MPs grapple with corporate tax avoidance

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Robert Lovell
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Accountant MP Nick Gibb laid into Amazon this week in the House of Commons as MPs debated corporate tax avoidance.

Twenty back benchers took part in the debate, which was brought to the house by Liberal Democrat MP Ian Swales in response to “lurid stories of tax avoidance” in recent weeks. Swales called the issue “a threat to our political system” as those who paid their taxes would not continue to tolerate abuse.

“UK Uncut might be just the start of the protests,” he warned.

Conservative MP Richard Bacon agreed that the tax system was not fit for purpose, referring to Starbucks' “voluntary” CT payment over two years after mounting public pressure.

The idea that companies should pay corporation tax “because the mob has turned on them” was a bizarre way of arranging tax affairs, he said.

Labour MP Frank Field asked Bacon to explain that if governments are inactive on this front, what action would he propose taxpayers take?

Bacon replied: “Governments should take notice when they see outside 100 Parliament Street, the headquarters of HMRC, large crowds of riot police – there are photographs to that effect, which can easily be found on the web. When governments see such a thing happening, they should sit up and take notice that the system is not working and that it is not fit for purpose.”

Nick Gibb, former KPMG accountant and now Conservative MP for Bognor Regis and Littlehampton, brought a more technical perspective to proceedings, but still gave little comfort to the multinational brands that appeared before the Commons Public Accounts Committee late last year.

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By Chaztax
10th Jan 2013 21:48

New Year, new debate...

I’ve considered this issue carefully and the conclusion that I’ve come to is that the very concepts of Permanent Establishment and the “trading in v trading with” distinction (trading in the UK brings an overseas company within the scope of UK CT, but merely trading with the UK’s inhabitants, without a physical presence here, does not) are looking increasingly out of date given the rise of online sales and the ease with which global companies can relocate.

It seems to me that the most principled global tax model is one which taxes the profits of international retailers where the CUSTOMER is based, regardless of whether the selling company has a physical presence in the destination country.

A business that has the opportunity to sell to the inhabitants of a country is thereby gaining an economic benefit from that country, for which in principle it should be paying.

Would such a destination – based taxation system involve significant practical challenges? Undoubtedly. For example, a “de minimis” threshold would probably be required to avoid imposing an excessive administrative burden on companies making a low level of exports.

Is it worth attempting to meet these challenges? Yes, I think so. That has been a lot of discussion in the popular and tax press regarding possible reorganisations of the global tax system. If such a reorganisation is to be undertaken, then it should be done on the basis of sound principles.  If a reorganisation is undertaken without proper planning, then there is a risk of a further major change in the system becoming necessary when  technology changes again, or maybe when a different tax topic becomes fashionable in the popular press.

This proposal may seem fanciful to many, so I suggest the following hypothetical scenario: A company based in country A spends £25 on materials (purchased from local taxpaying businesses) and £75 on labour (paid to local taxpaying employees), thus producing a product at a cost of £100. The product is then shipped to country B (ignoring transport costs for now, for simplicity) and sold there for £130 to a consumer who would otherwise have bought a similar product from a local taxpaying business.

The question is: To which country, if you were designing a tax system “from scratch”, and suspending for the time being any concerns about the practicalities, would you give taxing rights over the £30?

My answer to this is country B. The COST of the product has been generated within country A and taxed there, but the PROFIT is attributable to the sale to the customer in country B.

If destination countries don’t have taxing rights in these kinds of situations, then their tax systems will eventually suffer massive losses due to businesses basing themselves in low tax jurisdictions.

Some may agree and some may disagree. I welcome posts from either group – if you disagree, please say on what basis.

Thanks (1)
11th Jan 2013 06:45

The problem arises from the EU

The difficulty of making any substantive changes is this regard is that although most of the companies highlighted thus far (Amazon, Starbucks, Google, et al) are companies originating from the United States, they all have EU establishments & operations, typically in either Luxembourg or Ireland for the very advantageous tax benefits to EU corporate residents in those countries.

The UK has signed away it's right to legislate on these matters as they are fundamental aspects of the EU Single Market. We gain advantages from this, but have to accept the consequences and the establishment rules are part-and-parcel of that.

The UK can no longer achieve what it wants by unitary legislation, but rather must obtain consent across the entire EU Single Market to effect such a change. As this would be to the obvious disadvantage of at least Ireland and Luxembourg they would be guaranteed to object and probably other countries such as Latvia and Estonia as well.

This is the difficulty you get when you hand control of major aspects of your tax-raising powers to a super-national body such as the EU. If things go awry, you have no easy mechanism for correcting them. 

Thanks (0)
14th Jan 2013 16:50

The MOB?

I do find it curious that the MOB will riot and protest but will continue to shop there anyway.

One assumes if Amazon's warehouse becomes a permanent establishment it can post its stuff from abroad and or is now large enough to form its own UK distribution company? Non profit making?

This is really just what policy and customer behaviour have demanded.

I bet if you told the public that they would have to pay more because the tax charge was more there would be a riot as well?


END free trade and bring back protectionism???



Thanks (0)