CRITICISM OF GLOBAL CORPORATIONS by the court of public opinion regarding their perceived avoidance of tax payments has reached fever pitch over the last few months.
Politicians on both sides of the Atlantic are putting increasing pressure on worldwide companies such as Apple, Google, Microsoft, Amazon and Starbucks to alter their transfer pricing arrangements and pay more corporation tax, yet these firms, and others like them are simply working within the confines of existing tax laws.
During a recent briefing with the US Senate, Apple confirmed it paid $6bn to the Treasury last year, representing a 30% tax rate. Despite having cash assets of $145bn (£95bn), the Senate Committee reported $102bn of this was held offshore (mainly in Irish-based subsidiaries) and therefore not subject to tax. Profits held offshore by US multi-national corporations are generally not subject to US tax until they are repatriated.
Google reported UK customers spent £3.2bn in 2012, but as its sales were concluded in Ireland, only £3.4m in UK tax was paid. Amazon’s UK sales topped £4.2bn, but as they are concluded in Luxembourg, £3.2m in UK tax was paid. Starbucks reduced its UK tax liability to zero by routing profits through Switzerland (although it did make a £20m voluntary payment to the Treasury as a result of public protests).
Transfer pricing supports economic growth
Whilst some commentators view this practice as morally dubious, these and other global corporations facilitate and encourage economic growth. Transfer pricing is needed to support this. In the US alone, Apple is responsible for creating or supporting 600,000 jobs.
Apple and other brands contribute locally via employment, VAT, sales, property and business taxes, boosting the income of goods and service providers within their supply chains and wider staff networks. For example, in 2013 Corporation Tax made up only 9% of the UK’s total tax take, with personal tax and VAT together, accounting for 75%. Dividends also go to shareholders, who in turn are taxed, and most of us will have them in our pension investment funds. In some way we’re all inextricably linked.
It’s not as if transfer pricing is new. In the UK, the principle of ‘arms length’ trading between connected parties has been around since the 1800s. Without them, there would be no consistent way of allocating profit between different jurisdictions.
It is clear to many that the current tax rules need to change in some manner to reflect the way in which global businesses now operate. How they should be altered is subject to much debate. How do you measure a fair or a moral profit?
Is there anything else better on the table? The European Commission is keen to roll-out the Common Consolidated Corporate Tax Base (CCTB) which could in principle, do away with transfer pricing. However much of this is based upon the way in which Formulary Apportionment works for allocating profit between US states. Ask any US State tax adviser whether that is a perfect system.
In the US, there’s talk of legislation to add ‘more teeth’ to the current transfer pricing rules. The IRS has been promulgating and using a ‘reasonableness test’ in many transfer pricing related audits. For example, a US corporation transacts with a subsidiary in a low tax jurisdiction and both entities’ profit margins are reviewed to see if a disproportionate (ie unreasonable) amount is allocated to the low tax entity. If the low tax entity’s profits appear unreasonable, the IRS will seek to move the excess profits back to the US through a transfer pricing adjustment to create a ‘reasonable’ balance.
In France, the Collin Colin Commission suggested taxing internet companies based on downloads and user data, but start-ups, reliant on gaining momentum through users and data to establish their business, have voiced major concerns. Imagine if Facebook had paid tax based on its number of users before it made a profit?
Better enforcement, particularly in the UK is seen by many constituents involved in the global tax debate as crucial to reform. But does it have the resources to do so? Tens of thousands of HMRC staff have been let go over the last few years and although there is now some movement to bring in specialists on a smaller scale, staff numbers are still very modest compared to other countries. In the US, IRS staff were recently furloughed, however the IRS continues to bolster its team of international examiners and transfer pricing economists by bringing in high flyers from accounting and law firms.
Perhaps we should follow the French example of enforcement where tax auditors may spend between six and 12 months on site with a firm, scrutinising its books.
Global agreement required
In practice, there must be global agreement on the principles to determine profits between countries; otherwise there will not be an appropriate means of determining tax liabilities in each tax jurisdiction. The OECD has spent many years trying to persuade developing countries to adopt its guidelines and we can’t see a major change in approach anytime soon.
Transfer pricing needs to move on and adapt to the new environment. Multi-national corporations will always need a way to measure their profits in each country – perhaps going forward it will be used less aggressively, but it will always be necessary, just not as evil as the Public Accounts Committee may think.
HMRC is continuing to ramp up the number of raids on premises it carries out as part of criminal investigations, searching 761 properties in the last year
The latest opinions from Accountancy Age on Making Tax Digital, and outline plans to evolve the UK's corporate governance regime
Lord Howard Leigh of Hurley discusses the government’s initiatives to mitigate tax avoidance and evasion
Top 50+50: Demand for tax advisory services remains high, but fee pressure is expected in relation to compliance services
The demand for tax advisory services remains high and this looks to continue; but fee pressure is expected in relation to compliance services as the “Making Tax Digital” initiative is rolled out,