UK transfer pricing and the tax avoidance debate.

• Author: Wilmshurst, Paul

Following the major events in the UK last year, the tax avoidance debate has continued to develop at a surprisingly fast pace in 2013. Part 1 of this article provides an overview of the main developments to date, up to the G20 meeting in Moscow. Part 2 considers how the UK transfer pricing environment may change as a result of these developments.

As the global economy has been impacted by recessions, we have seen a major increase in governmental focus around the world on increasing tax revenue. In the UK, specifically events in 2012 raised public and political awareness of multinationals' transfer pricing practices dramatically. Much of this resulted from the Public Accounts Committee's (PAC's) annual review of HMRC's accounts, which led to the public questioning of representatives from Starbucks, Amazon and Google. The PAC's strongly-worded report, released in early December, described the situation as "outrageous". It also called for a change in mindset at HMRC, which must be "more aggressive in policing and prosecuting companies that paid too little tax" and "be seen to challenge practices to prevent the abuse of transfer pricing, royalty payments, intellectual property pricing and interest payments." In the same week, the government announced increased funding for transfer pricing enforcement and Starbucks, in an unprecedented move, announced that it wanted to voluntarily pay more tax in the UK by not claiming deductions for intra-group charges.

In 2013, corporate tax avoidance and the potential role of transfer pricing has remained in the news and firmly on the political agenda.

Developments so far in 2013

The stance taken in a recent Financial Times article (1) reflects what may be the view of many who have been calling for action: "It has become increasingly meaningless to talk about where many big companies earn their profits. Companies can game the system by moving intangibles--the intellectual property, brands and know-how that make up much of their value--to low-tax countries. The current rules policing the system are often hard to enforce."

The first main development was a debate in the House of Commons on corporate tax avoidance on the 7th January.

1. House of Commons Debate (2)

   The debate was opened with a statement from one backbench Member of Parliament (MP) that there is "a growing crisis of our national tax system operating in an international business environment" and a call for radical action. It was observed that the government is borrowing more than predicted, especially because of lower than expected corporation tax receipts.

   Much like the US Senate hearings conducted in late 2012, issues of morality and the line between tax evasion and avoidance came up a number of times. One MP noted that tax avoidance should be a matter of law and not moral persuasion; another that companies choosing to avoid tax simply reflects rational behaviour. Concern was also expressed that investors might begin to view the highly complex UK tax system as becoming even more uncertain.

   Transfer pricing was a central issue throughout the debate, though some of the statements made continued to reflect a tendency in the media in 2012 to measure taxes by reference to company revenues rather than profits. Also, to associate multinationals' staff numbers and physical infrastructure more closely with profits than, say, the contribution made by intangibles.

   One MP referred to the OECD's project on the transfer pricing aspects of intangibles and suggested that the discussion draft implied that "the OECD is coming to the view that the huge royalty payments that some international groups make their overseas subsidiaries pay to their home country, or to tax havens, may no longer be allowable against tax in the overseas jurisdictions."

   A number of ideas for action were floated about how the UK transfer pricing rules could be changed unilaterally, some of which are summarised in part 2 of this article. Other ideas included requiring companies to file their tax returns along with their annual accounts at Companies House and undertaking a review of the UK's role and relationship with crown dependencies.

   There were also several references to the need for country-by-country reporting, together with comments on the value and limitations of the narrowly drawn General Anti-Avoidance Rule (GAAR) to be introduced in the UK later in 2013.

   A number of MPs emphasised the need for greater transparency on the part of multinationals and also on the part of HMRC in terms of its dealings with taxpayers. They went on to comment on the significant overall reduction in HMRC staff in recent years. It was also observed that HMRC should not be treated as a cost centre given its potential for revenue generation.

   A closing statement from the Minister with direct policy responsibility for the issues debated set out the government's position. He said the vast majority of UK taxpayers pay the tax due and noted that approximately half of all UK corporation tax paid by large businesses in 2011-12 was from foreign-owned companies. However, he also recognised the general concern about whether the tax rules adequately capture the profits generated by multinationals in the jurisdictions where their economic activity is located, noting that reform needs to be pursued internationally, particularly through the OECD.

2. Views of the Opposition

   Since the backbench debate, both the Leader of the Opposition (Ed Miliband) and the Shadow Chancellor (Ed Balls) have made strong statements relating to tax avoidance and transfer pricing.

   On 13th January on a popular TV politics show (4), Miliband, referring to a current review of his party's policy on tax avoidance, said that "We will act on this issue" and noted that other countries take a tougher approach, mentioning Denmark as an example (also see part 2 of this article).

   He also made it clear that the UK should take unilateral action if necessary, for example in relation to tax transparency.

   In a Huffington Post article from the same day (5) the Shadow Chancellor wrote that reform of the UK corporation tax system is needed given that "In the 21st century value is now often in brands, intellectual property, customer loyalty and ideas which can be traded globally between different parts of a company group". The rules "need to be clearer, tighter and properly enforced."

   He also observed that whilst sometimes there are good reasons why companies pay little tax "we also need to know when companies are stripping their profits out of the UK through artificial schemes."

3. Prime Minister's G8 Announcement at Davos (6)

   In a keynote speech at the World Economic Forum in Davos on 24th January, David Cameron set out the UK's priorities during its presidency of the G8 this year. He said the UK would use the G8 to drive a more serious debate on tax evasion, avoidance and transparency and noted that there is gathering political will to take action.

   He noted that although there is "nothing wrong with sensible tax planning," but that some forms of avoidance have become so aggressive that they raise ethical issues and that "Any businesses who think that they can carry on dodging that fair share or that they can keep on selling to the...