House of Commons - HM Revenue and Customs: Annual Report and Accounts

HM Revenue and Customs: Annual Report and Accounts - Public Accounts Committee Contents

1 Tax avoidance by multinational companies

1. In 2011-12, £474.2 billion of total tax revenue accrued to HM Revenue & Customs (the Department) which was £4.5 billion higher than for 2010-11. Yet there was a decrease in corporation tax revenue of £6.3 billion.[2]

2. HMRC stated that it had been a policy of successive Governments to make the UK an attractive place for business and for multinationals to see the UK as competitive.[3] But HMRC also expected everybody to pay their fair share of tax and saw its role as strictly enforcing the tax laws which it felt were strong enough to collect tax owing under both national and international tax systems[4] and rebutted any suggestion that it had been lenient with big businesses.[5]

3. We were not sufficiently convinced by the Department's assertion that it was pursuing all the tax due from big businesses given the reduction in corporation tax revenue from last year.[6] There is genuine public anger and frustration because there is an impression that rigorous action is taken against ordinary people and small businesses and British companies based wholly in the UK but, apparently, lenient treatment is given to big corporations, of which almost half have a head office overseas.[7]

4. HMRC considered that it had a well-resourced unit bringing in very significant amounts of money; for the 770 largest businesses it had 1,200 staff and was able to draw on expertise across the Department, for instance 65 transfer pricing experts.[8] HMRC told us that it had the right talent: many of its staff resist offers from firms and are motivated by the public service ethos.[9] We were sceptical of these claims.

5. HMRC was not able to show conclusively that tax avoidance was not increasing.[10] HMRC also could not tell us how many of the big corporations were handling their tax affairs through offshore tax havens but suggested that it could provide figures in future annual reports.[11] HMRC told us that all it could do was to apply the law as it is and, in an international setting, multinational businesses could choose, to some extent, where to set up and where some of their profits are based.[12] International co-operation will be required to improve global tax legislation.[13]

6. HMRC acknowledged that it has to maintain broad confidence and credibility in its administration of the tax system to maintain the very high levels of compliance that there is in the UK.[14] However, we felt that this was undermined by the Department's use of selective prosecutions; a practice which it could not clearly justify to the Committee.[15] HMRC had not carried out any analysis into the effect high-profile cases of large companies avoiding tax could be having on the compliance rate of individuals and small and medium companies.[16]Multinational companies appear to be using transfer pricing, payment of royalties for intellectual property or franchise payments to other group companies to artificially reduce their profits in the UK or to remove them to lower tax jurisdictions.[17] We were not convinced that HMRC has the determination to robustly challenge the practices of these companies.

7. To explore these issues, the Committee held a hearing with representatives from three multinational companies (Amazon, Google and Starbucks) and we are grateful to those companies for providing evidence to us. While their circumstances and business models are different they all have a significant commercial presence in the UK and we wished to gain an understanding as to why it appears that they do not pay their fair share of corporation tax in the UK.[18] Our intention in inviting these companies was to provide an illustration of what we perceive to be a wider problem of possible corporation tax avoidance; not to single out Amazon, Google and Starbucks as the only companies engaging in these practices.

8. Starbucks told us that it has made a loss for 14 of the 15 years it has been operating in the UK, but in 2006 it made a small profit.[19] We found it difficult to believe that a commercial company with a 31% market share by turnover, with a responsibility to its shareholders and investors to make a decent return, was trading with apparent losses for nearly every year of its operation in the UK.[20] This was inconsistent with claims the company was making in briefings to its shareholders that the UK business was successful and it was making 15% profits in the UK.[21] Starbucks was not prepared to breakdown the 4.7% payment for intellectual property (which was 6% until recently) that the UK company pays to the Netherlands based company.[22] The Committee was sceptical that the 20% mark-up that the Netherlands based company pays to the Swiss based company on its coffee buying operations, with a further mark up before it sells to the UK, is reasonable .[23] Starbucks agreed that it had a special tax arrangement with the Netherlands that made it attractive to locate business there, which the Dutch authorities asked Starbucks to hold in confidence, and that Switzerland offers a very competitive tax rate.[24] In addition, there is an inter-company loan between the US Starbucks business and the UK Starbucks business over a period of time with the interest rate set at higher rate than any similar loan we have seen.[25] We suspect that all these arrangements are devices to remove profits from the UK to these areas with lower tax.[26]

9. At the hearing we were frustrated with the representative from Amazon, who we found evasive and unprepared to answer legitimate questions on the company's structure and the true location of its economic activity.[27]Amazon has subsequently provided this information.[28] Amazon has a reported turnover of £207 million for 2011 for its UK company (Amazon.co.uk), on which it has shown a tax expense of only £1.8 million, however it shows a European-wide turnover of €9.1 billion for its Luxembourg based company (Amazon EU Sarl) and a tax of €8.2 million.[29] Amazon.co.uk is a service company in the UK providing services to Amazon EU Sarl for which it receives payment.[30] That company is owned by a holding company, which is a subsidiary of Amazon's group companies.[31] Amazon subsequently provided a copy of the unaudited accounts for Amazon Europe Holding Technologies S.C.S for 2011 showing a profit of €301.8 million and no tax payments.[32] Amazon also provided information showing that for 2011, £3.35 billion of sales were from the UK, 25% of all international sales outside the USA.[33] Yet 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 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.[34] Amazon has received an assessment from the French tax authorities which it disputes.[35]

10. Google explained in its responses that it minimised tax within the letter of the law and that low tax areas or tax havens influenced where it located its group companies.[36]The vast majority of Google's non-USA sales are billed in Ireland.[37] Google makes money from business to business advertising, adverts which can be targeted to the UK website and to UK Google users[38]. In the UK, Google Ltd recorded revenues of £396 million in 2011, from Google Ireland, but paid corporation tax of only £6 million.[39] Google Ireland paid for the services provided by the 1,300 staff in the UK.[40] Google had approximately 700 staff who undertake marketing work in the UK as part of their activities, but only 200 of Google's Irish staff of 3,000 were involved in marketing Google in the UK.[41]

11. Google accepted that profits should be taxed in the jurisdictions where the economic activity generating those profits occurred[42] but it asserted that its underlying economic activity arose from the innovative software technology underlying its Google search engine generated by the US company.[43] Google also confirmed that it had an entity based in Bermuda to protect its intellectual property.[44] We consider 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.[45] Subsequently, Google told us that there were no outstanding issues with HMRC about Google UK's accounts. HMRC is currently carrying out a review of the tax returns filed by Google UK for 2005-11 inclusive and Google told us this is standard practice and that it is co-operating fully with that review.[46]

12. All three companies accepted that profits should be taxed in the countries where the economic activity, that drives those profits, takes place and that, alongside their duty to their shareholders, they had obligations to the society, from which they derive their profits, which included paying tax. However, we were not convinced that their actions, in using the letter of tax laws both nationally and internationally to immorally minimise their tax obligations, are defensible.[47] They all accepted that the perceived ethical behaviour of corporations could affect consumer behaviour. Being more transparent about their business practices, including paying their fair share of taxes, was becoming an increasingly important issue to their customers.[48]

The Tax Gap

13. The tax gap is the Department's measure of the difference between tax collected and the tax that would be collected if all individuals and companies complied with both the letter and the spirit of the law. The Department estimated that some 25% of the tax gap is down to large businesses, although this includes other taxes as well as corporation tax discussed above.[49]

14. HMRC's latest published estimate of the gap for 2010-11 is £32.2 billion which has reduced from £33.3 billion for 2004-05.[50] HMRC did not agree with the Committee's view that there has been disappointing progress in closing the tax gap as the gap, while trending down only very slowly, is competitive when compared with most countries and is lower than Sweden and the United States.[51]

2 C&AG's Report: para 1.3; Figure 1; and Figure 2 Back

3 Qq 20-21 Back

4 Qq 23-24 Back

5 Q 29 Back

6 Q 26 Back

7 Qq 25-26, 29, 33 Ev 50 Back

8 Q 65 Back

9 Q 95 Back

10 Qq 26-28 Back

11 Qq 46-47 Back

12 Q 25 Back

13 Qq 47-48 Back