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MPs get action on avoidance

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3rd Dec 2012
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The Treasury announcement on Monday adds less than 10% to the £917m already committed to anti-avoidance during the current spending review, but immediately followed the latest tirade from PAC chair Margaret Hodge in her continuing moral crusade against tax avoidance.

The hook for her latest intervention was the committee’s report on HMRC’s annual accounts for 2011-12, which included stinging criticisms for multinationals that exploited tax rules to minimise their UK corporation tax bills and HMRC for allowing them to do so unchallenged.

After listening to “unconvincing” and in some cases “evasive” evidence from Amazon, Google and Starbucks at a recent hearing, Hodge commented:“The inescapable conclusion is that multinationals are using structures and exploiting current tax legislation to move offshore profits that are clearly generated from economic activity in the UK.”

In her view, both HMRC and corporate taxpayers were failing to meet legitimate public expectations from the tax system.

“HMRC should be challenging this but its response so far to these big businesses and their aggressive tax planning has lacked determination and looks way too lenient. Policing the tax system must be at the heart of what HMRC does,” Hodge said.

The thought that huge global organisations generating significant profits in the UK were getting away with paying little or no corporation tax  was “outrageous” and “an insult to British businesses and individuals who pay their fair share" she added.

The committee concluded that HMRC’s efforts to maintain confidence in its administration of the tax system were undermined by the department’s selective approach to prosecutions, which it was unable to justify at the committee hearings. Nor had it conducted any analysis of the affect that high profile corporate tax avoidance was having on other taxpayers’ attitudes.

“Multinational companies 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,” the committee commented in its report on HMRC’s annual accounts for 2011-12.

“We were not convinced that HMRC has the determination to robustly challenge the practices of these companies.”

Calling for a change of mind set at the tax department, the committee complained: “At the moment there is a pervasive acceptance of the status quo by the top officials in HMRC and we have seen little evidence of a desire to be more assertive.

“For example, it is perplexing that, on transfer pricing HMRC consider a royalty fee of 6% or 4.7% can be competitive when the company involved consistently makes a loss. We expect HMRC to prosecute multinational companies who do not pay the tax due in the UK.”

One of the problems the committee did acknowledge was that it was not clear HMRC had the necessary resources to devote to collecting appropriate levels of corporation tax.

In response Treasury minister Danny Alexander announced on Monday that an extra £77m would be devoted to tackling offshore tax avoidance and evasion by individuals and companies. The extra resource should reap an additional £2bn a year, he claimed.

A new information-sharing agreement with the US and a crackdown on promoters of aggressive avoidance schemes is also coming. The chancellor will announce further action to close specific tax avoidance loopholes in his Autumn Statement on Wednesday, the Treasury said.

In its report, the PAC said that it had invited the three multinationals to appear at its public hearing not to single them out as the only ones taking advantage of the rules, but to illustrate the wider problems.

The evidence the committee collected included:

  • Starbucks - claimed to have made a loss for 14 of the 15 years it has been operating in the UK, which the committee found hard to believe from a company with a 31% market share. The apparent losses were inconsistent with claims to shareholders that the company was making 15% profits in the UK. Starbucks declined to break down the 4.7% intellectual property payment (previously 6%) the UK subsidiary paid to the Netherlands-based European company and the committee was also sceptical about the 20% mark up that the Netherlands subisiary paid to Starbucks Switzerland for its coffee purhcases.
  • Amazon - Public policy director Andrew Cecil frustrated the committee when he avoided answering its questions about the company’s structure and location of economic activity, but later submitted more detailed figures, which showed Amazon earning £207m in the UK during 2011, on which it paid £1.8m in corporation tax. Total turnover in Europe was €9.1bn, booked through its Luxembourg-based subsidiary Amazon EU Sarl, on which it paid €8.2m in tax. However unaudited accounts for Amazon Europe Holding Technologies SCS in 2011 showed a profit of €301.8m and no tax payments. With 15,000 staff based in the UK, further information from Amazon showed sales of £3.35bn from the UK in 2011 - 25% of all Amazon’s sales outside the USA.
  • Google - Bills the majority of its non-US sales through its Irish subsidiary. The UK subsidiary Google Ltd recorded revenues of £396m in 2011, but paid corporation tax of only £6m, with Google Ireland paying for the services provided by 1,300 UK-based staff. While the MPs prepared their report, HMRC was carrying out a review of the Google UK’s tax returns for 2005-11. Google argued that its underlying economic activity was based on innovative software developed in the US to run the Google search engine and operated an in Bermuda to protect this intellectual property. “We consider that the company undermined its own argument since it remits its non-USA profits (including from the UK) not to the USA but to Bermuda and therefore may be depriving the USA of legitimate tax revenue as well as the UK,” the committee commented.

Replies (9)

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By ThornyIssues
03rd Dec 2012 16:17

Family feud?

I do hope that the relatives of Ms Hodge, who are currently running a tax efficient family business, are grateful for her input.

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Teignmouth
By Paul Scholes
03rd Dec 2012 18:33

I wonder...

....if Danny Alexander could be convinced that maybe half the £77M might be better spent asking AccWeb to do the work in finding and rectifying the tax avoidance, I'm not sure if HMRC are up to it?

It would be a great way for me to work my way to retirement and I'd feel good that, at last, after all these years I had done something to help the country.

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By ThornyIssues
04th Dec 2012 12:35

OTS

Why doesn't Osborne put a few million in the direction of the OTS and let them get on with what they were tasked.

Simples!

 

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By johnjenkins
04th Dec 2012 12:38

Whatever tax they

agree to pay will only come from thier employees. Less earnings for emplyees less tax take to make up the bit of corp tax they will have to pay.

HMRC then turn round and say "didn't we do a good job" Utter shambles.

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By frustratedwithhmrc
05th Dec 2012 09:13

Lest we forget...

Margaret Hodge MP, the honourable member for Stemcor should not forget family trusts, such as the one where the profits from tax avoidance by Stemcor (the company set-up by her late father) are distributed.

Although I suspect she is following the old maxim "Do as I say, not as I do" in her hypocritical moral tirade.

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The Business Growth Secret
By anndartnall
05th Dec 2012 11:50

Where does the immorality begin?

I work from home, so I take my Home as Office allowance & reduce my CT. Admitedly, in some respects it costs me more to work here but I save in other ways. However, I deliberately chose this set-up in tax planning. This is just about the thinnest end of the wedge on Tax Avoidance I can think of. Is this immoral? I don't think so. So where does the immorality start?

Government sets the rules on what constitutes Tax Evasion. EVASION is where the immorality starts in my opinion. So if the Government think that Companies and individuals are acting immorally but legally, surely they should be blaming themselves as to the poor quality of legislation they have passed?

Or have I lost the plot, thinking that politicians would be prepared to say Mea Culpa and spend that £77m on plugging the loop-holes?

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By J Lessels
05th Dec 2012 11:52

Can we possibly address the issues?

I love the right wing thing of let's ignore the ball and play the man (woman in this case). As long as anyone in the Labour party and their extended family are not whiter than white, corporations should not have to pay tax. Am I understanding you correctly, Frustrated and Thorny Issues?

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Replying to HeavyMetalMike:
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By frustratedwithhmrc
05th Dec 2012 12:29

Not really...

J Lessels wrote:
I love the right wing thing of let's ignore the ball and play the man (woman in this case). As long as anyone in the Labour party and their extended family are not whiter than white, corporations should not have to pay tax. Am I understanding you correctly, Frustrated and Thorny Issues?

I was more interested in "playing the ball" of this being a typical example of political hypocrisy.

Amazon, Google, Starbucks AND Stemcor are all following the letter of UK tax law and correctly applying the terms of international tax treaties determined by UK governments past and present and enforced by HMRC.

Any avoidance measures taken by those companies (and many others) to reduce their tax bills without breaking the law are understandable as those companies have a responsibility to obey the tax law and also for many US companies a fiduciary duty to maximize returns to investors in so doing.

The recent moral outrage that it is easier for an international company to avoid tax than a purely domestic company (through transfer pricing and other games), should be firmly placed back in the lap of the politicians.

They and their civil service minions have written the many thousands of pages of the UK tax code and agreed and signed the EU Single Market treaties which these companies are following.

The reason I find the MP for Stemcor's moral outrage distasteful is that she and her parliamentary colleagues are both the cause of this problem and its only real solution.

They are too lazy and gutless to strip down the UK tax code to a reasonable, workable and irreducible minimum, which would substantially reduce UK tax avoidance.

They are too cowardly to face down the EU & European Courts to stop transfer pricing and similar scams which enable this avoidance.

If MP's had any ethical substance at all then they would be acting, not egotistical grandstanding.

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By markfd
05th Dec 2012 13:37

You couldn't make it up...

...the execrable Hodge, principal previous claim to fame of covering up child abuse on her watch, hypocritically wants international businesses to pay more tax but not her own one.

Plus Starbucks has franchisees in the UK, presumably these are paying the same rates for IP and coffee etc. as the connected parties thus any TP enquiry would be pointless.  Other businesses are just setting up as the EU permits and has permitted for a long period of time.

Inevitable consequence = more bully boy HMRC tactics on small businesses, closing some perfectly compliant ones down.  Why would anyone set up a small business in the UK at the moment?  I wouldn't.

The LibCon imbeciles really are continuing Gordon Brown's scorched earth policy towards the UK economy. 

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