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Politicians must get into tax details

07 December 2012

They need to go beyond PR in getting companies to pay fair rates, says Paul Vallely

Starbucks, Amazon, Google, and other global megabrands are not pay­ing much corporate tax in the UK. Starbucks, for example, has paid zero corporation tax in the past three years, despite having almost one third of the UK coffee-shop market in turnover, and told its shareholders that its UK arm was making 15 per cent in profit. It manages all this by charging itself a series of premiums that are paid to its Dutch and Swiss offices, where taxes are much lower.

Other multinationals pursue similar policies - so much so that government revenue from corporation tax fell by £6.4 billion last year. Margaret Hodge, who chairs the House of Com­mons Public Accounts Committee, says that clever accounting tricks mean that paying corp­oration tax has, for some large global firms, be­­come almost voluntary. This is, she says, "im­­moral".

You can see her point. At a time of financial austerity, ordinary people who have no choice but to pay their taxes in full are outraged at companies that take profits from the UK, and then refuse to pay their proper share of tax. 

What goes around comes around, as the pro­verb has it. It was in 1989, in a book calledBad Samaritans: First World ethics and Third World debt,that I firstexamined the business of what is called "transfer pricing", whereby a transnational firm adjusts the price of goods that it transfers between subsidiaries in different countries, in order to pay as little tax as possible. In those days, the chief victims were developing countries with abundant resources, cheap labour, weak trade unions, a lack of environmental laws, and tax con­cessions from desperate, manipulable, or cor­rupt government élites.

Well, now the boot is, if not exactly on the other foot, swinging in our direction. There are two ways of dealing with this. The first, then as now, was by consumer boycotts and public con­demnation. Today's politicians are flirting with that. Ms Hodge has announced that she will buy her grandchildren's Christmas presents at John Lewis rather than on Amazon. Danny Alexander, the Chief Secretary to the Treasury, says that he's not drinking Starbucks coffee. Starbucks has since set up a meeting with the British tax authorities to discuss its tax bill.

But public indignation takes us only so far; as does a company's deciding for PR reasons that it had better be seen to pay a bit more of its fair share of tax. The problem is what a "fair share" is, and who decides. Companies argue that they have a fiduciary duty to maximise profit by minimising costs, including taxes. It is only what we do when we claim deductions or credits on our tax bill.

The answer is that it is for politicians to decide. It is not a one-sided equation. On the one hand is the public outrage; on the other hand, they know that if we tax international companies punitively, they will move elsewhere - and take jobs, VAT, and employment taxes with them.

Firms use many mechanisms to avoid tax. Some ship goods, on paper only, to tax havens such as the Cayman Islands. Others lend funds from the parent company to an overseas subsidiary at artificially high rates of interest. Some sub­sidiaries make over-generous payments to the parent to cover the intellectual property rights of using a well-known brand-name.

Controls are possible. The US tax authorities have considerable powers, under Section 482 of the Internal Revenue Code, to allocate income, deductions, credits, and other allowances inside the part of a transnational that falls under their juris­diction. Other nations could do the same, separ­ately or through international agreements. It would be helpful if British politicians, instead of huffing and puffing, were to turn their attention to the detail of how to do this.

Paul Vallely is associate editor of The Independent.

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