Corporate Tax Avoidance

Stephen Williams Excerpts

Monday 7th January 2013 Commons Chamber

[Ian Swales]

That could well be the case, and I shall speak about that later, too.

The person who wrote to me saying that they could not get a VAT number for the iPad they bought for business purposes was told that Amazon was unable to provide one. Had that been made clear to the buyer, they would have gone elsewhere to get a lower net price. Who knows, they might even have gone to Comet.

Amazon’s turnover in Europe is €7 billion. The gross VAT on that, even at Luxembourg’s lower rate of 15%, would be more than €1 billion. Where is it paid? That would be €2,000 a head for every man, woman and child in Luxembourg, but I would guess that is not paid at such a rate. I would also guess that Amazon’s UK order fulfilment subsidiary pays little or no VAT. I ask the Minister urgently to investigate how the business model operates.

[Stephen Williams (Bristol West) (LD)]

I happen to be reading Deloitte’s tax guide to Luxembourg in 2012, which states that the standard rate of VAT in Luxembourg is 15%, but that for printed materials and e-books it is 3%.

[Ian Swales]

My hon. Friend makes a good point. Amazon has already been found out for charging 20% when it should have been charging 3% on e-books.

Should we care about all that? Yes, we should. There is the obvious point about the loss of billions in Government revenue, leading to higher taxes on other parts of the economy or cuts in services, including the very infrastructure and services on which a tax-avoiding company and its employees might depend. Then there is the question of competition. My previous experience was in the global chemicals industry, but in the internet and franchising age, the unfair effects can hit anyone. Our high streets are now subject to global competition in burger restaurants, bookshops and coffee bars. Local bookmakers have largely disappeared rather than trying to compete with rivals operating from Gibraltar—on paper. Most retailers are competing not only with the unstoppable rise of the internet but with offshore-based giants such as Amazon and eBay. The list of national and local UK businesses that cannot compete will get longer and longer: Comet was the latest to go broke, just before Christmas, probably costing the UK taxpayer £50 million.

Companies that pile up untaxed revenue in tax havens also have enormous financial muscle to reinvest cheaply or take out any other business they want to. It was recently estimated that the world’s tax havens hold $13 trillion of cash, which is the total GDP of the USA plus Japan, or enough to buy the entire London stock market four times over. That highlights the compound effect of tax avoidance, as those companies benefit from not paying the tax to begin with and can then use that money to compete ever more aggressively.

The big accountancy firms have led the charge in devising schemes from which companies benefit. What world do they envisage? If more and more companies routinely avoid taxes, the Government will get revenue only from people stuck as employees on pay-as-you-earn, and from property taxes, business rates and ever-increasing VAT and duty from the companies that cannot find ways to avoid them. There will be a net move from tax on companies to tax on individuals, and if that trend continues, only companies with offshore tax havens will be able to compete. A nation of shopkeepers will be run out of business. There is also a threat to our political system, because we cannot expect all those who pay their taxes fully and fairly to keep on tolerating such abuses indefinitely. UK Uncut might be just the start of the protests.

I have been talking about the problem; now I want to explore ideas for action. First, having a national tax system operating in an international business world means that we need to police our financial borders just as rigorously as we police our physical borders for illegal movements of people, counterfeit goods, drugs or any other activity that we want to control. We must say that if a sale or business activity takes place in the UK it should be accounted for in the UK. The idea that an item can be manufactured in the UK, stored in the UK and shipped to a UK customer, but invoiced from Luxembourg, must be challenged.

We should then force transparency into the system. UK companies doing the right thing report their profits and taxes paid to Companies House in some detail, so the blanket taxpayer confidentiality regime in HMRC, which prevents the disclosure of tax affairs not only to Parliament and the Public Accounts Committee but to HMRC’s own non-executive directors, mainly helps the international tax avoiders. It is time for the publication of simple statistics that are mostly available anyway in Companies House, as that would force companies to justify their behaviour. Transparency and honesty with consumers are important. If companies have nothing to hide, they will have nothing to fear.

--- Later in debate ---

[Stephen Williams (Bristol West) (LD)]

Much of the debate so far has been about the domestic impact of corporate tax avoidance, and rightly so. Safeguarding the UK tax base and watching over how the Government spend its proceeds is one of the primary duties of the House of Commons, over which you preside, Mr Speaker.

I begin by mentioning some of the international tax impacts of corporation tax avoidance. Over the last year, I worked closely with ActionAid and Christian Aid to highlight how multinational companies divert their profits all around the world and avoid paying tax in the countries where they derive much of that money, particularly in the developing world. It is entirely appropriate that a great deal of our increasing budget for international development is spent on upgrading the capacity of developing countries to safeguard their tax base, so that they build expertise in their equivalents of HMRC to make sure that they can stand up to multinational companies.

I endorse what the hon. Member for Stevenage (Stephen McPartland) said earlier, when he referred to the report of the International Development Committee. One of the things we need as a country in terms of our corporate law is country by country reporting so that we can see clearly, whether as shareholders, Government, consumers or citizens, where UK-based companies are earning their profits, where their economic activities take place and, more importantly, how much tax on those activities is being paid and where.

We are concerned about UK-based companies that have huge UK activity but apparently pay little UK corporation tax. Several companies were highlighted in the course of our debate; Starbucks was one of them. Several months ago, I was the first Member of Parliament to criticise the UK operations of Starbucks, so I was pleased that the chief executive of Starbucks UK, Mr Kris Engskov, came to see me in my office in Portcullis House and used all his Arkansas charm to run through some of the corporate numbers line by line to persuade me that the company was doing nothing wrong. I have to take at face value what he said about high rental charges in the UK, although they do not seem to affect competitors in the field. None the less, Starbucks structures its international corporate affairs so as to minimise its tax liabilities. If royalties are paid on the brand of a company that originated in Seattle, yet the brand value lies in the Netherlands and the cup of coffee is bought elsewhere in Europe, where even with the generosity of the common agricultural policy we do not grow coffee, it is obvious that aggressive tax planning is taking place. Consumer pressure has led Starbucks to seek to make voluntary tax payments.

Several Members mentioned Amazon. The hon. Member for Bognor Regis and Littlehampton (Mr Gibb) described in some detail what Amazon does. I disagree that the company has a novel business structure that has enhanced the book-purchasing experience. I have never bought a book from Amazon. The company has in essence developed older business models, such as mail order and telesales, which have been around for half a century. There is nothing particularly innovative or transformational about it, yet we are asked to believe that there are huge amounts of intellectual property and that royalty and interest payments are needed to have what appears at first inspection to be an artificial structure, contrived for tax rather than business purposes.

Of course, Amazon also damages the high street, and the principal reason I have never bought anything from it is the loss of bookshops from all our high streets. It structures its sales via Luxembourg because the corporation tax rate there is 21%. Over time, the coalition Government will reduce the differential between that country and the UK; it was 7% in 2010, but that will be eroded. Perhaps at some point Amazon will ship its books and DVDs from some other lower-corporate-tax haven.

What would my Liberal Democrat colleagues and I like to happen, so that we can tackle the problem? First, we need the right resources in Her Majesty’s Revenue and Customs. I listened carefully to Labour Members earlier, when they lamented the reduction in HMRC’s total staffing numbers. Of course we all lament the fact that cuts have to take place, but what is more important is not the total headcount of a public sector organisation, but what people are doing in it. What HMRC needs is specialists and forensic accountants to tackle these complicated transactions. That is why I am pleased that, in the autumn statement, the Chancellor announced extra resources in that area, and that we would look at transfer pricing. The second thing that I would like is the introduction of a general anti-avoidance rule—something for which my colleagues and I have called many times in the past few years. There will be legislation on that later this calendar year.

Thirdly, there needs to be much more transparency about the deals that HMRC is striking with several international companies. I am talking about the sorts of issues frequently raised in the pages of Private Eye; Vodafone is a classic example. We often see people who might be characterised as benefit scroungers named and shamed in the press, and it is right that that happens. I would like much more transparency about the deals being done with large companies, with regard to how much tax is at stake and what deal has been arrived at.

Fourthly, and more importantly, we need more international action through the European Union. It is ludicrous that corporation tax rates vary so much in what is supposed to be a single market, and within the OECD, in the model tax treaties. They are double taxation treaties that are meant to prevent double taxation of the same profit by more than one country, but they are being used for the perverted purpose of avoiding tax altogether. We need to get to a system in which the commercial substance, rather than the legal form, is looked at closely by tax authorities, and that is what ends up being taxed.