November 4, 2012 4:43 pm

HMRC to face MPs over multinationals’ tax

When top Revenue officials appear before MPs on Monday to discuss their latest accounts, they are likely to come under renewed pressure over the tax affairs of some of the highest profile multinationals operating in Britain.

In recent weeks, Starbucks, Google, Amazon, Facebook and eBay have been the focus of intense scrutiny after it emerged that they paid corporate tax of, at most, a few million pounds despite clocking up sales from British consumers worth hundred of millions, or even billions, of pounds.

Consternation is being voiced at the highest levels of British politics. When asked to condemn the behaviour of certain multinationals as “morally wrong”, David Cameron replied that he was “not happy with the current situation” and he wanted governments to tackle the problem of companies not paying the appropriate amount of tax.

The tax officials – who are barred from discussing specific companies – can say little to assuage the MPs’ anger but there is evidence that they, too, are concerned about the tax payments of foreign-owned companies.

Over the past five years, HMRC has raised £4.7bn from investigations into multinationals’ “transfer pricing”, the intra-group payments for goods and services that can shift profits to low tax countries. Foreign-owned companies represent 44 per cent of the tax that HMRC believes might be underpaid by large companies.

Some, if not all, the companies in the political spotlight have already been under investigation. Starbucks, which says its low tax bills are a result of low profitability rather than avoidance, says HMRC negotiated the tax deduction for its 6 per cent royalty fee – paid to its European headquarters for the use of its brand and business processes – down to 4.7 per cent.

Amazon, which is fighting a $1.5bn transfer pricing dispute in the US, has told investors that the UK, along with several other countries, may be examining its returns from 2003 onwards.

It is no coincidence that attention is being focused on US multinationals. A quirk in their tax code, known as the “check the box” rule,– incentivises them to avoid foreign tax and pile up earnings in tax havens.

In addition, HMRC has particular problems in taxing digital companies. They do not necessarily need a UK presence to make sales in Britain; the UK can only tax economic activity that takes place in Britain. Although Google employs 2,000 people in the UK, it, like Facebook, makes its European sales out of Ireland.

Amazon’s digital sales are downloaded from Luxembourg, which is also the destination for fees paid by sellers of eBay’s auction site in Britain.

As a result British consumers are far more important to these companies than their UK accounts suggest: the parent companies’ annual reports show that Amazon attributed . . . made between £3.3bn and £4.5bn of revenues to the UK in 2011; eBay attributed £790m of revenues to Britain.

There is scope for argument over tax payments where an internet company delivers physical goods. Amazon is dependent on its warehouses up and down Britain. HMRC can argue that these operations are responsible for a substantial share of the profit associated with British sales because consumers value speedy delivery.

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