This afternoon, Parliament’s Public Accounts Committee (PAC) will be discussing “Taxation of Multinational Corporations” with Matt Brittin, Chief Executive Officer of Google UK, Troy Alstead, Starbucks Global Chief Financial Officer and Andrew Cecil, Director of Public Policy at Amazon.
The Guardian reports that Starbucks may already have sustained lasting damage to its brand image from the allegations against it, and today’s hearing is unlikely to fix that. Meanwhile there was quite a lot of venom directed at the PAC on Twitter last week, from those who considered it “uninformed” and “lacking understanding”.
There’s at least one point where I agree with these critics. The PAC is a group of MPs, who as legislators are responsible for the design of our tax system. These hearings are a chance for them to examine that system and recommend changes to it, but in doing so it’s fair that they should acknowledge that much of what they consider to be problematic is a consequence of laws for which they themselves have voted.
With that in mind, here are some suggestions for the hearing.
Three things the committee should ask
- I think they should start with that old chestnut, a country-by-country (CBC) disclosure of these companies’ taxable profits. Let me say at the outset that I think the usefulness of CBC disclosures is frequently overstated, but that this is one of the cases in which it would be valuable. It’s impossible for the PAC as legislators to effectively scrutinise the system that they are responsible for creating without seeing on a basic level the impact that it has on the distribution of the right to tax these companies. That would be the sole purpose of the disclosure in this case: to illuminate the current consequences of profit-based taxation and the transfer pricing system.
- The committee’s chair, Margaret Hodge, appears to have joined calls for a move to sales-based taxation (of which I’m sceptical). So it would be useful for the committee to ask these witnesses how a shift to this approach would change the distribution of taxing rights set out above. Which countries would be the winners and losers? How might the businesses change their corporate structures to react to the tax consequences of such a change?
- Finally, there are two tax reforms under discussion at international level that could have a direct impact on the three companies giving evidence. One is the United Nations tax committee’s plan to give countries the right to tax technical services provided to their residents even when the service provider has no physical presence, for example because it’s internet-based. The other is the OECD’s proposed new guidelines on transfer pricing for ‘intangibles’, including royalty fees and licenses. The UK is opposed to the former, a position that the PAC should scrutinise actively. But it should also ask these companies about their own lobbying, and that of any industry bodies to which they belong, on these reforms.
Three things that businesses should be willing to say
- I’ve argued before that businesses and the tax profession shouldn’t just write off people’s intuitive reaction to the system as a lack of understanding, when underneath there may be a disagreement about the principles on which the system should be based. John Humphreys’ interview with Bill Dodwell of Deloitte this morning was a case in point: from his position of technical expertise, Dodwell didn’t try to defend the rationale for the system, he just argued that this was how the system worked. Businesses have a view on how they would like the system to work, and they should be willing to defend this.
- Furthermore, we all know that businesses make decisions to adopt particular tax planning strategies, and I think it is legitimate to hold them to account for these decisions and their impact on tax payments (I’m well aware that others disagree with me on this, because they don’t think an informed public debate is possible). If a business needs to defend itself, I think it should do so with more information, explaining how the result was arrived at. Instead, I notice that Starbucks has wheeled out the old Total Tax Contribution, which tells us nothing about its corporate bill and overstates its own tax burden by parcelling it up with things like the VAT that is levied on its customers.
- Finally, businesses aren’t passive subjects of tax law, they’re active participants in the standard-setting and law-making processes, whether in the UK or at the OECD. Transfer pricing works the way it does in part because that’s how business wants it to work, just as reforms to the UK’s Controlled Foreign Companies rules were heavily shaped by corporate lobbying. This is something that our three witnesses today could acknowledge and even elaborate on in terms of their own companies’ activities.