Corporate Tax Avoidance

Paul Farrelly Excerpts

Monday 7th January 2013 Commons Chamber

[Paul Farrelly (Newcastle-under-Lyme) (Lab)]

I am glad that the hon. Gentleman has chosen to talk about Amazon, because it gives me the opportunity to pay tribute to my great friend and former journalistic colleague, Ian Griffiths, who wrote the seminal investigation on behalf of The Bookseller in The Guardian in April, which showed that Amazon had made £7.6 billion of sales in the UK but had paid zero corporation tax because of the Luxembourg structure, even though the warehouses are here. I am sure that the hon. Gentleman will come on to this, but does he think that it is right that the tax playing field should be levelled, because booksellers and record retailers are going out of business day after day in this country?

[Mr Gibb]

That is why this issue is so important. It is not just about the corporate tax base, which is hugely important, but about the competitiveness of British-based businesses.

Another thing that I found odd about the Amazon structure was that the accounts filed at Companies House report that the company has 2,265 employees, which is vastly different from the 15,000 employees that Andrew Cecil told the Public Accounts Committee Amazon employs in the UK. The other strange thing about Amazon’s group structure is that even the Luxembourg operation, with its €9 billion turnover, appears to have made a post-tax profit of just €20 million.

As we have seen with Starbucks and Google, profits can be siphoned off from individual jurisdictions by payments for intellectual property rights through royalties or technical fees. Starbucks pays a royalty of 6% of its turnover to its company in the Netherlands. Google also pays for the use of its technology. Although that technology was developed in California, the rights to use it outside the USA are held in Bermuda.

Much of this area of law is governed by a network of double tax treaties, of which the UK has signed more than 100. They are based on a model double tax convention that was agreed at the OECD and have been highly effective in boosting worldwide trade and overseas investment over the decades. Britain benefits hugely from that network of treaties. We have £10.9 trillion of investments abroad, which generated £188 billion of income in 2011. The Government are therefore right to want to tackle the problem of corporate tax avoidance through international negotiation. As the Prime Minister wrote in his letter to G8 leaders on 2 January:

“in a globalised world, no one country can, on its own, effectively tackle tax evasion and aggressive avoidance. But as a group of eight major economies together we have an opportunity to galvanise collective international action.”

One such action is the OECD’s study into the transfer pricing aspects of intangibles. In its discussion draft, snappily entitled “Revision of the Special Considerations for Intangibles in Chapter VI of the OECD Transfer Pricing Guidelines and Related Provisions”, published in June last year, the OECD concluded:

“It should be emphasized that not all intangibles deserve separate compensation in all circumstances, and not all intangibles give rise to premium returns in all circumstances.”

In other words, the OECD is coming to the view that the huge royalty payments that some international groups make their overseas subsidiaries pay to their home country or to tax havens may no longer be allowable against tax in the overseas jurisdictions. However, the OECD, by necessity, moves slowly. Speedier action could be taken by the UK tax authorities by speeding up transfer pricing inquiries. It is therefore welcome that the Chancellor has allocated additional funding to HMRC to do that. HMRC could also take powers to require companies to disclose in advance all international connected party payments and to supply the associated documentation. There could be tougher penalties when a company’s tax return is wrong because of over-aggressive transfer pricing.

I conclude by touching on a wider issue relating to corporate tax avoidance: the ethics of companies and their boardrooms. In our everyday lives, we are all governed by a sense of morality, not just by law and regulation. Corporations are artificially created legal personalities. The morality of a corporation is determined by its board—by both executive and non-executive directors. It is no good for individual companies or for free market capitalism, which I support passionately, if directors interpret their role too narrowly. Too often, people who sit on company boards fail to ask the simple and straightforward question that governs moral behaviour: is this the right thing for us to do? Too often, directors seem to take the view that their fiduciary duty as directors stops at the maximisation of shareholder value, but section 172 of the Companies Act 2006 makes it clear that the duty of a director to promote the success of the company must be subject to a number of wider considerations including

“the desirability of the company maintaining a reputation for high standards of business conduct”.

I question whether the directors, including the non-executive directors, of the three companies so ably questioned by the PAC were fulfilling that duty.

Action needs to be taken to ensure that the corporate tax contribution of a multinational to a nation’s Exchequer is broadly consistent with the level of economic activity in that jurisdiction. We need to ensure that that action does not hamper world trade: it must be multilateral, but it needs to be swift. There are measures that HMRC can take in the meantime to ensure that it has the intellectual resources to match those of the international accounting firms. There are also questions that the boards of corporations need to take seriously as business leaders and members of society.

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[Nigel Mills (Amber Valley) (Con)]

It is a pleasure to speak in yet another tax debate—we seem to be having more and more of them as the months of this Parliament go by. This is an important issue, and the debate is about corporate tax avoidance, not just corporation tax avoidance. We can sometimes drift into focusing on tax on profits and miss out on the avoidance of VAT or payroll tax, which we could more readily do something about.

The publicity on the issue has had some positive impact, because it has probably discouraged a lot of businesses from entering into aggressive or artificial avoidance schemes. That has to be welcomed on one level, but we do not want to go so far that we start to do damage. The last thing that we want to do is deter international investment in this country. After all, the Government have set out to make ours the most attractive corporate tax regime in the G20. There has been great progress on that through rate reductions, and I believe that after the latest reduction we are about fifth in the G20. However, when we consider the effective rates that people actually pay, we are down to about 15th because of the complexities of our system. There is still a lot of work to do to make our system an attractive one that encourages investment both internationally and domestically.

We have to be careful that we do not drift towards having a tax regime that ceases to be based on a clearly advanced and published rule of law and is instead based on arbitrary decisions, with the Revenue having the power to ignore the law completely or rewrite it retrospectively, or if that fails, to bully people into paying a bit more tax until we think it is about right. After all, corporation tax is on profits for tax purposes, not on profits for accounts purposes, and certainly not on sales for accounts purposes. It is worrying that people seem deliberately to confuse the matter, talking about a company with a turnover of £1 billion paying only £500,000 of corporation tax and saying that that is a low percentage. That percentage could be completely irrelevant, because if it has made no profit, it will pay no corporation tax. We need to be accurate and focus on a different issue.

There are some aggressive avoidance schemes that are intended to exploit UK domestic law that we can tackle. The Government are tackling them, and I believe they have announced some more rules today to do so. We need to be as proactive as we can on those schemes, and that is where the general anti-abuse rule has a role to play. I am a sceptic about that. I am not sure I like the idea of giving any government bodies the power to implement something that is not law, but which they think ought to be. We are here to make laws; they are there to implement the laws we make. If we get the laws wrong, we should sort that out and improve our processes, not expect those bodies to find a way of fixing the problem retrospectively.

However, a lot of the avoidance we have been talking about involves transfer pricing. We are an international economy and we want to remain one. One of the things we are focused on is trying to encourage exports—we want people to invent and design things here, and then export and license them and get royalties and sales back. However, we will not win if we start an international war to see who can clobber royalties the most or put up the biggest barriers to trade. That would be a suicidally stupid thing to do.

[Paul Farrelly]

One example of where the Government have quite sensibly changed the taxation regime is their approach towards remote gambling, where they are moving towards a “point of consumption” basis. We might argue about what profits should be taxed, but the principle is that the bet is taxed where it is “consumed”—that is, where the good or service is consumed—not where the business is accounted for. Does the hon. Gentleman agree that that is a model we might follow in order to repatriate other tax revenues?

[Nigel Mills]

Yes, I do. Indeed, I think we will end up travelling in that direction, because corporation tax rates will be in some kind of global race to the bottom—as we reduce ours, people will follow suit, which will lead to revenues falling. However, it is right to say that if something is sold to a UK customer, the VAT on it should be accounted for in the UK—in fact, what we are talking about is like a trading activity. To be fair, if I rang a random business in Botswana tomorrow and said, “Can you send me a widget you’ve made?”, and that business did not regularly sell anything to the UK, I suspect we would not be too worried, but sales of things regularly marketed into the UK should be accounted for here and VAT should be paid. I think we are moving towards that system, which is absolutely right.

To return to my thread, it is not in our interests to encourage some kind of global race towards tax barriers, withholding taxes or whatever else. The right hon. Member for Birkenhead (Mr Field) was talking about some strange tariff for international companies to come and trade here, which would be crazy—certainly illegal and probably economically suicidal. We do not want to end up in that sort of mess.

We should not vilify the payment of royalties, management fees, design fees or even interest. What we need to do is ensure that those payments are not excessive, either individually or collectively. One of the things I fear, having worked in the industry, is this. At times, it is easy to say, “That fee’s okay, that fee’s okay and that fee’s okay,” but then we forget to look at the overall situation in the UK and reflect on the fact that no one would operate a business if the most they could ever make was a 1% margin on turnover in a very good year, while regularly making a loss in an average or bad year. That is not how to trade: these things have to be looked at as a whole, to try to ensure that the profit expected in an average year is reasonable enough for a business to want to operate in that territory.

That point can easily be lost, so what the Government can do to try to improve the situation is this. First, we need global rule changes to try to make internet-based business fit our tax systems. What we are trying to do, not just in the UK but globally, is make a tax system from the 1940s and 1950s—or even earlier—work for a different model of business. I remember that even when I started work a lot of my clients were inbound investors who actually made stuff in the UK and sold it just in the UK. That is not how things work now: people make stuff in low-cost territories, market it globally and administer that regionally. I do not think our system can be made to work in the current situation, where we have Amazon. There is a global need for reform.

However, we can do more on transparency. As I said earlier, we ought to require large corporates to file their tax returns with their annual accounts. People might say, “We have taxpayer confidentiality,” and yes, for individuals we do have that. However, we make companies file accounts and show what their profits are. What is the harm in making them show how they got to their taxable profit and the tax they paid? That would add transparency and show that the vast majority of corporates are not avoiding tax at all, but trying to do the right thing and making use of the different calculations that exist for tax. I have moved amendments in this place proposing to move our corporate system much closer to one based on accounting profit. We do not need all the different tax schedules—we probably do not even need a capital versus revenue divide. We can get our tax system much closer to one based on accounting profit, which would stop all these fears that some people are avoiding tax when they are perhaps not doing so. It would be much harder to implement complex transactions if that were in the accounts published. Indeed, we are talking about the profit that a business is judged on by lenders and the markets.

We could go so far as to say that all multinationals had to disclose all their cross-border transactions with related parties. A lot of companies used to do that in their accounts. They would list the royalties that they had paid to the US, for example, and the management fees that they had paid to Japan. We could get back to that. It would not be too difficult for a company to say that it had paid a royalty of 6% on sales to the United States. That would aid disclosure. There are practical measures that we could take to improve the situation without ending up with some kind of awful taxation baseball-bat regime that would put people off investing here at all.

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[Stephen McPartland (Stevenage) (Con)]

I congratulate the hon. Member for Redcar (Ian Swales) on securing such an important debate. I listened with great interest to the comments of my hon. Friends the Members for South Norfolk (Mr Bacon) and for Bognor Regis and Littlehampton (Mr Gibb), who eloquently described the differences between tax avoidance and tax evasion, and how the lines between them have been blurred. Tax evasion is clearly wrong, illegal and unfair to the rest of society, as everyone else has to pay more in taxes to make up for those who do not pay their fair share. We cannot have mob rule and, as explained by my hon. Friend the Member for Cities of London and Westminster (Mark Field), we cannot have anti-business sentiments.

Just before Christmas, there was an explosion of public interest after the Public Accounts Committee named and shamed some well-known companies that used transfer pricing to offset their tax liability here in the UK, basically to avoid paying tax. I am aware there is a strong argument that the tax authorities in the UK could do more to enforce tax payments. The Government have done a lot of work on tackling tax avoidance—so much so that I fear the general anti-avoidance rule that will be introduced might be too severe and end up penalising the sole trader and small and medium-sized enterprises more than the larger corporates.

My interest in tackling tax avoidance stems from a meeting I had with Christian Aid supporters in my constituency last September when the tax justice bus tour visited Stevenage. The tax justice campaigners believe that tax dodging by international companies costs the UK around £35 billion and developing countries an estimated $160 billion a year. Just imagine the dramatic difference such a huge sum of money would make if it were available to invest in public services, infrastructure and other vital services essential for economic growth—both at home and abroad.

There is growing anger and concern at the fact that some large companies are hiding behind complex accounting rules that may be strictly legal, but are considered to be unethical by the public. The problem of the missing billions in tax is not just a problem in the UK; it is worldwide, and it does the greatest damage to poor and developing countries that cannot stand up to massive corporations.

I know that Governments from all around the world will agree with the sentiment of greater tax transparency, but they will struggle to introduce it as every nation competes in the global race. I welcome the Prime Minister’s initiative to make tackling tax avoidance a priority as the UK takes over the presidency of the G8, and I would urge him to convene a cross-Whitehall meeting with tax justice experts and campaigners to identify what this policy would look like in practice.

There is real concern and feeling in this evening’s debate about the fact that transfer pricing seems to be at the heart of the problem, so the draft Finance Bill could include some measures to try to create enforcement in respect of transfer pricing and to stop the problem. However, despite the best of intentions, I believe that in the end it will be up to the companies themselves to lead the way and they will only do that if their customers—the British public—drag them kicking and screaming towards tax transparency and a fairer tax system for us all.

With that in mind, in October or November I wrote to the chief executives of all the FTSE 100 companies asking them individually whether they were willing to pledge their support for corporate tax transparency, and whether they would support a new international accounting standard for country-by-country reporting. The current international accounting standards only require multinational companies to report accounts on a global consolidated basis, which makes it incredibly difficult to know where taxable economic activities are occurring and where profits are declared. Companies, particularly multinational corporations, move billions of pounds of profit between jurisdictions in order to reduce their tax bills, and large companies are allegedly manipulating their centres of interest through the use of holding companies, offshore accounts and intellectual property rights.

Whether this is tax avoidance or tax evasion, whether it is illegal or immoral, the British public and most Members of Parliament believe that it is wrong and should be stopped. A recent inquiry by the International Development Committee recommended legislation

“requiring each UK-based multinational corporation to report its financial information on a country-by-country basis. Such information should include the names of all companies belonging to it and trading in each country, its financial performance in each country, its tax liability in each country, the cost and net book value of its fixed assets in each country, and details of its gross and net assets in each country.”

I believe that the only way of resolving the problem is to introduce greater transparency, and Members will be pleased to learn that, in the interests of transparency, I am publishing all the responses that I have received on a website that I launched today: www.taxchallenge.co.uk. The first 15 responses from the FTSE 100 are now live, and many more will be published during the coming days and weeks. The responses have been wide-ranging. HSBC has offered to help design a tax transparency standard, BT and others have welcomed the transparency initiative—although not the means—and Hargreaves Lansdown has questioned the value that it receives for the taxes that it pays. My hon. Friend the Member for Lincoln (Karl MᶜCartney) spoke about that eloquently earlier today.

[Paul Farrelly]

One of the reasons for the Government’s intention to change remote gambling taxation is the fact that all the companies bar one have gone offshore. That one is Bet365, which owns my local team, Stoke City. It is staying here because the Coates family believe in paying their taxes—they paid £130 million last year through Bet365—and in creating local employment. Does the hon. Gentleman agree that all the companies in his survey should wholeheartedly follow their example, and that the National Association of Pension Funds and the Association of British Insurers should try to ensure, on our behalf, that shareholders encourage them to do so?

[Stephen McPartland]

I do agree, and I firmly believe that most employees in most of the FTSE 100, the FTSE 250 and other companies in the United Kingdom would expect their employers to pay their fair share of tax in the UK. They all have very devolved and developed corporate social responsibility projects and organisations, and they want to understand what British customers, employees and consumers want them to do. They are very conscious of their brand.

The new website—www.taxchallenge.co.uk—gives Members’ constituents an opportunity to sign a petition calling for greater tax transparency, so that everyone will know which FTSE 100 companies are willing to sign up to tax transparency and which are not. Every one of us can then decide individually whether the biggest companies in Britain really care about the poorest in our society, at home and abroad.

[Jackie Doyle-Price (Thurrock) (Con)]

I am very pleased to follow my hon. Friend the Member for Stevenage (Stephen McPartland). I think that his excellent initiative will do much to provide transparency, and to enable consumers to make informed decisions. If there is one thing that the debate has shown us, it is that consumer power is perhaps the most effective weapon that we have when it comes to ensuring that companies pay their fair share of tax.

I pay tribute to my hon. Friend the Member for Redcar (Ian Swales) for securing this important debate. Let me say for the benefit of some of my colleagues that I am happy to refer to him as my hon. Friend, and that I am gratified to see that so many of his own colleagues are present. That contrasts markedly with the attendance on the Opposition Benches.

As my hon. Friend the Member for Redcar will know, the debate was prompted partly by the work of the Public Accounts Committee—of which I am proud to be a member—and its work on tax avoidance by global companies. Our report at the back-end of last year found that HMRC’s performance in that regard was perhaps not as good as we would have liked.

I shall concentrate on some of the wider lessons learnt from the inquiry about how to make the UK tax system efficient and effective, while remaining competitive. I would like to associate myself with the comments made by my hon. Friend the Member for Cities of London and Westminster (Mark Field) and others about the debate becoming unduly political and playing to the gallery. It is good politics to attack global names as tax dodgers in the media, but we have to be careful about the messages we send out to potential investors in our country. I am pleased that, in the main, this debate has been a lot more mature than the debate that has played out in the media.

Members will know that the Committee heard evidence from Google, Starbucks and Amazon. We looked at the extent to which they exported their profits to more favourable jurisdictions and whether those arrangements could be described as fair. In that respect, the evidence supplied by Amazon was the least convincing—that has very much been the flavour of this debate. Those of us who have used Amazon—I am sure that many of us have—think we were dealing with a company in Slough, and those of us who visited our local post offices over Christmas would have seen just how much business Amazon was doing, yet, despite booking billions of pounds of sales through the UK, it pays less than £2 million in corporation tax, as has been said, with the profits being exported to the parent company in Luxembourg on more favourable terms.

Before we get too excited, we need to recognise that this is one of the things the European single market contributes to achieving—a company, wherever it is based in Europe, can sell across member states. The question is why, when Amazon has so much business here, it has chosen not to locate here. Ultimately, there is nothing wrong with trying to limit tax liability. After all, that money is earned and owned by the individuals and business; it does not belong to the Government. We need to look at what more we can do to encourage those firms to be more honest in their reporting of how much money is made here. In that sense, I associate myself with the comments of my hon. Friend the Member for South Norfolk (Mr Bacon): this is about simplicity of the tax system.

[Paul Farrelly]

Does the hon. Lady agree that it is not just a case of headline corporation tax rates—for instance, ours compared with Luxembourg’s—but about the special deals that those companies can do with the authorities in Luxembourg, the Republic of Ireland or the Netherlands, through which they pay very little tax and export their profits to tax havens? Does she agree that we need to do more at European level to ensure that those sorts of special deals do not happen in one jurisdiction in a way that disfavours another jurisdiction?

[Jackie Doyle-Price]

I suspect this will be a rare occasion, but I totally agree with the hon. Gentleman. The important point to which he alludes is that we cannot afford to take unilateral action in this area. We live in a global marketplace, and in reality some countries—even members of the EU—are perhaps less honourable in their dealings under tax treaties than we are. We all need to be a lot more savvy and a bit more mature about what will make our tax system more efficient and competitive, and that comes down to simplifying rates.

The hon. Member for Newcastle-under-Lyme (Paul Farrelly) mentioned the sweetheart deals made by other countries. In that respect, I would like to highlight the issue of Google. Google is an internet firm, but the language of the internet is English, so why would a company such as Google choose Ireland over Britain? It can only have been because of the offers made to it. Again, we need to use the institutions of the EU to ensure a level playing field and a genuine single market. We need to recognise that companies will locate where they like and make sure that everybody is doing their bit to ensure a genuinely competitive market between states.

In response to the comments of my hon. Friend the Member for Stevenage, I mentioned the issue of consumer power. Perhaps the most telling thing about what has happened since the PAC’s inquiry is how Starbucks has reacted. Amazon and Google are in near-monopoly positions, so competition cannot make them change their behaviour. There is no doubt that the negative publicity Starbucks faced following our inquiry forced it to make its gesture of offering to pay more corporation tax. We are in the bizarre position where that company seems to behave as if the amount of tax it pays is very much a voluntary contribution. It is incumbent on the Treasury and HMRC to make it clear that such a practice will not be tolerated.

I wish to highlight another issue that the Committee found when it examined Starbucks and the more sinister impact it had on the marketplace here in the UK. This comes back to the degree to which the ability to export taxes on profits enables these companies to engage in anti-competitive behaviour. Despite the phenomenal growth in the presence of Starbucks throughout the UK, we were told throughout our inquiries that Starbucks had made no profits here. We were also told that Starbucks was committed to expanding its operation, as its presence in the UK was important to it. Those two statements simply do not add up. If we look a little more deeply, we find that it seems the most significant losses were run up during a bidding war with Coffee Republic for certain sites on our high streets, with the result being that Starbucks entered into more expensive contracts for property and Coffee Republic was reduced to having a mere fraction of the stores it had had hitherto. So we are talking about a global provider engaging in very aggressive anti-competitive behaviour against a home-grown provider, and the tax system, in effect, subsidising it to do so. I would like the Minister and the Treasury to reflect on the extent to which that sort of behaviour gives unfair competitive advantages to foreign providers.

I am running out of time, so I shall just come back to one point: we cannot afford to act unilaterally. I call on the Government to make full use of relationships in the G20, the OECD and the EU to lead a global effort to tackle these unfair and uncompetitive practices.