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Businesses should only engage in ‘reasonable’ tax planning, says CBI

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UK businesses should only engage in “reasonable tax planning that is aligned with commercial and economic activity and does not lead to an abusive result”, the CBI said yesterday in a statement of tax principles designed to “advance the debate on responsible management of tax”.

The principles are based on five key observations, the CBI said. One of these – that tax is a business expense, which needs to be managed like any other – is likely to be contested by campaigners and others who regard tax as a contribution to society, payable on profits after deduction of business expenses.

Ernst & Young and the CBI lobby against country by country reporting

But the CBI pointed out that businesses “may respond to legitimate tax incentives and statutory alternatives offered by governments”. Some tax experts have insisted that companies using such incentives are doing nothing wrong, and that only international cooperation will address what many see as an unfair advantage offered to multinationals by the current system.

The CBI said: “In international matters, UK businesses should follow the terms of the UK’s double taxation treaties and relevant OECD guidelines in dealing with such issues as transfer pricing and establishing taxable presence, and should engage constructively in international dialogue and the review of global tax rules and the need for any changes.”

The employers’ body has also updated and expanded its explanation of corporation tax concepts that are often “misunderstood”.

In a section addressing the “sweetheart deals” controversy, the CBI pointed out that there can be a genuine difference of view between HMRC and a company on how tax law applies to a particular transaction. “This does not necessarily mean that the company has used a ‘scheme’,” it said.

Some issues can have a range of outcomes, the CBI explained. “For example an arm’s length royalty is not a precise figure, but an acceptable range such as (say) between 3% and 5% of sales income.”

The CBI added: “HMRC will not do ‘package deals’ – if there are several issues to be agreed, each one must be considered on its own merits.”

Kevin Nicholson, head of tax at PwC, said: “We're comfortable with the spirit and direction of the CBI's principles on taxation. However, we caution against prescription as individual businesses need to make informed and balanced decisions dependent on their own specific circumstances. Also, transparency alone is not enough. The tax system needs to develop as international business models, economies, the policies of governments and public opinion evolves.”