Multinational companies, like Starbucks and Google, are by definition different to domestic businesses (like John Lewis or Morrisons). This is especially true of internet retailers like Amazon. Under the current law, multinationals can choose where they locate international operations, and they often do so in response to competitive tax policies. If that means the tax take in the UK is lower as a result, that is the nature of competition.
Britain’s current tax law supports this system. Companies can deduct expenses (whether interest payments, royalties, or management charges) in computing taxable profits. It is the job of HMRC to examine whether such payments are incurred wholly and exclusively for the purpose of trade. If deductions are found to be in contravention of the law, adjustments are then made. These are fundamental cornerstones of UK law and are premised on internationally-agreed concepts that have developed over several decades.
The PAC should therefore know better than to argue that throwing more funds at HMRC is the answer to getting multinationals to pay more tax. And it should also realise that some of the other proposed solutions to the issue are unlikely to work. Unitary taxation (a levy on a corporation’s worldwide income) is not the answer. Global domestic tax systems, and the double tax treaties that facilitate cross-border trade, would need to be fundamentally amended to cater for it. This would take decades to achieve.
And if the current system is seen as fundamentally broken, our response should not be to simply demand companies pay more tax. We should create a simpler system, and understand that companies will pay more UK tax if our arrangements are seen as more competitive than our rivals.
One reform could be an overhaul of transfer pricing rules, which determine how the costs of services can be measured. In particular, if we reduce and streamline the number of methodologies that can be used to determine a transfer price, fewer companies would have the ability to get around the current system.
More importantly, we could introduce a system whereby HMRC expands its focus beyond the deductions that are claimed by the UK limb of a foreign multinational. It could instead holistically examine that company’s UK business activities, with the aim of agreeing acceptable profit margins on which UK corporation tax is payable.
The UK has opened its doors to multinationals on an agreed set of internationally-accepted policy principles. Tax competition is unlikely to go away and, rather than attacking specific nations or companies, we should look at how the likes of Ireland, Switzerland, Netherlands and Luxembourg attract and retain big businesses. So often, the answer is a simpler system and lower corporate tax rates.
Miles Dean is founder of Milestone International Tax Partners.