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Lords calls for fundamental review of corporation tax system

THE TREASURY should undertake a fundamental review of the UK’s corporate tax regime to stop multinational companies from manipulating their affairs to drive down their global tax payments, according to the House of Lords Economic Affairs Committee.

While pledging support for the OECD’s action plan on addressing the issue in its report on corporate taxation, the committee expressed scepticism on whether the reforms will be effective or achieved within the proposed two-year timescale.

The committee also recommended increasing funding to HM Revenue & Customs and providing politicians with the opportunity to take private testimonies from HMRC officials on tax agreements with companies.

Greater parliamentary oversight of HMRC would instil greater public confidence in the tax system, it added, while it was also proposed advisers responsible for establishing and marketing avoidance schemes should have their right to practice revoked.

Companies including Google, Amazon and Starbucks have been in the firing line for their use of offshore jurisdictions to drive down their UK tax liabilities.

In particular, the companies have been using transfer pricing, which some claim has the effect of mitigating their liabilities. The method sees multinational corporations value and purchase goods and services moving across international borders from one of the group’s corporate entities to another. An ‘arm’s length’ principle is usually applied to ensure the transaction is made at market value, but there have been questions raised over whether all companies do so in practice

Head of the committee Lord MacGregor said the current state of affairs means there is “a sense that corporation tax is voluntary for some multinationals which operate globally while small UK-based businesses go by the book and have to pay”.

“That brings the tax system into disrepute and loses much-needed revenue,” he added.

“We recognise that the government is taking the lead in pursing international agreement to reduce tax avoidance but it is unclear whether these reforms can be achieved in two years. We have therefore made a number of recommendations for specific reforms the government should consider on its own to deal with abuses.”

Heather Self, partner at law firm Pinsent Masons, said the proposals were both radical and unworkable.

She said: “Moving to a destination-based cash flow tax may result in more tax on UK sales, but would be impossible to implement in the short to medium term – and very difficult even in the long term.”

“The suggestion that the Treasury should look again at the tax treatment of debt and equity is likely to dismay business. As the CBI said in their evidence, the deductibility of interest is an important feature of the current system, and is part of a competitive package.”

“The report looks only at corporation tax, and ignores the wider picture. The overall economic benefits of investment should be considered, not just the amount of corporation tax paid.”

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