as this was the place of transaction: product has been introduced on website hosted in India, I have seen product on Website hosted in India therefore I have seen it in India and I made a purchase in India.

I know this may seem silly but at the moment we have got a law which is actually restricted to the geographical registration of business. Over years we have learnt to use the internet and explore its possibilities unfortunately legislation is not as quick as our discoveries in internet. I agree with those who think the legislation should accommodate for internet transactions in wider spectrum but which way it should go. We have got problem with google and other companies but it only became a problem when we became aware of possibilities and wholes in legislation.

Yes we need update in legislation but this is not one country battle this has to be tackled globally to be able to determine where transactions take place. I would love to see all the taxes being paid in UK from UK sales however it is very hard to find out where transaction actually has taken place do to different IP addresses from the same servers and completely different business registration details. At the minute There is a little way of getting to companies like google just because they are better at using the internet than most of other users or providers and they are using the fact that international law is not actually allocating  transaction place to the IP of Customer Computer which for UK is in the UK.

I hope you understand what I tried to say

Patryk Machowiak - Correct Balance LLP

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By vrickett
20th May 2013 12:53

Microsoft

As Microsoft has its European headquarters in Ireland as well.  Does anyone know if they use the same strategies as the others. Just curious.

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By jonmillar
20th May 2013 14:10

PAC grills HMRC and Google on transfer pricing

Well one Hodge

some hilarious comments

"I share the committee’s view that the top of HMRC needed more tax experience. The three [external] directors mean we have a better balance of skills.”

WTF are they doing as head of HMRC if they don`t have "tax experience"

 Mind you (at last count) HMRC staff total approx 75000-- Number of qualified accounts employed less than 300

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Replying to kaff:
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By The Black Knight
20th May 2013 14:15

next we'll have

jonmillar wrote:

Well one Hodge

some hilarious comments

"I share the committee’s view that the top of HMRC needed more tax experience. The three [external] directors mean we have a better balance of skills.”

WTF are they doing as head of HMRC if they don`t have "tax experience"

 Mind you (at last count) HMRC staff total approx 75000-- Number of qualified accounts employed less than 300

Next we'll have the excuse

"HMRC is only a filing and telephone answering service"

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Replying to lionofludesch:
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By stgreg
20th May 2013 16:20

joke?

The Black Knight wrote:

"HMRC is only a filing and telephone answering service"

HMRC answering the telephone...! you are joking aren't you?
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By johnjenkins
20th May 2013 16:05

It's quite

obvious that the world financial structure has to change. If countries actually want tax on sales in their particular country then companies will have to keep records of that countries sales and apportion accordingly.

The easiest way is to have a global tax rate for multinationals so it doesn't matter where they are based, but that would "buck the market".

To me this is all a PR exercise so that when HMRC are told to come down on us smaller boys and girls they can say "look we are hitting the bigguns as well".

 

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By The Black Knight
20th May 2013 16:40

ah ha?

Perhaps the answer is to have some additional connected persons rules along with the separability of assets when connected. Can and should the image rights of a player be separated from the asset that they are derived from namely the footballer? Or can the intellectual property rights/ branding which would essentially be goodwill?, be separated from where the coffee is sold? perhaps that would be the more sensible way of proportioning things that are not physical?

It would be constantly shifting value and location granted? So an annual adjustment calculation would be required?

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By mydoghasfleas
20th May 2013 17:14

Immoral?

 A few thoughts came to mind over the weekend. 

I work and earn £100, someone takes 47% of that and gives it to someone who does not work.  Is that immoral?  Is it fair?

I work and earn £100, someone mugs me, takes £47 and spends it on himself.  Is that immoral?  Is it fair?

In each case I am £47 down.  In each case the politicians' 2 buzz words "immoral" and "fair" are used.  To some taxation is immoral. 

I am not taking any side here because the standard defence here is, "We acted within the rules."  The PAC is lambasting them for finding the limits and then pushing them.  However, MPs are hardly the best to judge, scroll back 4 years with the Torygraph's expose on expenses; the standard defence was, "We acted within the rules".  Glasshouses and stones come to mind.

As for the interest and management charges shifting profits overseas, the legislation is there to handle transfer pricing and thin capitalisation.  Unfortunately, the rules are not enforced; the former Chairman of HMRC is alleged to have made sweetheart deals completely ignoring HMRC's own settlement guidelines and then had only the most cursory of reviews by one of his own who predetermined the outcome; Lin Homer-Simpson the current chairman is a career blame dodger, whose early progress was in resources management (ordering stationery) so has more experience of tacks than tax.

HMRC when the direct tax was IR trained Inspectors to deal with enforcement (I know, I was there).  Now the department is run by managers who are disconnected from the staff any esprit de corps has long gone (there was some, honest).  The Inspectors started off working on local patches and got to understand what was going on with those patches.  They progressed up the greasy pole as Inspectors to bigger cases with more training but they never started anywhere except the bottom.  There are a number of theories as to what rises to the top; I never found out as I was inclined to poaching not gamekeeping.

In my view we have the situation we have due to an ill led department, ill trained to deal with anything but low grade volume, overseen by a self serving board and monitored by a committee of career politicians.  The system needs to command respect, with the bolt-ons of child benefit, tax credits it does not.

HMRC says

"What we do

We are the UK’s tax authority. We are responsible for making sure that the money is available to fund the UK’s public services and for helping families and individuals with targeted financial support."

Too touchy feely!  it is responsible for assessing and collecting tax. 

If it wants all this helping families it should include paying our armed forces to fight actions around the world; giving aid to corrupt governments around the world; goldplating EU directives whilst other states pay lip service to them etc (add your own pet gripes here).

Thank God for the therapy this outpouring provides; have you seen the length of the NHS waiting list for psychiatric help?

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By andrew.hyde
21st May 2013 09:05

Immoral??

I don't think it's helpful to frame this argument in terms of morality or immorality, simply because everyone has different benchmarks.  We probably all agree that murder is wrong, but for purely economic matters there are a wide range of attitudes.

A more pragmatic view is that entrepreneurs (such as Mr Amazon) like to do business here in the UK.  They like it because we have a police force and fire brigade that protect their premises, roads that their delivery vehicles can use, laws that protect their IP, an NHS that looks after their employees, and so on.

All this stuff costs money.  I pay my share, more or less willingly, but apparently they do not.

You can't trade at a car boot sale unless you pay the fee.  If you don't want to pay the fee, then that's fine.  You're free to go and trade somewhere else.

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Replying to lionofludesch:
By mydoghasfleas
21st May 2013 09:41

Not my terms of reference

It's not me but the PAC who introduces the moral dimension and you have made exactly my point.  There is no benchmark; anyone who uses the words fair/unfair, moral/immoral is making subjective judgement. 

I do not know if you have said it for ironic purposes.  The fee at the car boot sale is the same size regardless of you turning up in a Smart car or a HumVee.

As soon as you accept someone is not evading tax any statement that they do not pay enough is either -

a moral judgement; oracknowledgement of -failure by HMRC to enforce the full weight of the law; orinadequately drawn legislation

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Replying to lionofludesch:
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By AndyC555
21st May 2013 11:44

Morality

andrew.hyde wrote:

A more pragmatic view is that entrepreneurs (such as Mr Amazon) like to do business here in the UK.  They like it because we have a police force and fire brigade that protect their premises, roads that their delivery vehicles can use, laws that protect their IP, an NHS that looks after their employees, and so on.

All this stuff costs money.  I pay my share, more or less willingly, but apparently they do not.

 

But the point is, they don't.  Amazon EU does NOT use our roads, or police or fire brigade. They do NOT have any warehouses or delivery vehicles or employees.  Amazon UK does but they are a seperate legal entitiy.  You can no more expect Amazon UK to pay taxes on another company's profits than you could expect ParcelForce or DHL to pay Amazon EU's taxes if Amazon EU used their services instead of a subsidiary.  That's the way the law is written and the law wasn't written by Amazon.  IF Amazon EU are paying Amazon UK the same as they'd pay DHL (which is what transfer pricing is supposed to ensure) then what's your complaint?

But let's get moral here.  Suppose the UK passed a law.  Wear a red tie to work and you pay tax on salary at 40%.  Wear a blue tie to work and you pay at 10%.

Hands up if you'd wear a red tie to work. I don't expect too many hands are up at the moment.  So what are you saying?  You would legitimately reduce your tax bill if you had the opportunity but object when someone else does? On what grounds?  That you don't have the opportunity to do the same thing?  Some morals.

 

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By johnjenkins
21st May 2013 09:35

@andrew.hyde

Then government should make that quite clear. It's no good telling a child "if you do that again you're grounded" and then wait for the umpteenth time before doing anything.

You can't cushy up to big business, entice them to our country, then have a pop when they get clever.

To blame HMRC for government ineptitude is wrong. What's the saying "let's all sing from the same hymn sheet".

Where are the politicians who really want to make a difference?  At least UKIP are making a bit of a stink.

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By vrickett
21st May 2013 09:35

I don't understand how this country can use the word immoral when if an economic migrant comes to work in this country for part of the year on a seasonal basis (say April to July) they want a share of their worldwide income. Now that is unfair and immoral. but they wont shout about that.

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By Red1960
21st May 2013 12:12

What's sauce for the goose

It looks as if the PR departments of Google, Amazon, Vodafone and others have been mustered on accounting web along with miscellaneous other “corporate whores”.

 

I never have been a fan of Hodge but it has to be admitted that she’s doing very good work on the PAC. The fact that she’s making these particular worms squirm confirms that.

 

I have yet hear an argument from HMRC that even approaches adequate as to why they are failing to apply the rules governing transfer pricing and corporate residency to these multinationals as rigorously as they should in these instances.

 

One could be forgiven for imagining that the whiff of expensive corporate lunches at the best restaurants, brown envelopes and executive appointments in retirement is almost tangible at Somerset House.

 

How else would one explain it?

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By johnjenkins
21st May 2013 15:55

The answer is

very simple really. Everytime a transaction is made in the UK RTI is introduced and sent to tax office. An agreement can be worked out with the multinational as to how much it will pay on transaction or value.Where the bank account or credit card is based forms the basis of where the transaction takes place.

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By AndyC555
17th Jun 2013 09:57

Interestingly

"Margaret replied a bit later that day, at 16:57:

“Dear George,

Thank you for your email. I have said publicly that I have boycotted all three companies, therefore I know how difficult it is to live without Google.

Best Wishes

Margaret Hodge MP”" 

 

George

 

Interestingly, I heard Margaret Hodge being interviewed on the radio only a few days ago confessing that, in fact, she still used Google as the other search engines weren't as good.

I suppose if Costa didn't make coffee as good as Starbucks, she'd carry on using Starbucks.

Perhaps you could email Margaret again and ask why she says one thing to you and another on the radio.

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