UK: Corporate Tax – Or Lack Of

Facebook, Starbucks, Amazon and other multinationals have been facing sustained criticism for the fact that they pay little or no corporation tax in the UK.  I am surprised that they have not countered by pointing out how many people they employ in the UK, the total PAYE that those people are paying, the amount of VAT they charge and hand over to the treasury and even how much revenue they generate for other UK companies by their presence.  I would have thought those would be big numbers and show that these companies make a substantial contribution to the British economy and to the UK treasury.

Irrespective, the criticism seems misplaced.  These companies have been presented with a set of rules and regulations and have adhered to them.  Principle among those are the tax treaties that the UK have signed with the US and other countries in which these companies have subsidiaries.  There are clauses within those treaties which can be very useful to multinationals and are put there in order to make the rules clear and to assist in attracting investment into the UK. 

Of particular relevance to Amazon is the rule about creating a permanent establishment (PE).   The standard PE clause states that a company may have a distribution and fulfilment centre within the UK without creating a taxable presence.  Amazon's sales to the UK are made via a Luxembourg subsidiary.  The sales are made over the internet.  The servers could be situated anywhere in the world and they create the point of sale.  Fulfilment is done by a UK warehouse.  If the treaty had said a company could not have a UK warehouse without creating a PE possibly Amazon would not have a fulfilment centre in the UK and would not be employing anyone in the UK. Undoubtedly delivery would be slower but Amazon may well be willing to accept that if that was necessary to avoid being taxed in the UK on the profits from those sales. 

George Osborne and the press frequently refer to the "fair amount" of tax.  It is not clear how much is a fair amount. But it appears to be more than is actually due and payable by law and is some arbitrary figure which we can just make up as we go along according to whim. 

The UK has attracted that business because of the treaty. Now because Amazon have been very successful, the UK seem to have decided that they would prefer not to apply the rules but just come up with a figure of money that they would like to receive instead. 

Starbucks is a different situation.  There is no suggestion that they are not taxable in the UK.  They set up coffee shops here and sell coffee to the UK public.  Their profits are fully taxable.  But people are attracted to go to Starbucks because of the very large amounts of money which the US company has spent promoting and marketing the Starbucks name to create this valuable brand.  It is right and proper that the shops selling Starbucks pay a royalty for the use of the name and that royalty is deductible from taxable profits in the UK.  The amount of the royalty payable is controlled.  Starbucks are allowed to charge no more to their own fully owned shops then they do to third parties i.e franchisees. 

A lot of the criticism seems to be that revenue is being sent to low tax jurisdictions such as Luxembourg or Ireland.  But Starbucks and Amazon are US companies.  If they sent the revenue straight back to the US , where it would undoubtedly be taxable, the UK would not benefit.  If profit is allowed to rest untaxed offshore it is the US who are losing out not the UK. 

So what can you be done about this.  The UK could change the rules but they must be applied across the board and not just arbitrarily aimed at multinationals who are successful.  And they have to be agreed by treaty partners.  They cannot be changed unilaterally to the disadvantage of the treaty partner without risking retaliation which might penalise UK companies doing business in the US.  Well is asy they cant but actually that is exactly what they have done with the introduction of the Base Erosion and Profit Shifting (BEPS) rules. Expect legal challenges to these rules soon.

In the internet age, businesses are very mobile and it is relatively easy to earn revenue and create profit anywhere in the world irrespective of the origins of the company. 

One solution could be for all countries to agree that the total profits of a company earned throughout the world will be assumed to arise pro rata to the total revenue earned from any particular country.  For example let's assume that ABC International Limited has total worldwide sales of US$100 million and total profits of US$10 million.  And the sales generated in the UK are US$5 million.  That means 5% of sales arise in the UK so perhaps it could just be assumed that 5% of profits – US$500,000 are generated in the UK. The UK could receive tax ion this 5%  of the total annual profits. 

This methodology would mean that the expenses incurred in the UK were irrelevant.  It would also be irrelevant to decide who had supplied the UK customers. 

Or another model might be that the home country of the company taxes the whole of the worldwide profit irrespective of where it arises and then apportions the tax between every country in which ABC does business pro rata to the sales revenue from each country.

What is definitely not "fair" is if the tax rules are ignored and taxes levied according to whim and the mood of the press.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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