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UK Lawmakers Slam Aggressive Transfer Pricing Strategies

by Robert Lee,, London

04 December 2012

HM Revenue and Customs's (HMRC's) response to "aggressive tax planning" by multinational corporations, especially in the area of transfer pricing, has lacked determination and looks far too lenient, a report by a group of UK lawmakers has concluded.

The report by the House of Commons Public Accounts Committee (PAC) examines HMRC's annual report and accounts for 2011-12 and concentrates largely on corporation tax revenues. Its publication comes after a series of high profile international companies have come under fire for their alleged corporation tax avoidance.

The PAC has been at the forefront of this criticism, with chairman Margaret Hodge telling Google's vice-president in northern and central Europe, Matt Brittin, that his company's activity was "immoral." Last week, a response by Amazon to the PAC showed that it had paid just GBP1.8m (2.9m) in corporation tax on UK sales of GBP3.3bn.

"HMRC needs a change in mindset in the way it approaches collecting tax from multinationals," the PAC states. "At the moment there is a pervasive acceptance of the status quo by the top officials in HMRC and we have seen little evidence of a desire to be more assertive. For example, it is perplexing that, on transfer pricing HMRC consider a royalty fee of 6% or 4.7% can be competitive when the company involved consistently makes a loss. We expect HMRC to prosecute multinational companies who do not pay the tax due in the UK."

The report urges the UK government to "get a grip" on large corporations which generate significant income in the UK but which appear to pay little or no tax. "Despite an increase in total tax revenues of GBP4bn from last year, corporation tax revenues have fallen. Multinationals appear to avoid UK corporation tax by arranging their corporate structures, transfer payments and royalties to move money to low tax jurisdictions overseas," it says.

At a time when HMRC is being accused of heavy-handedness in its dealings with small firms in the UK, the PAC said that the tax authority "needs to be seen to challenge practices to prevent the abuse of transfer pricing."

"Top officials need to challenge the status quo and be more assertive, for example in accepting that excessive levels of royalty payments are appropriate when businesses are making a loss," the report states. "Given the high-profile cases of large companies avoiding tax and the Department's selective prosecution practice, there may be an impact on the compliance rate of individuals and small and medium companies who feel victimized. HMRC should direct more effort into challenging artificial arrangements, be more willing to prosecute improper corporate arrangements and make more information available to the public about this aspect of its work."

Last week, Brittin defended the company against UK lawmakers' accusations of "immoral" accounting practices. In an interview broadcast on Channel 4 television in the UK, Brittin defended Google along with the business community in general saying: "It's the wrong bias to think everyone is out to cheat."

"Google plays by the rules set by politicians," he observed. "The only people who really have choices are politicians who set the tax rates."

Brittin insisted that its status as a US company shaped its tax arrangements in the UK: "I would love it if Google had been invented in Cambridge. If Google had been created there and was a British business we'd be having a very different conversation now."

TAGS: tax | economics | business | tax avoidance | law | corporation tax | United Kingdom | group taxation | tax authority | multinationals | tax planning | transfer pricing

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