View more on these topics

Tony Wickenden: Venti profits – skinny tax

Tony Wickenden Tax Planning Technical Area

The tax zeitgeist continues to harden against those who appear to get a lot but pay only a little – in tax.

After the high profile entertainers, sportsmen and captains of industry it’s the turn of the international companies trading in the UK.

Starbucks, Google and Amazon have hit the headlines but for the wrong reasons.

The public accounts committee (yielding to the principle of “something must be done” – thanks to Edward VIII for this) has looked into how such companies can generate so much revenue but pay so little tax through the use of “transfer pricing”. Some potential solutions have been proposed, many of which rely on international cooperation and so would take some time to implement. A sales tax is another proposal but under EU rules the only turnover tax permitted is VAT.

The EU has suggested a common tax system across Europe using a formula to apportion tax revenues to Member States as a means of preventing profit shifting under transfer pricing. This idea is unlikely to gain traction in the UK.

Harmful corporate tax avoidance is frowned on in the EU and pressure is put on Member States to prevent it.

The OECD works hard to prevent avoidance and it has been reported that the UK has joined forces with Germany to back an OECD initiative to prevent profit shifting.

For businesses with “digital/e-commerce sales”, such as Amazon and Google, the place of supply of the service represents an opportunity for the business and a challenge for the authorities. The place of supply, which broadly speaking determines the rate of corporation tax, is usually outside of the UK in a usually lower tax zone. The lack, under the current law at least, of any economic activity taking place in the UK, despite the customers (receiving the digital services) being resident in the UK, is an obvious cause of concern. This, though, is a challenge for many countries – as was said on the posters for Close Encounters …”we are not alone”! We can expect, as a result, to see continued debate and consideration given to this issue as it represents an increasingly important and profitable area of business.

And, of course, there’s good old fashioned naming and shaming. Apparently three of Britain’s largest water companies paid little or no tax on their profits through the (legitimate) use of capital allowances and interest deductions.

Much like transfer pricing, it is fundamentally permissible but the public appear not to like the outcome – adding to the hardening zeitgeist.

Even if the tax saving is legitimate, if the public doesn’t like it and the media “expose it” action seems to naturally follow. As the Treasury minister, David Gauke, said recently “if there is a perception that big business does not pay its fair share, that will make it all the harder for those of us advocating a competitive tax system”.

The December 5 autumn statement followed by the results of the many consultations to be published on December 11 will give us a clearer picture of what challenges the world of tax avoidance (or perceived tax avoidance) will be facing.

Perhaps the most telling quote from the recent public accounts committee investigation of the tax paid by large multinational corporates is that of Margaret Hodge, chair of the said Committee: “We’re not accusing you of being illegal, we are accusing you of being immoral”. And therein lies the most powerful underlying driver to all of this tax brouhaha – the strong media and officially supported public opinion against those (individuals or corporations) who are perceived to pay less than their fair share of tax.

Vince Cable has added his support to this morality-fuelled campaign by stating “We deplore any systematic abuse of the tax system”. ..well he would wouldn’t he? And pretty soon we will have a General Anti-Abuse Rule that will shore up insufficiently well drafted legislation that, within its terms, appears to permit outcomes that (taking into account the reasonably ascertained intentions of Parliament) Parliament would not support. In effect, this rule will operate to prevent outcomes that Parliament would have wanted to prevent had they thought about them. Nice.

At multinational corporate level and on matters of transfer pricing, as mentioned above, most accept that effective prevention of shifting profits between jurisdictions to avoid or reduce tax will require international cooperation.

A sales tax (largely rejected), and a proportionate allocation of profits for tax by jurisdiction based on worldwide profits determined by various measures of “presence” in particular countries where revenue is generated, eg employees or sites/locations in the country in question, have both been proposed.

Naming and shaming has started in earnest with the public accounts committee investigations and, to accompany this (and facilitate easier boycotting by customers), a “tax tick” system has been proposed by the left wing “Tax Research”. Under this system the “tax behaviour” of companies would be monitored and published for all to see. It is thought (by those proposing the system) that this might then influence consumer behaviour (positive or negative) in relation to those companies.

The constant flow of media pressure on those individuals or companies who are perceived to pay less than their fair share continues – regardless of whether the methods employed are completely legal or not.

From the sound of Margaret Hodge (chair of the public accounts committee) the (officially) aspired to objective of “changing the culture of tax avoidance in the UK” is already well on its way to being achieved.

_____

Tony Wickenden is joint managing director of Technical Connection

Through Techlink Professional, you can access CII and IFP-accredited CPD, a full and up-to-date technical library, technical updates, business generation ideas and, through our additional ASKservice, case-related technical support. Techlink Communicator delivers content for regular client and professional adviser communication. Go to www.techlink.co.uk and click the Free Trial link. Go to www.technicalconnection.co.uk for more details on our services or call 020 7405 1600.

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. “Under this system the “tax behaviour” of companies would be monitored and published for all to see. It is thought (by those proposing the system) that this might then influence consumer behaviour (positive or negative) in relation to those companies.”

    That’s an excellent idea. It would influence most normal people to head straight for the companies that had the worst ‘tax behaviour’ ratings, because they would know that, as with Amazon, they’d probably be cheaper.

    A bit like how the ‘traffic light’ labelling is very good for finding the tastiest food – just head straight for the one covered in red splodges.

  2. I think a clue to the solution lies in the statement ‘in a usually lower tax zone’.

  3. There is no such thing as a fair share of tax. All tax is unfair. It is more unfair to some and less unfair to others. It is at root merely compulsory charity as it seeks to redistribute wealth from the solvent to the feckless.

    Where it is effective is in helping the sick, the old and the injured.

Leave a comment