THE PUBLIC ACCOUNTS COMMITTEE hearing on Monday was remarkable in many respects, not least the appalling way in which the members of the committee treated the three executives from Amazon, Google and Starbucks.
Margaret Hodge – as chairwoman – in particular appeared to want nothing more than to use the opportunity to soapbox about ‘morality and fairness', neither of which has anything to do with tax. Ms Hodge (pictured) often gave no or little opportunity for the executives to respond to the statements (rarely was a real question actually proffered) she and the other PAC members were making.
It was clear that an agenda of ‘corporate assassination' had been set and no response, however honest or tempered, would steer the PAC members from this task. It is outrageous for any taxpayer to play by the rules set by parliament and then be branded ‘immoral' and ‘unjust' for simply doing so.
What was more worrying, however, was the panel's complete ignorance of how a tax system is designed to function (particularly the trade-offs that are made between raising sufficient revenue and encouraging domestic and foreign investment), how global businesses operate and how they are structured.
This seems to stem from either wilful blindness or a total lack of understanding of basic economics. There appeared to be no appreciation of the differences between cost centres and profit centres or the component parts that make up a multinational.
The inability of the PAC to appreciate the global nature of multinationals and the choices they are entitled to make as to their corporate structure undermines the UK's standing amongst business leaders around the world. Those running the country ought to have been better informed and knowledgeable – in our view, there is simply no excuse for this type of outrageous band standing. Their behaviour was an embarrassment.
Large corporates are very likely to be better governed than medium-sized and small businesses, especially as regards transfer pricing and the methodologies adopted to justify the prices that are charged within a corporate group. There is no doubt that the prices charged will have been benchmarked against open-market comparables to allow justification of the arm's length price (against which HMRC can judge the reasonableness of the amounts paid).
What the committee seem to be asking for is for multinationals to artificially adjust their pricing to reflect a greater profit in the UK. This is nonsense in two respects. First, this artificial inflation of profits to allow a ‘fair' amount of tax to be paid (whatever that means) will likely mean that the cost of goods and services sold in the UK will increase (leading to general inflationary rises) and, second, UK businesses will have carte blanche to artificially reduce what they charge overseas operations, limiting the profit brought back into the UK.
Neither seems a palatable option, yet this is what the PAC members seem to support. It is apparent that the consequences of PAC's stated position have not been considered, even at a cursory level.
Perhaps more puzzling was the committee's surprise at the tax rulings obtained by the multinationals from the Luxembourg and Netherlands tax authorities. The reality is that each of the multinationals under attack is also likely to have entered into binding Advance Pricing Agreements with HMRC in respect of their transfer pricing strategies (i.e. HMRC has agreed in advance what Starbucks, for instance, pays its Dutch sister company for the coffee beans or what Amazon UK pays Amazon Luxembourg for fulfillment and delivery).
It is highly worrying that the committee were not aware of this or the ability of companies to gain advance clearance from HMRC. Before this panel was convened, it would have been extremely helpful if HMRC had been called before PAC to explain how the UK tax system works. Not only is this necessary, but should now be a priority.
Miles Dean is a founder of Milestone International Tax Partners.
All agreed. What is equally staggering is the inability of the HMRC representatives to adequately get many of these points across. But the real issue is a political/legislative one. We have the tax system our elected representatives have given us. Railing against its consequences seems a little rich coming from a committee made up of politicians!
Posted by: John Rowley, 14 Nov 2012 | 12:58
I think you're giving the multinationals more credit for their approach to transfer pricing in the UK than warranted.
The 'arm's-length standard' principle asks whether businesses - acting at arm's-length would continue to transact at the prices charged within companies. No rational businessowner, acting at arm's-length, would continue in this Starbucks arrangement if they incurred losses over 15 years. They would either (a) renegotiate prices of the beans and/or royalty rates or (b) stop transacting with Starbucks altogether.
Yes, I'm sure that Starbucks has some sort of benchmarking for the Swiss purchasing operation that buys beans and resells to its in-country distributors. I’m sure they paid their advisors big dollars for that benchmarking. That being said, how likely is it that there will be a market transaction that is equivalent to the volume of beans that Starbucks purchases globally? Even if there is a benchmark out in the market, the purchasing volume of Starbucks globally would generate a substantial volume discount – and Starbucks UK should benefit from those savings.
If HMRC did require Starbucks to lower the price of coffee beans sold into the UK, I don’t see how this would affect the end-market price of coffee to customers. Starbucks UK is already charging a market price for coffee to their customers, they could try to increases their prices further but they would lose business as a result. While the world market price of coffee can vary dramatically, the transfer price negotiated between Switzerland and the UK has nothing to do with the end-user price.
Over the past three years, HMRC has signed an average of 30 Advance Pricing Arrangements (APA) with taxpayers regarding transfer pricing. Considering all of the UK and foreign-owned multinationals operating in the UK, it’s quite unlikely that these three companies have an advance agreement in place with HMRC. There is no incentive for HMRC to agree to a intercompany pricing mechanism where Starbucks could incur losses over a 15-year period in the UK. If HMRC did agree to that transfer pricing arrangement, they should be made redundant.
Posted by: Alex, 14 Nov 2012 | 14:09
Funny, there's a very similar schene in the new Bond movie, Skyfall. Judie Dench as 'M' deals with the committee grandstanding much better.
Posted by: TaxTeddy, 14 Nov 2012 | 14:28
This article totally sums up the total lack of basic knowledge of the UK tax system by our legislators. PAC is really a star chamber for political posturing without any idea of fairness to a taxpayer, albeit, global companies, who operate within the UK tax law as written by same legislators. It is nothing more than political posturing and does our democracy a dis-service in not being able to objectively and forensically look at the the total tax bill and jobs that these companies provide to the UK economy.
Other countries, with a lower tax rate would hopefully not engage in such shamelesss star chamber tactics or if they did I would hope that they would apply some fairness and common sense to the process.
And then you have some of the media jumping on to this and giving a flawed and unbalanced report. How can the ordinary taxpayer form an opinion of the total contribution to the UK economy of multi-nationals if all they hear is part of the picture. What about the jobs, boost to local economy, PAYE, NIC, VAT (and CT) contributed by these companies?
Posted by: Joseph McDonnell, FCCA, 14 Nov 2012 | 14:48
I agree with the thrust of this article. The only thing I would like to have seen take further is the disclosure that Starbucks (I think - it could have been one of the others) negotiated a reduced rate of corporation tax in the Netherlands in order to base it's operations there. I am sure this must be in breach of some EU rule or other? This to me, seems to be quite apart from the arguments on transfer pricing, effectively acting as state aid to companies based in that country. The competition authorities ought to be looking at this now.
Posted by: Gareth Ackroyd, 15 Nov 2012 | 09:26
Calling witnesses to Parliamentary Select Committee hearings is getting like putting people in the stocks and throwing rotten fruit & eggs at them. Our elected representatives seem only to want to play to the gallery in showing how rude (and ignorant) they can be in questioning witnesses. None of the politicians seems to have even a basic understanding of how the British tax system works or how multinational companies operate. If there were anything seriously wrong with what the multinationals were doing surely it would already have been challenged and investigated by HMRC? If not, then it is the leaders of HMRC who should be "in the stocks" for failing in their duty of maximising the UK's tax receipts.
Posted by: Simon Gleaden, 15 Nov 2012 | 09:26
According to some press reports, not only is Hodges a substantial shareholder in a family company btu that company pays remarkably little tax in the UK. Perhaps she should have a little chat with her accountants? Maybe even call them in to explain to the PAC?
Posted by: Edward, 15 Nov 2012 | 10:33
Hodge is the crazy landlady who sets the rent at £500 per month, only to berate her tenants as immoral for not giving her double.
Posted by: Dave Chaplin, 15 Nov 2012 | 10:48
Politicians make the rules. Accountants make sure that their clients play by the rules. That's what we are paid to do; to keep our clients within the law. Asking them to do otherwise is as stupid as suggesting that someone should pay 23% tax when the rules say it should be 20%. Only the politicians can change the rules. The problem is, they can't understand them in the first place. How can they be expected to? Accountants find it hard enough! It all needs simplifying. There should be no taxation without understanding!
Posted by: Tony Pinfold, 15 Nov 2012 | 11:05
At last an article saying it as it is!
It's totally hypocritical of Margaret Hodge of all people to question accounting practices and then talk about immorality in the same sentence.
MPs preside over (and fail to address) the most immoral accounting practice of all - namely to ignore the accruals concept in relation to the unfunded public sector debt which is excluded from our balance sheet - a mere figure of £1.3 trillion according to an ICAEW Report from 2010.
Let's be clear, government accounts are at present produced on a basis that would attract criminal legal sanctions in the private sector. Moreover, we as accountants would be held criminally liable if we helped clients do this!
Perhaps if MP's had the same obligations and responsibilities as company directors, it would stop politicians making promises which will have to be paid for by our great, great granchildren.
Incorporation of the real liabilities (prefereably fully funded) in the balance sheet would force the tax system (and public spending ) to be completely overhauled now.
Unfortunately, there is no chance of that happening - as Sir Humphrey would say, such a decision would be (politically) courageous! The 3 party conspiracy of silence will therefore continue!
Posted by: David Gill, 15 Nov 2012 | 11:36
What is needed is an international agreement on corporate taxation so that countries can collect the tax due in proportion to the business carried out in their country. With increasing numbers of businesses operating largely online and on a global basis, the developed world needs tax harmony, not tax competition. Admittedly, the chances of getting this are pretty slim - although with millions of revenue going missing at a time of fiscal austerity perhaps now is as good a time as any to agree on tax rules which are fair for everybody.
Posted by: Lorna Bourke, 15 Nov 2012 | 18:45
Our analysis of the Amazon tax structure can be found here: http://www.milestonetax.co.uk/wp-content/uploads/2012/02/The-Amazon-Debate-16-November-2012.pdf
Posted by: Miles Dean, 16 Nov 2012 | 15:33
The BBC also avoid full tax liability with colourful tax schemes. They encorage their staff to do the same, most are freelance. Diffrence is i can opt out of Amazon and so on. But try not having a BBC tv license . The state will come down hard on you, and even imprison you for this. but its not a crime. eh. I don't understand it, maybe all the commentators are on the BBC payroll or scared of any outcome if they mention it. I cancdelled my license and will never buy another one.
Posted by: nigel, 04 Dec 2012 | 01:25
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