Heads of tax at the big four accountancy firms have welcomed the Commons public accounts committee’s endorsement of a multilateral approach to corporation tax reform.
International tax rules are out of date, the PAC said in its report last week on the role of the large accountancy firms. The PAC welcomed the firms’ agreement that tax laws needed revising, and said the UK must take the lead in “demanding the urgent reform of international tax law”.
It was concerned, however, that securing international agreement on global solutions to ensure that tax systems do not unduly favour multinationals would be “a lengthy process”.
Any negotiations may take “many years”, it said. “In the meantime, some companies will continue to find ways to avoid paying tax where they actually do business.”
The OECD warned in February that “the integrity of the corporate income tax” is at stake. It called for a holistic approach to address “base erosion and profit shifting” issues in a competitive manner.
Peers said in March that the OECD’s review “clearly needs to be carried out as a matter of urgency”. But OECD officials have indicated that the arm’s length principle behind the transfer pricing rules will be retained, describing it as “an essential element” of a fair allocation of taxing rights between countries.
The PAC had heard that international tax rules had not changed to reflect the way businesses operate globally and via the internet.
“It is too easy for companies to exploit these rules by setting up structures in low tax jurisdictions, rather than pay tax where they actually conduct their business and sell their goods and services. We heard helpful examples of ways of better matching taxation with economic activity, as used in some US states.”
The treaties of the 1920s and 1930s, and the transfer pricing models of the 1970s and 1980s, were based on predominantly domestic economies, when companies were not global in nature and there were very few cross-border transactions, it noted.
“This business model no longer reflects the modern economy in which the global nature of companies’ operations and transactions mean that countries compete for tax. Countries are increasingly using tax incentives to attract inward investment. Many create specific reliefs to encourage particular activities, and some operate as tax havens by offering very low levels of taxation.
“Whilst multinational companies take into account a wide range of factors when deciding where to locate their business, such as the available workforce and infrastructure, we are concerned that tax considerations appear to dominate their decisions and that avoiding tax has become a new source of profit.”
It was relatively easy, the PAC said, for companies to establish a viable office for tax purposes in a low tax location and “pay their tax there rather than where the majority of their business activity takes place”. This was unfair to UK businesses that do not use “complex international structures”, and had put them at a competitive disadvantage.
Kevin Nicholson, head of tax at PwC, said there was clearly scope for “modernisation” of an international tax system that was “outdated” for today’s business world.
“We support reforms that will help build trust in the system,” he added.
John Dixon, UK managing partner for tax at Ernst & Young, said: “Inherent in delivering a suitable competitive tax regime is the need to ensure that the tax system applies equitably and robustly. We welcome the PAC endorsement of a multilateral rather than unilateral approach to international tax policy reform.”
Jane McCormick, head of tax at KPMG in the UK, said: “As the business world evolves, the tax system must adapt. We welcome the government’s initiatives on both domestic and international levels to ensure the continued evolution of the UK and global tax system to operate effectively in the current environment.”
Bill Dodwell, head of tax policy at Deloitte, said: “The government needs to capitalise on international initiatives to update the principles of allocating taxing rights for the challenges of new technology; continue to work to simplify the tax system and make it more competitive; maintain and strengthen their vigilance against avoidance; and lead an educated public debate on how the corporate tax take has risen substantially over the last 40 years in an increasingly competitive world.”
Heads of tax at the big four accountancy firms have welcomed the Commons public accounts committee’s endorsement of a multilateral approach to corporation tax reform.
International tax rules are out of date, the PAC said in its report last week on the role of the large accountancy firms. The PAC welcomed the firms’ agreement that tax laws needed revising, and said the UK must take the lead in “demanding the urgent reform of international tax law”.
It was concerned, however, that securing international agreement on global solutions to ensure that tax systems do not unduly favour multinationals would be “a lengthy process”.
Any negotiations may take “many years”, it said. “In the meantime, some companies will continue to find ways to avoid paying tax where they actually do business.”
The OECD warned in February that “the integrity of the corporate income tax” is at stake. It called for a holistic approach to address “base erosion and profit shifting” issues in a competitive manner.
Peers said in March that the OECD’s review “clearly needs to be carried out as a matter of urgency”. But OECD officials have indicated that the arm’s length principle behind the transfer pricing rules will be retained, describing it as “an essential element” of a fair allocation of taxing rights between countries.
The PAC had heard that international tax rules had not changed to reflect the way businesses operate globally and via the internet.
“It is too easy for companies to exploit these rules by setting up structures in low tax jurisdictions, rather than pay tax where they actually conduct their business and sell their goods and services. We heard helpful examples of ways of better matching taxation with economic activity, as used in some US states.”
The treaties of the 1920s and 1930s, and the transfer pricing models of the 1970s and 1980s, were based on predominantly domestic economies, when companies were not global in nature and there were very few cross-border transactions, it noted.
“This business model no longer reflects the modern economy in which the global nature of companies’ operations and transactions mean that countries compete for tax. Countries are increasingly using tax incentives to attract inward investment. Many create specific reliefs to encourage particular activities, and some operate as tax havens by offering very low levels of taxation.
“Whilst multinational companies take into account a wide range of factors when deciding where to locate their business, such as the available workforce and infrastructure, we are concerned that tax considerations appear to dominate their decisions and that avoiding tax has become a new source of profit.”
It was relatively easy, the PAC said, for companies to establish a viable office for tax purposes in a low tax location and “pay their tax there rather than where the majority of their business activity takes place”. This was unfair to UK businesses that do not use “complex international structures”, and had put them at a competitive disadvantage.
Kevin Nicholson, head of tax at PwC, said there was clearly scope for “modernisation” of an international tax system that was “outdated” for today’s business world.
“We support reforms that will help build trust in the system,” he added.
John Dixon, UK managing partner for tax at Ernst & Young, said: “Inherent in delivering a suitable competitive tax regime is the need to ensure that the tax system applies equitably and robustly. We welcome the PAC endorsement of a multilateral rather than unilateral approach to international tax policy reform.”
Jane McCormick, head of tax at KPMG in the UK, said: “As the business world evolves, the tax system must adapt. We welcome the government’s initiatives on both domestic and international levels to ensure the continued evolution of the UK and global tax system to operate effectively in the current environment.”
Bill Dodwell, head of tax policy at Deloitte, said: “The government needs to capitalise on international initiatives to update the principles of allocating taxing rights for the challenges of new technology; continue to work to simplify the tax system and make it more competitive; maintain and strengthen their vigilance against avoidance; and lead an educated public debate on how the corporate tax take has risen substantially over the last 40 years in an increasingly competitive world.”
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