Corporation tax is not a voluntary tax and it is not easy to avoid tax in the UK, heads of tax at GSK, BP and Reed Elsevier have told the House of Lords economic affairs committee’s inquiry into taxing corporations in a global economy.
Paul Morton, head of group tax at Tax Journal’s parent company Reed Elsevier, acknowledged that multinationals have “a great deal of choice as to where they locate activities”. The exercise of that choice can affect where tax is payable, he said.
But Morton emphasised the importance of a well-established distinction in tax law between doing business in the UK and doing business with the UK: “Doing business in the UK would involve an establishment in the UK which is recognised under international tax principles as a permanent establishment giving rise to a taxable presence – a fixed place of business through which the business of the enterprise is carried on: whereas doing business with the UK from abroad would involve, historically, selling goods into the UK remotely for UK customers but with no activity in the UK.”
The world had changed “dramatically”, Morton said, in that it was now possible for a company with a digital business to conduct business in the UK “without being here”.
“This can give rise to the impression that a company is avoiding tax, whereas in fact it’s the consequence of the company having chosen to locate its activities outside the UK but doing business with customers in the UK,” he said.
Helen Jones, senior vice president for global tax at GSK, told the committee that much of the present “confusion” surrounds the question which territory has the taxing rights in relation to a group’s profits, particularly for digital businesses. “We need to update the rules for that change in business model, but that does not necessarily mean the business model is broken.”
John Bartlett, group head of tax at BP, said the arm’s length transfer pricing principle “still secures an answer in 99 cases out of 100”. There are uncertainties, which are not unique to digital businesses, as to whether a taxable presence has been created in a country. “The fundamentals still work for us,” he said.
Lord MacGregor, the committee’s chairman, asked the witnesses whether they shared the government’s view that the location of a business can be influenced by the corporation tax rate.
Jones said tax had a part to play in investment decisions such as where to build a new factory. “Different tax regimes can give you a very different economic result,” she said, citing the UK’s new patent box regime. “We are going to build a factory in the UK for the first time in 40 years. Prior to the introduction of the regime it was very difficult … Tax is not the only factor [but] the UK was often losing out because the tax regime was not competitive enough.”
Morton said commercial considerations would normally determine the location of business activities. “Commercial considerations prevail, but where the decision-making is at the margin then tax would be important.”
Bartlett said the government’s corporation tax roadmap had put the UK in “a great position”. He could not think of a better location from which to run a multinational company from a tax perspective. Asked whether he thought tax competition between governments was a good thing, Bartlett said: “I think it’s a good thing if it’s designed to encourage growth and investment, and is open and transparent. I would not support secret deals.”
Jones recognised that there was a need to “rebuild public trust”. As a company, GSK was seeking to put out more information about its tax affairs. “Just publishing more data would not necessarily be the best solution to help inform the debate, and we need to be more proactive about describing why the tax position is as it is, rather than just giving more data.” Morton questioned whether provision of data on a country by country basis would be helpful in the absence of an agreed global standard of definitions “by which companies could properly be compared”.
Reed Elsevier supported the OECD’s work, to review the classic definition of a permanent establishment and to reconsider the allocation of taxable profits between countries, Morton said. “We think this is very worthwhile, we do think the debate should be thorough, and in particular that countries should come to an international consensus so that we don’t have double taxation of the same profits. We think this will be difficult because countries where activities are being carried on will wish to preserve their taxing rights, and countries where the customers are based will wish to acquire new taxing rights.”
He noted that the OECD had said it did not think there should be “a complete fresh start”. It was in favour of “refining and improving” the current system based on the arm’s length standard and the definition of taxable presence. Bartlett agreed, adding: “There is a need for the OECD to continue to try to address the abusive type of behaviour that seeks to exploit differences between countries’ tax systems such that a profit is taxed nowhere, or that you get a deduction for the same expenditure twice, or more frequently in several jurisdictions. I believe that is unacceptable, and I believe most of British business does as well.”
However, Bartlett said he would not advocate unitary taxation. “The possibility of formulary apportionment would put fear into most businesses’ hearts, because of the uncertainty.”
Jones agreed: “I think we need to understand what that would do to the UK tax base. The OECD model does recognise value added and the creation of intangibles, and rewards them through the tax system. That becomes much more difficult if you’re looking at a formula based on assets and people, for example.”
In a second evidence session yesterday, peers heard from Chas Roy-Chowdhury, head of taxation at ACCA, Elspeth Orcharton, director of taxation at ICAS; Frank Haskew, head of Tax Faculty at ICAEW; and Richard Woolhouse, head of tax and fiscal policy at the CBI. The hearing is available to view on the Parliament website.
Corporation tax is not a voluntary tax and it is not easy to avoid tax in the UK, heads of tax at GSK, BP and Reed Elsevier have told the House of Lords economic affairs committee’s inquiry into taxing corporations in a global economy.
Paul Morton, head of group tax at Tax Journal’s parent company Reed Elsevier, acknowledged that multinationals have “a great deal of choice as to where they locate activities”. The exercise of that choice can affect where tax is payable, he said.
But Morton emphasised the importance of a well-established distinction in tax law between doing business in the UK and doing business with the UK: “Doing business in the UK would involve an establishment in the UK which is recognised under international tax principles as a permanent establishment giving rise to a taxable presence – a fixed place of business through which the business of the enterprise is carried on: whereas doing business with the UK from abroad would involve, historically, selling goods into the UK remotely for UK customers but with no activity in the UK.”
The world had changed “dramatically”, Morton said, in that it was now possible for a company with a digital business to conduct business in the UK “without being here”.
“This can give rise to the impression that a company is avoiding tax, whereas in fact it’s the consequence of the company having chosen to locate its activities outside the UK but doing business with customers in the UK,” he said.
Helen Jones, senior vice president for global tax at GSK, told the committee that much of the present “confusion” surrounds the question which territory has the taxing rights in relation to a group’s profits, particularly for digital businesses. “We need to update the rules for that change in business model, but that does not necessarily mean the business model is broken.”
John Bartlett, group head of tax at BP, said the arm’s length transfer pricing principle “still secures an answer in 99 cases out of 100”. There are uncertainties, which are not unique to digital businesses, as to whether a taxable presence has been created in a country. “The fundamentals still work for us,” he said.
Lord MacGregor, the committee’s chairman, asked the witnesses whether they shared the government’s view that the location of a business can be influenced by the corporation tax rate.
Jones said tax had a part to play in investment decisions such as where to build a new factory. “Different tax regimes can give you a very different economic result,” she said, citing the UK’s new patent box regime. “We are going to build a factory in the UK for the first time in 40 years. Prior to the introduction of the regime it was very difficult … Tax is not the only factor [but] the UK was often losing out because the tax regime was not competitive enough.”
Morton said commercial considerations would normally determine the location of business activities. “Commercial considerations prevail, but where the decision-making is at the margin then tax would be important.”
Bartlett said the government’s corporation tax roadmap had put the UK in “a great position”. He could not think of a better location from which to run a multinational company from a tax perspective. Asked whether he thought tax competition between governments was a good thing, Bartlett said: “I think it’s a good thing if it’s designed to encourage growth and investment, and is open and transparent. I would not support secret deals.”
Jones recognised that there was a need to “rebuild public trust”. As a company, GSK was seeking to put out more information about its tax affairs. “Just publishing more data would not necessarily be the best solution to help inform the debate, and we need to be more proactive about describing why the tax position is as it is, rather than just giving more data.” Morton questioned whether provision of data on a country by country basis would be helpful in the absence of an agreed global standard of definitions “by which companies could properly be compared”.
Reed Elsevier supported the OECD’s work, to review the classic definition of a permanent establishment and to reconsider the allocation of taxable profits between countries, Morton said. “We think this is very worthwhile, we do think the debate should be thorough, and in particular that countries should come to an international consensus so that we don’t have double taxation of the same profits. We think this will be difficult because countries where activities are being carried on will wish to preserve their taxing rights, and countries where the customers are based will wish to acquire new taxing rights.”
He noted that the OECD had said it did not think there should be “a complete fresh start”. It was in favour of “refining and improving” the current system based on the arm’s length standard and the definition of taxable presence. Bartlett agreed, adding: “There is a need for the OECD to continue to try to address the abusive type of behaviour that seeks to exploit differences between countries’ tax systems such that a profit is taxed nowhere, or that you get a deduction for the same expenditure twice, or more frequently in several jurisdictions. I believe that is unacceptable, and I believe most of British business does as well.”
However, Bartlett said he would not advocate unitary taxation. “The possibility of formulary apportionment would put fear into most businesses’ hearts, because of the uncertainty.”
Jones agreed: “I think we need to understand what that would do to the UK tax base. The OECD model does recognise value added and the creation of intangibles, and rewards them through the tax system. That becomes much more difficult if you’re looking at a formula based on assets and people, for example.”
In a second evidence session yesterday, peers heard from Chas Roy-Chowdhury, head of taxation at ACCA, Elspeth Orcharton, director of taxation at ICAS; Frank Haskew, head of Tax Faculty at ICAEW; and Richard Woolhouse, head of tax and fiscal policy at the CBI. The hearing is available to view on the Parliament website.
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