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Taxing times for multinationals as governments get tough on avoidance

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YOU WILL have to travel far to find someone who’s used a computer and never made a Google search.

The Silicon Valley firm is synonymous with providing answers to life’s most intriguing questions, but when it comes to paying European taxes, Google has struggled to come up with an answer that eases growing public anger over how it and other multinationals defer their tax liabilities.

This year the search engine giant became the latest in a long line of multinationals to cut a deal with HMRC over unpaid UK corporation tax, much to the dismay of the taxpayer and international authorities.

In 2013, Starbucks, the second-largest restaurant or café chain in the world, paid UK corporation tax for the first time in five years, cutting a £20m cheque to the taxman despite generating more than £3bn in UK sales between 1998 and 2012.

And last month saw social media behemoth Facebook announcing plans to overhaul its tax structure, following criticism over paying just £4,327 in corporation tax in 2014.

However, it is Google’s £130m agreement with HMRC following a six-year investigation over its back taxes that has really sparked public outrage.

On 23 January George Osborne hailed the Google deal as a “victory”, but was immediately met with public ridicule over the figure, with critics labelling it a “sweetheart deal”. Shadow chancellor John McDonnell has repeatedly highlighted that in 2013 alone, Google made £3.9bn profit in the UK, insisting that the figure the firm paid to HMRC doesn’t add up.

How do they get away with it?
The deal has sparked a nationwide debate over how multinationals have been able to navigate through the UK’s labyrinth-like tax structure and come out the other side with a much smaller tax bill.

Soon after the deal was brought to light, HMRC CEO Lin Homer and Google chiefs Matt Brittin and Tom Hutchinson were called to a PAC grilling by chair Meg Hillier, but MPs failed to gain any real insight into how Google exploits the current system.

What we as an audience learned, however, is that international tax rules need fixing, with RSM senior tax partner George Bull stating after the hearing: “Unless the fundamental structure of corporation taxes worldwide is to be changed, debates such as this present the spectacle of individual countries scrambling for larger slices of the same cake.”

And Bull was right. Less than two weeks after the PAC hearing, reports from France suggested that its government are set to demand Google pay €1.6bn (£1.3bn) in back taxes, ten times the amount HMRC received from the search engine.

However, to change the structure of corporation taxes worldwide, governments and international organisations have to get to grips with the complex system and discover exactly how multinationals are able to pay such a low tax bill, as one tax expert attempts to explain.

“There are three categories into which multinationals put their tax planning,” says Malcolm Joy, a corporate tax services partner at BDO, and leader of its transfer pricing team.

“One is looking at tax incentives that certain countries offer, such as Ireland offering a 12.5% headline corporation tax rate or the UK which has similar incentives, like R&D tax credits.

“Another would be using hybrid arrangements to make the profits fall out of the tax system all together, which is seen as very aggressive tax planning and the OECD is keen to stamp this out.

“And the third area is around the allocation of profits using transfer pricing rules to push the boundaries as far as they can. As the OECD tightens its rules around transfer pricing, that kind of planning will become more difficult,” says Joy, who believes the plans of the OECD and the European Commission could alter how multinationals approach tax planning.

Greater transparency
In 2013, the OECD ramped up its efforts to clamp down on international tax avoidance, releasing its 15-point BEPS action plan that aimed to lay the foundations of a “modern international tax framework”, taxing multinationals’ profits in the country that they are made in, rather than allowing companies to filter their profits through tax havens like the Cayman Islands.

Yet two years on there are some who feel that the OECD’s efforts have not gone far enough to combat multinational tax avoidance, with firms such as Google continuing to pay less than they should throughout the continent.

“The whole of BEPS is a bit disappointing because many of us thought the current rules for sharing profits between countries are a bit antiquated,” explains Robert Maas, tax consultant at Carter Backer Winter.

“The big problem is that the world has now decided that countries should tax profit where a company bases its ‘shop’. Companies like Google don’t have a shop in the UK – so the world says they don’t have to pay UK tax.”

Maas continues: “Unless you change that basic premise, the tax on where the shop is based is not right. People can think what they want to think, but they are stuck with that system.”

One thing that the OECD is striving for is greater transparency. On 28 January, the UK and 30 other countries signed the Multilateral Competent Authority Agreement, an arrangement that will allow tax authorities to share country-by-country reports, including those of multinationals. Despite this apparent move forward to solve a growing tax crisis, Maas is not convinced that it will lead to anything substantial.

“All the OECD is really doing is saying that tax authorities should work more closely together to share more information,” he says.

“The OECD had this vague hope that if the UK knows how much Google is paying in Timbuctoo or the US or wherever, that would help it understand how much tax Google is paying in the UK, which is absolute nonsense.”

Mass strongly believes that any tax information of multinationals shared by authorities should not be made available to the public, despite calls by the public to have more access to companies’ tax affairs.

Not everyone shares the same opinion as Maas. Jolyon Maugham QC, an avoidance specialist at Devereux Chambers, believes that although the OECD will play a large role in the battle against tax avoidance, there is a long way to go before we see major reform.

“We don’t yet know exactly what impact the BEPS measures are going to have as they’re yet to be fully adopted in the UK,” he says. “They signal the direction of travel of a journey that we’re on. Even if the measures are adopted, I don’t think they will have an effect, and importantly I don’t think they will quell public anger about tax avoidance.”

Balancing act
If the responsibility of making sure multinationals pay the right amount of tax does not completely lie on the shoulders of the OECD and tax authorities, then some must lie with the multinationals and its CFO.

However Andrew Bonfield, finance director at FTSE 100 group National Grid and leader of the The Hundred Group’s tax committee, feels that tax is an issue that can no longer be solely managed by a company’s FD.

“Tax is now a board-level issue; it’s something that is not purely in the remit of the CFO,” Bonfield makes clear. “I think given what’s happened in the external environment, you know that something is wrong when taxation is on the front page of every newspaper – the only time I’ve ever been quoted on the front page is for a story about tax.”

For many CFOs, tax is a sticky subject. Many finance directors, including Bonfield, recognise that they have to balance their obligation to maximise return to shareholders, but at the same time taking into account the risk of what could be considered to be aggressive tax planning. Bonfield uses Starbucks as an example to illustrate what happens when this balance isn’t taken into consideration.

“With the Starbucks issue, it was very clear that around the time they were being scrutinised over their tax planning, rivals such as Costa were seeing an uptake in market share because customers were turning away from them,” he says.

“Your role as a CFO is to manage the balance between what you can do to mitigate your tax exposure as best as you can in a commercially-sensitive way, but at the same time to avoid doing something that can damage your reputation and down-the-line cost your business a lot of money.

“If you ask boards today, you’ll find that they are interested in what they pay in taxation and you’ll discover that companies are much more sensitive now over how they manage their tax affairs, given the public opinion over it.”

Is corporation tax dead?
This is a question that will continue to be asked by politicians, tax experts and at boardroom level. With Osborne’s diverted profits tax punishing firms that continue to take their profits offshore, many have wondered whether the tax is past its sell by date, considering that corporation tax receipts as a proportion of GDP have steadily declined since the mid-1980s.

Despite this, experts believe that corporation tax is here to stay, calling it an “important part” of our tax system; but have urged global authorities to put up a united front against avoidance.

“I don’t think it’s dead,” says Maas. “The problem is that companies are always going to shift profits around the world if there isn’t a single rate of corporation tax. I think a unilateral rate of corporation tax is impractical, but you’re always going to get people wanting to ensure profits are rising in the most effective places.

“The term ‘shifting profits’ suggests that companies can somehow decide where they want their profits taxed. It’s not as easy as that; companies have to carefully structure things in order to benefit from profit shifting, so tax institutes should definitely work closer together to combat this problem.”

Timeline
23 January 2016 Following a six-year investigation by HMRC, Google agrees to pay the taxman £130m in back taxes for the period 2005 to 2014. George Osborne calls the deal a “victory” on Twitter, but critics were outraged over the amount Google paid, labelling it a “sweetheart deal”. PAC chair Meg Hillier said she would call in Google and HMRC chiefs to explain the deal
26 January The Treasury Select Committee announced it would be conducting an “in-depth” review of the UK’s corporation tax system. Chairman Andrew Tyrie said that the inquiry is not directed at Google, but would be exploring how effective HMRC has been in tackling tax avoidance
27 January French MEP Eva Joly tells the BBC that the UK is “preparing itself to become a tax haven” following the Google deal, and threatens to drag George Osborne in front a European Parliamentary Committee to explain himself
28 January EU competition commissioner Margrethe Vestager opens the door to a potential investigation into Google’s tax dealings, labelling the deal with HMRC as “unfair”
28 January 31 countries, including the UK, sign the OECD’s Multilateral Competent Authority Agreement, enabling the sharing of country-by-country reports by 2017
12 February Google’s head of European operations Matt Brittin, vice president Tom Hutchinson and HMRC CEO Lin Homer defend the Google deal in a PAC hearing. Homer tells Hillier that HMRC should get more recognition for the work it does collecting tax from multinationals
25 February PAC release findings from its hearing into Google and HMRC, claiming that it’s “impossible to judge” whether Google paid the right amount of tax
25 February Reports in France claim that the French government is demanding Google pay €1.6bn (£1.3bn) in back taxes, ten times the amount HMRC received from the search engine
1 March HMRC releases a policy paper explaining how it taxes multinationals. Advisers were outraged by some of the language used by the taxman. Jolyon Maugham labels the paper as “an attempt by HMRC to redefine tax avoidance” for the likes of Google and Apple.
4 March Facebook announces that it will no longer route UK sales through its Irish headquarters, agreeing to pay millions more in corporation tax from 2017. Reports suggest the move was fuelled by a desire to avoid being caught out by the diverted profits tax
15 March European Parliament quizzes Google, McDonalds, Apple and Ikea over how they pay European taxes. Starbucks and Fiat Chrysler Automobiles decline the invitation to attend

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