The report says that “Policing the tax system must be at the heart of what HMRC does...This is essential for the credibility of both the Department and the tax system.”
Following last month’s questioning of executives from Starbucks, Amazon and Google the PAC wants to see reform of corporation tax for multinational companies. Whilst pointing out that those three are not the only culprits, the MPs have now all discovered how multinationals can use transfer pricing, payment of royalties for intellectual property and franchise payments to other group companies to artificially reduce their profits in the UK or to remove them to lower tax jurisdictions. The PACs says that they are “not convinced that HMRC has the determination to robustly challenge the practices of these companies.”
Transfer pricing
On transfer pricing the PAC says that “HMRC needs a change in mindset in the way it approaches collecting tax from multinationals." It provides the following examples:
Starbucks
- Starbucks made a loss for 14 of the 15 years it has been operating in the UK.
- It claimed to shareholders that the UK business was successful and it was making 15% profits.
- It pays 4.7% in royalties for intellectual property (which was 6% until recently) to its Netherlands based company.
- Its Netherlands based company pays a 20% mark-up to its Swiss based company on its coffee buying operations.
- There is a further mark up before it sells to the UK.
- The company has a “special tax arrangement” with the Netherlands.
- There is a higher interest rate set on the inter-company loan between the US Starbucks business and the UK Starbucks business than between other businesses.
Amazon
The PAC were frustrated with the representative from Amazon, who it found “evasive and unprepared to answer legitimate questions on the company's structure and the true location of its economic activity.” The company subsequently provided this information.
Amazon pays virtually no corporation tax in the UK. Some inconsistencies were reported:
- Amazon.co.uk declares turnover of just £207 million in the UK for 2011 with a tax expense of only £1.8 million.
- Information provided to the PAC shows that for 2011, £3.35 billion of Amazon's sales were from the UK, 25% of all international sales outside the USA. This turnover was credited to its Amazon's Luxembourg company Amazon EU Sarl.
- Amazon EU Sarl declares a european-wide turnover of €9.1 billion and a tax cost of €8.2 million.
- Amazon.co.uk is a service company in the UK providing services to Amazon EU Sarl which is owned by a holding company, which is a subsidiary of Amazon's group companies. Amazon Europe Holding Technologies S.C.S shows a profit of €301.8 million and no tax payments.
- Amazon has over 15,000 staff in the UK, invoices UK customers from the UK, hires UK staff in the UK, has inventory physically in the UK for UK customers and according to the PACs to all intents and purposes has the majority of its economic activity in the UK, rather than in Luxembourg, but pays virtually no corporation tax in the UK.
Google
Google asserted that its underlying economic activity arose from the innovative software technology underlying its Google search engine generated by its US company however despite this it admitted that its profits end up in Bermuda, via Ireland:
- The vast majority of Google's non-USA sales are billed in Ireland.
- In the UK, Google Ltd recorded revenues of £396 million in 2011, from Google Ireland, but paid corporation tax of only £6 million.
- Google Ireland paid for the services provided by the 1,300 staff in the UK.
- Google accepted that profits should be taxed in the jurisdictions where the economic activity generating those profits occurred but the PAC considered “that the company undermined its own argument since it remits its non-USA profits (including from the UK) not to the USA but to Bermuda and therefore may be depriving the USA of legitimate tax revenue as well as the UK.
The PAC’s conclusions are as follows:
1. The UK Government needs to get a grip on large corporations which generate significant income in the UK but pay little or no tax. Despite an increase in total tax revenues of £4 billion from last year, corporation tax revenues have fallen. Multinationals appear to avoid UK corporation tax by arranging their corporate structures, transfer payments and royalties to move money to low tax jurisdictions overseas. There is little credible information to inform public debate over the equity of corporate tax payments and HMRC lacked clarity when explaining its approach to enforcing the corporation tax regime. Since multinational companies are able to set up in any country, this may need international co-ordination to resolve. HMRC should work with HM Treasury to:
- police our tax borders more efficiently, introducing national measures to secure a fair contribution to the tax base from multinational corporations;
- lead international efforts, particularly within the EU, to reform the way in which multinational companies are able to transfer earnings overseas and thereby potentially avoid tax payments;
- publish clear sector benchmarks for common charges such as royalty payments and intellectual property rights; and
- develop best practice standards in the information companies should make publicly available about their tax practices and work with the relevant bodies to make them part of mandatory reporting requirements.
2. HMRC needs to be seen to challenge practices to prevent the abuse of transfer pricing, royalty payments, intellectual property pricing and interest payments.HMRC needs a far more determined approach to dealing with multinationals and their tax affairs. Top officials need to challenge the status quo and be more assertive, for example in accepting that excessive levels of royalty payments are appropriate when businesses are making a loss. Given the high-profile cases of large companies avoiding tax and the Department's selective prosecution practice, there may be an impact on the compliance rate of individuals and small and medium companies who feel victimised. HMRC should direct more effort into challenging artificial arrangements, be more willing to prosecute improper corporate arrangements and make more information available to the public about this aspect of its work.
3. HMRC is too passive in its approach to closing the tax gap. It has only reduced the gap between what is due and what is collected by £1 billion since 2005. Closing the tax gap is central to public perceptions of fairness during a period of austerity and of cuts to public services and HMRC appears to be complacent in its approach. HMRC must set immediate and ambitious targets to reduce the tax gap.
4. This Committee lacks confidence that HMRC both has and is using the business intelligence systems it needs. HMRC is rationalising 3,000 systems down to 13 big systems. Private sector tools for business intelligence analysis develop quickly, but HMRC does not. In 2004, and again in 2009, this Committee recommended HMRC use risk profiling to better target debt collection activities; but full implementation of systems to enable systematic analysis of debt and of debtor behaviour (known as "analytics") has been delayed from April 2011 to October 2012. HMRC should use its fully implemented analytics systems to develop a sector-by-sector approach to compliance activity so that it focuses resources on priority areas.
5. HMRC is unduly complacent about the rollout of the Real Time Information (RTI) system and the child benefit changes. We are concerned that, with four months to go to the main roll out of RTI, the project has been rated amber by the Major Projects Authority. The Institute of Chartered Accountants in England and Wales (ICAEW) thinks that the Department's current plans will increase the burden on small businesses and therefore on the Department's workload. Similarly more individuals will be required to register for self-assessment as a result of the changes to child benefit. HMRC believes that there will be negligible impact from both sets of changes and do not have contingency plans to deal with delay or fluctuations in workload. By the end of March 2013, HMRC should provide the Committee with details of its plans to manage the burden on small businesses as a result of RTI; and provide credible contingency arrangements should the main rollout of RTI between April and October 2013 not go according to plan.
6. HMRC is persistently unable to get a grip of error and fraud in tax credits.The estimated level of error and fraud in tax credit payments was between £2.08 billion and £2.46 billion in 2010-11, which was higher than both the estimate for 2009-10 and its target. Given its performance, HMRC is unlikely to recover tax credit debt before the introduction of Universal Credit. Families may receive less money from the new system, and will receive even less if they have to repay tax credit overpayments. The poor administration of tax credits will undoubtedly deter some of the most needy from claiming tax credits yet HMRC has not made any estimate of the extent of this. HMRC must improve its use of data and analytics to target its interventions more effectively and improve the accuracy of tax credit awards by the end of 2012-13.
Source: Public Accounts Committee 19th Report into HMRC's 2011/12 Accounts
