Netflix: Tax Affairs

Jesse Norman Excerpts

Monday 3rd February 2020 Commons Chamber

[The Financial Secretary to the Treasury (Jesse Norman)]

May I begin by thanking the right hon. Member for Barking (Dame Margaret Hodge) for calling this debate on an interesting and important topic that is of great public import? Members across the House will be aware of the interest that she has taken for many years in matters of tax avoidance, and I am grateful for the opportunity to speak in the debate and to outline work that the Government are doing to address concerns.

As the right hon. Lady will know, although I have overall responsibility for the tax system, I and other Ministers are never privy to information about the tax affairs of specific companies or individuals. This is a basic safeguard for taxpayers that is designed to ensure that Her Majesty’s Revenue and Customs can administer the tax system independently and without political interference. I am not, therefore, in a position to comment on the situation with Netflix as such, although I would like to reassure her that I have taken time to read around the subject of the debate, which excites a range of differing views. She will be aware that many of the wider concerns that she expresses are shared by Members across the House. I myself have written about them at some length and indeed pursued them as a member of the Treasury Committee, as she noted. In particular, she has raised several important general points about the tax system, which I would like to address.

The UK, like most major economies, taxes multinational companies based on the profits attributable to the economic activities they undertake here—for example, product development or manufacturing. That point has been well made by the right hon. Lady. That means that revenues alone are not a useful indicator of the amount of tax that a business should be paying in the UK. It is also necessary to consider the profitability of the business concerned, and the extent to which the activities that generate profits take place in the UK or abroad. However, the Government recognise that some multinational businesses have sought to avoid paying their fair share of tax in the UK by entering into contrived arrangements to divert profits to low tax jurisdictions, depriving the Exchequer of revenues needed to fund the public services on which we all reply. That is completely unacceptable, which is why the Government have taken robust action designed to inhibit or prevent it.

Internationally, the Government have been at the forefront of efforts to ensure that multinational companies pay their fair share of tax. In 2013, the UK used its presidency of the G8 to initiate the OECD’s base erosion and profit shifting project, which carried out a comprehensive review of international tax rules. The BEPS project recommended a range of measures to combat tax avoidance, which the UK has led in implementing. They include rules restricting companies’ ability to shift profits using interest deductions, rules counteracting tax avoidance arrangements involving so-called hybrid mismatches, a requirement for multi- nationals to disclose information about their sales, profits and assets in each country to HMRC, and new rules to prevent the abuse of tax treaties.

The Government have also acted unilaterally where needed. In 2015, they enacted the diverted profits tax, which charges a higher rate of tax on profits diverted from the UK in order to encourage companies to declare the right amount of profits. In 2019, they introduced a tax charge on offshore receipts in respect of intangible property—known in the trade as ORIP—which targets companies that hold valuable intangible assets, such as brands or technology rights, in low-tax jurisdictions. Such measures have significantly curbed the ability of multinational companies to shift profits to low-tax jurisdictions and have collectively raised over £8 billion for the Exchequer.

However, we must be realistic about the scale of the problem, not merely in the UK but around the world. New digital business models continue to pose challenges for international tax rules, and the sad fact remains that the vast majority of the rules were developed prior to the digital revolution of the past two decades. The Government therefore strongly support further work that is being undertaken at the OECD to reform profit allocation rules to ensure that market economies, including the UK, can tax a fair share of the profits of highly digitalised businesses. Only last week, UK officials attended meetings of the OECD in Paris, at which countries agreed to an outline of reforms. It is a complex area and there remains much work to be done, but the Government are optimistic that global agreement will be reached.

[Wes Streeting (Ilford North) (Lab)]

I thank the Minister for giving way. He is right to emphasise the importance of international co-operation, but the passage of time since many of these arrangements were agreed and the prevalence of the problems today suggest that international action has not been sufficient. What about the two examples of unilateral action that my right hon. Friend mentioned: a withholding tax applied in this country, or an extension of the ambit of the digital services tax that the Government currently have under consideration?

[Jesse Norman]

I thank the hon. Gentleman for his question, although it is a pity that he asks a question that has already been asked when we are short of time in a debate, because that does not allow me the time to come back to the right hon. Member for Barking, who asked the question in the first place. If they permit me, I will get to his point in due course after I address another issue raised by the right hon. Lady that is of great importance to the debate.

Turning to creative sector tax reliefs, we need to be clear that the creative industries make an important and extremely valuable cultural contribution to the UK. They are also an important part of a dynamic and diversified economy, with the UK’s world-famous creative industries making a record contribution to the economy in 2017 by breaking through the £100 billion mark. The Government are committed to supporting these highly skilled and innovative industries as they support economic growth across the UK. That is why the Government continue to offer support for the creative industries through eight sector-specific tax reliefs. The most established of those are reliefs for British film and high-end television productions. The reliefs have supported over £19 billion of UK expenditure, including the completion of 90 TV programmes and 245 films in 2018-19 alone. The success and popularity of British films overseas is well known. The UK film industry exported a record £2.6 billion-worth of services in 2017 and employed over 90,000 people across the UK in 2018.

The effect of the tax reliefs, in turn, is to help cement investor confidence in UK creative skills, infrastructure and innovation. Indeed, investment in facilities has spread to projects around the UK and includes new studio spaces such as Wolf near Cardiff, Pentland in Scotland, Church Fenton in Yorkshire, and the Littlewoods building redevelopment project in Liverpool.

I now turn to the questions raised by the right hon. Lady. She asked about the location where IP is created and whether that should determine the taxation of that IP. As she will be aware, I cannot comment on the circumstances of individual businesses, but under international tax rules, the UK is entitled to tax the shares of a company’s profits that relate to those production activities. That is what we are in a position to do, so she should not have concern on that front.

The right hon. Lady also raised the question of Brazil.

[Martin Docherty-Hughes (West Dunbartonshire) (SNP)]

Will the Minister give way?

[Jesse Norman]

I really have no time if I am to answer the right hon. Lady’s questions. Perhaps I can come back to the hon. Gentleman, but I have already taken two completely irrelevant repetitions of questions that I am trying to answer.

Why can Brazil tax companies but the UK cannot? As the right hon. Lady explained, Brazil has a withholding tax. In the Finance Act 2019, the UK introduced a charge, as I have described, on offshore receipts from intellectual property. That charge, introduced in 2019, completely refutes the suggestion made by the hon. Member for Ilford North (Wes Streeting) that tax arrangements have existed for a long time—in fact, trying to stop these forms of aggressive avoidance and potentially outright evasion is an ever continuing process. The effect of the ORIP rules is to replicate the effect of a withholding tax where IP is held in low-tax territories, along the lines that the right hon. Member for Barking has called for.

The right hon. Lady asked about the digital services tax. As she is probably aware, that is designed to relate to large search engine, social media and online marketplace businesses. Those are different from the case that she is discussing, as they rely on their users to create value where that value is not recognised under current international tax rules. Therefore the set of rules would have to be entirely rewritten to take into account the circumstances of the case that she is describing now, which may be important but is in any case captured by existing Government law in many instances. In any case, the DST is intended to be a temporary measure pending agreement of a long-term global solution, potentially including the United States, that will address the wider challenges posed by digitisation.

I remind the right hon. Lady as she denounces the company in question, for which I hold no brief either way, that it is planning to invest about £232 million in Shepperton Studios. That is not a trivial act and is something that we should be aware of. Finally, she mentioned country-by-country reporting. Again, the law is in place. Since 2017, large multinationals have been disclosing the information to HMRC. Businesses of all shapes and sizes make a valuable contribution to the UK’s creative economy, and it is absolutely right that they should be incentivised to continue to do so. But it is equally right that HMRC should subject large businesses to an appropriate level of scrutiny, and my understanding is that it is actively investigating around half of the UK’s large businesses at any given time. That is a very considerable undertaking and ample testimony to the seriousness with which it takes this issue.

Let me conclude, Mr Deputy Speaker, by thanking you and thanking the right hon. Lady once again for raising this important issue.

Question put and agreed to.