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.
Martin Hearson 
Martin,
I am one of those deeply sceptical of how the PAC has handled things. There are legitimate questions about how the system of international corporate taxation works. However, the way the PAC is going about addressing these issues is surely very unhelpful.
There seems to be a feeling amongst at least some of the members of the committee that there should be a strong relationship between corporation tax paid in the UK and UK sales. However, they appear to be oblivious of the fact that this is not at all the system that we have.
The system we have attempts (via the transfer pricing mechanism) to allocate profits between the countries where those profits are earned. This it basically does by trying to look at where the economic activity took place and allocating profits accordingly (via a mechanism of arms length pricing). Thus a business which – for example – sells cars, laptops or anything else to third parties in the UK, but does not have a presence in the UK will have no corporation tax to pay here. In the cases of an overseas multinational which develops, designs and manufactures its goods overseas, and only has a sales and marketing operation in the UK only that part of the profit which could reasonably be attributed to its sales and marketing activity in the UK would be expected to be taxed in the UK. In the cases – say – of Apple which (I believe) does not do much more that sales and marketing in the UK, we expect that most of the profits on its UK sales would be generated outside the UK.
If the PAC thinks the system should be changed, by all means get in a range of people who’ve thought about the issues (academics, tax practitioners, companies and tax campaigners) and investigate them. Find out the pros and the cons and publish a report. However, simply attacking Lin Homer and HMRC for not getting foreign multinationals to pay more tax in the UK when under the current system no more is due is just pathetic, and certainly gives the impression that PAC is ignorantly blundering about in the dark.
Thanks for your comment Tim. I didn’t see the HMRC evidence session so can’t comment on it, but I think I am suggesting the same kind if inquiry as you, just adding that the companies giving evidence today can usefully be treated as case studies too.
As I argued in a previous post, I’m personally sceptical of a sales-based approach because I think it would still produce outcomes that seem perverse (e.g. a manufacturer that produces mainly for export) and it certainly wouldn’t work for developing countries (where the latter scenario is more common). Which I suppose makes the intellectual case for a formulary approach that includes sales as one of several allocation factors…?
I will try to watch the session. It would be nice if the members – when asking their questions – showed some appreciation of how the current rules are supposed to work. By all means conduct a review to see if the system is appropriate, but simply attacking Google, Amazon and Starbucks for doing stuff that is likely squarely within the rules is pointless and makes the PAC look like fools.
I really think that this afternoon’s PAC session will decide in my mind whether the PAC is about MPs grandstanding, or whether they are interested in understanding the underlying nature of the problem.
Like you, I don’t see any value in blaming companies for exercising choices that appear to be acceptable within the spirit of the law, as well as the letter. I think that is, perhaps, the point that many tax professionals try hard to convey and get slightly entrenched in discussing.
However, I don’t think you always get an honest answer if you ask an honest question. Sometimes a bit of distraction or even softening up can offer you the opportunity to gain very honest responses that you may not otherwise achieve. I’d happily accept the politicking if I thought it helped achieve greater honesty from the respondents.
Despite the odd insight last week (I thought Fiona Mactaggart asked a good question about behaviours), much more of it appeared politically motivated rather than “interrogation technique”. I’m not holding my breath, but if we see some questions along the lines suggested above snuck in there, it may prove to be a useful session.