Public Accounts Committee Report

The PAC has published a report based on the discussions it had with Starbucks, Google, and Amazon here: http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/716/71605.htm

It talks about the tax paid by a company in the context of its turnover.  It accuses HMRC of failing to show that avoidance is not increasing, as if that is evidence that it is.  It complains that HMRC, a department whose staffing has been massively cut, might not be acting robustly enough.  It several times says "we weren't convinced of X", but never sees fit to provide any evidence for concluding not-X.  It seems to think that agreeing how to tax something in the Netherlands is an arrangement designed to remove things from UK tax, rather than an exercise of that government's sovereign rights.

Above all, it harps on about looking at where economic activity takes place, but seems entirely ignorant of the normal rule that to decide this you look at where the contract is made.  It betrays no understanding of the Permanent Establishment clauses of tax treaties, which are in there precisely to resolve this sort of issue, which have been carefully negotiated by the UK Government, and which almost universally agree that marketing and distribution operations do not constitute a taxable presence in a country. 

But it comes to no conclusions whatsoever, beyond a general feeling that the companies and HMRC are in the wrong, somehow.  Or rather, the cynic in me says, that the MPs want to show that they are in the right and therefore need to find someone else to be in the wrong.

What the PAC wants to do

There seem to be two main issues that the PAC is complaining about.

The Starbucks issue is that it's a big business but isn't very profitable even though it tells people things are going well.  So what the PAC wants to do is scrutinise the amounts Starbucks pays to related parties to make sure they're not inflated to avoid UK tax.

So we need to set up an official arm of the UK Government with powers to examine the accounts and tax returns of large companies to make sure they don't do uncommercial things.  Oh, wait, that's exactly what HMRC is meant to do, and in fact has done - as evidenced by the reducting in royalties from 6% to 4.7%.  So, er, nothing for the PAC to look at here.

The Amazon/Google issue is different: the issue for them is that they're located outside the UK and selling into it, which is made a lot easier by the web.  So when someone in the UK buys from them, the profit on that sale is taxed outside the UK.  So what the PAC wants to do is make sure that it's taxed in the UK.

Only... if you apply that across the board, then every company selling across the web will need to carefully keep track of where its customers are, and file tax returns in every single country they come from.  Bit of a bugger for businesses, especially small ones - you either have an impossible administrative job, or you have to refuse sales, or probably both.  This was considered in the VAT context a few years ago, and the EU decided that the only way to make things work was to have the VAT chargeable where the supplier is, as otherwise there'd be no sales to charge VAT on.

Also, for every person on the outside selling in, you have people on the inside selling out.  So doing this would strip a lot of profits out of the UK tax net.  Ignoring balance of payments issues, it would have no effect on tax revenues - except for the fact it now makes it much harder to sell anything, so the economy goes downhill and taxes fall.

The other thing might be to look at the definition of "Permanent establishment".  At the moment marketing and distribution are regarded as ancillary to the main business of selling, so if you have an overseas company with a warehouse in the UK then it doens't necessarily have a taxable presence here.  There may be some scope in looking harder at that area to see if maybe some marketing/distribution operations are substantial enough to count as establishments.  At that point, the UK gets a cut.  Again, this is something you need to look at both ways round, and would be a major international discussion point, not something you can do unilaterally.

So what the PAC wants to do is stop meddling in what it doesn't understand.  Oh, and maybe think about funding HMRC properly so they can get on with doing the job that they're actually surprisingly good at (for all I say about them).