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FT: Reforms could expose ‘scandalous tax treatment’ of multinationals

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Campaigners for country-by-country reporting of profits and corporate taxes have seized on a Financial Times editorial claiming that the reform may expose what it called ‘the scandalous tax treatment of multinationals in the rich world’. The editorial, published on 22 December, suggested that, for some multinationals, current practice turns corporation tax ‘largely into a voluntary gesture’.

It observed that UK Uncut, the pressure group co-ordinating nationwide protests against tax avoidance, ‘has a point – if not the one it thinks it has’.

Avoidance, unlike evasion, is legal and ‘not obviously immoral’, the article said. But a tax system that is seen as fair ‘goes a long way to win the public over to the imperative of deficit cuts’.

It called on the European Commission, which has just completed a consultation on country-by-country reporting, to extend the rule to all listed groups.

It continued: ‘Civil society groups think such reporting will unveil tax avoidance undermining developing countries’ tax revenues. In fact, the greater impact may be to expose the scandalous tax treatment of multinationals in the rich world.’

The FT editorial suggested that as the use of intragroup financial links and transfer pricing of intangibles ‘grow in importance’, so will ‘the slipperiness of the corporate tax base’.

But Richard Lambert, the CBI’s Director-General, responding in a letter to the FT, claimed that a ‘steady exodus’ of multinational companies and mobile talent to other jurisdictions demonstrated that ‘the UK’s status as an international business location is being threatened by its heavy-footed approach to business tax’.

Tax risk
The Tax Justice Network has claimed, in its submission to the recent EC consultation, that ‘essential’ country-by-country data is ‘not available to the boards of directors of the vast majority of multinational corporations at present because [it] is not conventionally prepared … although the data to enable its preparation must exist’.

The TJN submission added: ‘As a consequence it is highly unlikely that effective tax governance takes place within the boardrooms of most major multinational corporations. This almost invariably means that risk from tax transactions is unlikely to be properly appraised by those boards.’

Country-by-country reporting would enhance tax governance within governments; tax collection; the upholding of the law on matters such as transfer pricing; and the accountability of government for its management of taxation within a jurisdiction, it said.

Profit shifting
As Tax Journal reported on 1 November, a BBC radio investigation into tax avoidance by some of the UK's largest companies concluded that there was a trend among larger multinationals towards collecting profit-generating activities in subsidiaries in low tax zones.

Malcolm Gammie QC, who represents taxpayers and HMRC in tax litigation, said recent case law had undercut the UK's controlled foreign companies rules. HMRC is now 'more vulnerable', he said, 'in the sense that it's more difficult to protect our borders against these activities'. He added: 'When you're looking at the European Union, the opportunity to locate and put profits in other member states is obviously significantly greater than it used to be.'

A former tax inspector, Tony Attwood, said the potential tax savings must be 'irresistible' to the multinationals. 'If a multinational can decide where its profits will fall, then revenues will fall drastically in normal rate countries,' he said. 'The vital components that drive profit will be in a tax haven.'

‘Growing consensus’
Campaigners at Christain Aid reported in November that just three respondents in the charity’s recent survey of FTSE 100 companies supported new international accounting standards to require country by country reporting. But the charity told Tax Journal that there was 'a growing consensus' on the need for greater transparency in tax.

The FT reported that while companies were unsurprisingly ‘cool’ about reform, Standard Chartered had already made a start on publishing accounts for individual countries but ‘wants a level playing field'.

Bill Dodwell, Head of Tax Policy at Deloitte has said companies need a strategy to inform shareholders and employees while being ‘careful not to over-react’ to recent campaigns. Writing in Tax Journal (20 December), Dodwell said such a strategy could cover ‘everything from choosing where to pay tax to a PR strategy (which could include simply saying nothing, of course)’. Companies ‘pay about one third of the total tax in the UK and need to help get that message across’, he added.