A summary: in November 2012 MPs from the House of Commons Public Accounts Committee (PAC) interviewed executives from Starbucks, Amazon and Google in order to investigate why these type of companies appear to pay so little tax in the UK.
The PAC's report reveals that the outcome varies case by case, however all these corporate groups minimise their UK tax bill by moving profits out of the UK to countries which have the benefit of lower corporation tax and VAT regimes. Simply put, Starbucks purchases coffee via that well-known coffee producer...Switzerland, but charges royalties via the Netherlands; their tax authorities offered a special deal. HMRC could only respond with a small adjustment for transfer pricing. Amazon operates via a head office in the low tax Luxembourg and the Netherlands, and one of the largest companies on the planet, Google has a European head office in Ireland with some profits ending up in Bermuda.
Avoiding tax by taking advantage of lower tax regimes is nothing new and is practiced by many companies of all shapes and sizes throughout the world. It does now seem that maybe governments are now realising that these companies are capable of distorting the ecomomics of whole countries. Thanks only to the economic crisis it appears that MPs in many countries are choosing to take a closer look at the affairs of multi-nationals. According to a recent report in the New York Times France has issued large tax assessments to Google and Amazon, and the US and Australia have each raised assessments on Apple.
What next - 'Mouse Tax'?
Assuming that EU countries and the US are unwilling to race "to the bottom" and go for a 10% or lower corporation tax regime, the issue has become "how to tax a multinational and yet still keep it interested in trading in our country".
Options available seem to be:
- Suppliers of goods are relatively easy to tax (in theory), because intra-group purchases can be covered by transfer pricing.
- Withholding tax could be applied to IP and royalty payments.
- Internet businesses present a different challenge, but the introduction of Mouse Tax (a variation on pay per click) they pay in the country where we click, is not difficult there is already the software tracking that data.
- Other service businesses could be taxed on a similar sales based formula.
In discussing the issues on the Linkedin discussion group, "Talking Tax", barrister Philip Ridgway helpfully provided a link to a paper by Reuven s Avi-Yonah and Kimberley A Clausing, A Proposal to Adopt Formulary Apportionment for Corporate Income Taxation: The Hamilton Project. Well worth the read if you have time.