1 Tax avoidance by multinational companies
1. In 2011-12, £474.2 billion of total tax revenue
accrued to HM Revenue & Customs (the Department) which was
£4.5 billion higher than for 2010-11. Yet there was a decrease
in corporation tax revenue of £6.3 billion.
2. HMRC stated that it had been a policy of successive
Governments to make the UK an attractive place for business and
for multinationals to see the UK as competitive.
But HMRC also expected everybody to pay their fair share of tax
and saw its role as strictly enforcing the tax laws which it felt
were strong enough to collect tax owing under both national and
international tax systems
and rebutted any suggestion that it had been lenient with big
3. We were not sufficiently convinced by the Department's
assertion that it was pursuing all the tax due from big businesses
given the reduction in corporation tax revenue from last year.
There is genuine public anger and frustration because there is
an impression that rigorous action is taken against ordinary people
and small businesses and British companies based wholly in the
UK but, apparently, lenient treatment is given to big corporations,
of which almost half have a head office overseas.
4. HMRC considered that it had a well-resourced unit
bringing in very significant amounts of money; for the 770 largest
businesses it had 1,200 staff and was able to draw on expertise
across the Department, for instance 65 transfer pricing experts.
HMRC told us that it had the right talent: many of its staff resist
offers from firms and are motivated by the public service ethos.
We were sceptical of these claims.
5. HMRC was not able to show conclusively that tax
avoidance was not increasing.
HMRC also could not tell us how many of the big corporations were
handling their tax affairs through offshore tax havens but suggested
that it could provide figures in future annual reports.
HMRC told us that all it could do was to apply the law as it is
and, in an international setting, multinational businesses could
choose, to some extent, where to set up and where some of their
profits are based.
International co-operation will be required to improve global
6. HMRC acknowledged that it has to maintain broad
confidence and credibility in its administration of the tax system
to maintain the very high levels of compliance that there is in
the UK. However,
we felt that this was undermined by the Department's use of selective
prosecutions; a practice which it could not clearly justify to
the Committee. HMRC
had not carried out any analysis into the effect high-profile
cases of large companies avoiding tax could be having on the compliance
rate of individuals and small and medium companies.Multinational
companies appear to be using transfer pricing, payment of royalties
for intellectual property or franchise payments to other group
companies to artificially reduce their profits in the UK or to
remove them to lower tax jurisdictions.
We were not convinced that HMRC has the determination to robustly
challenge the practices of these companies.
7. To explore these issues, the Committee held a
hearing with representatives from three multinational companies
(Amazon, Google and Starbucks) and we are grateful to those companies
for providing evidence to us. While their circumstances and business
models are different they all have a significant commercial presence
in the UK and we wished to gain an understanding as to why it
appears that they do not pay their fair share of corporation tax
in the UK. Our intention
in inviting these companies was to provide an illustration of
what we perceive to be a wider problem of possible corporation
tax avoidance; not to single out Amazon, Google and Starbucks
as the only companies engaging in these practices.
8. Starbucks told us that it has made a loss for
14 of the 15 years it has been operating in the UK, but in 2006
it made a small profit.
We found it difficult to believe that a commercial company with
a 31% market share by turnover, with a responsibility to its shareholders
and investors to make a decent return, was trading with apparent
losses for nearly every year of its operation in the UK.
This was inconsistent with claims the company was making in briefings
to its shareholders that the UK business was successful and it
was making 15% profits in the UK.
Starbucks was not prepared to breakdown the 4.7% payment for intellectual
property (which was 6% until recently) that the UK company pays
to the Netherlands based company.
The Committee was sceptical that the 20% mark-up that the Netherlands
based company pays to the Swiss based company on its coffee buying
operations, with a further mark up before it sells to the UK,
is reasonable . Starbucks
agreed that it had a special tax arrangement with the Netherlands
that made it attractive to locate business there, which the Dutch
authorities asked Starbucks to hold in confidence, and that Switzerland
offers a very competitive tax rate.
In addition, there is an inter-company loan between the US Starbucks
business and the UK Starbucks business over a period of time with
the interest rate set at higher rate than any similar loan we
have seen. We suspect
that all these arrangements are devices to remove profits from
the UK to these areas with lower tax.
9. At the hearing we were frustrated with the representative
from Amazon, who we found evasive and unprepared to answer legitimate
questions on the company's structure and the true location of
its economic activity.Amazon
has subsequently provided this information.
Amazon has a reported turnover of £207 million for 2011 for
its UK company (Amazon.co.uk), on which it has shown a tax expense
of only £1.8 million, however it shows a European-wide turnover
of 9.1 billion for its Luxembourg based company (Amazon
EU Sarl) and a tax of 8.2 million.
Amazon.co.uk is a service company in the UK providing services
to Amazon EU Sarl for which it receives payment.
That company is owned by a holding company, which is a subsidiary
of Amazon's group companies.
Amazon subsequently provided a copy of the unaudited accounts
for Amazon Europe Holding Technologies S.C.S for 2011 showing
a profit of 301.8 million and no tax payments.
Amazon also provided information showing that for 2011, £3.35
billion of sales were from the UK, 25% of all international sales
outside the USA.
Yet Amazon has over 15,000 staff in the UK, invoices UK customers
from the UK, hires UK staff in the UK, has inventory physically
in the UK for UK customers and to all intents and purposes has
the majority of its economic activity in the UK, rather than in
Luxembourg, but pays virtually no corporation tax in the UK.
Amazon has received an assessment from the French tax authorities
which it disputes.
10. Google explained in its responses that it minimised
tax within the letter of the law and that low tax areas or tax
havens influenced where it located its group companies.The
vast majority of Google's non-USA sales are billed in Ireland.
Google makes money from business to business advertising, adverts
which can be targeted to the UK website and to UK Google users.
In the UK, Google Ltd recorded revenues of £396 million in
2011, from Google Ireland, but paid corporation tax of only £6
million. Google Ireland
paid for the services provided by the 1,300 staff in the UK.
Google had approximately 700 staff who undertake marketing work
in the UK as part of their activities, but only 200 of Google's
Irish staff of 3,000 were involved in marketing Google in the
11. Google accepted that profits should be taxed
in the jurisdictions where the economic activity generating those
but it asserted that its underlying economic activity arose from
the innovative software technology underlying its Google search
engine generated by the US company.
Google also confirmed that it had an entity based in Bermuda to
protect its intellectual property.
We consider that the company undermined its own argument since
it remits its non-USA profits (including from the UK) not to the
USA but to Bermuda and therefore may be depriving the USA of legitimate
tax revenue as well as the UK.
Subsequently, Google told us that there were no outstanding issues
with HMRC about Google UK's accounts. HMRC is currently carrying
out a review of the tax returns filed by Google UK for 2005-11
inclusive and Google told us this is standard practice and that
it is co-operating fully with that review.
12. All three companies accepted that profits should
be taxed in the countries where the economic activity, that drives
those profits, takes place and that, alongside their duty to their
shareholders, they had obligations to the society, from which
they derive their profits, which included paying tax. However,
we were not convinced that their actions, in using the letter
of tax laws both nationally and internationally to immorally minimise
their tax obligations, are defensible.
They all accepted that the perceived ethical behaviour of corporations
could affect consumer behaviour. Being more transparent about
their business practices, including paying their fair share of
taxes, was becoming an increasingly important issue to their customers.
The Tax Gap
13. The tax gap is the Department's measure of the
difference between tax collected and the tax that would be collected
if all individuals and companies complied with both the letter
and the spirit of the law. The Department estimated that some
25% of the tax gap is down to large businesses, although this
includes other taxes as well as corporation tax discussed above.
14. HMRC's latest published estimate of the gap for
2010-11 is £32.2 billion which has reduced from £33.3
billion for 2004-05.
HMRC did not agree with the Committee's view that there has been
disappointing progress in closing the tax gap as the gap, while
trending down only very slowly, is competitive when compared with
most countries and is lower than Sweden and the United States.
2 C&AG's Report: para 1.3; Figure 1; and Figure
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