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Tax academic warns against ‘public shaming’ of multinationals

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A Financial Times editorial claiming that there is ‘nothing wrong with high-profile public shaming as a weapon in the armoury against the exploitation of loopholes’ has been challenged by Michael Devereux, director of the Centre for Business Taxation at Oxford University.

‘This tactic has echoes of the lynch mob and should be treated with caution,’ Devereux said in a letter published in today’s FT. ‘We have a legal system to ensure that companies pay the right amount of tax. Claims that particular companies are exploiting loopholes are typically based on scant information, and sometimes appear to be based on a misunderstanding of the tax system. Starbucks is a case in point. Part of the argument is that Starbucks has paid little UK tax despite having high UK sales, regardless of the location of sales being irrelevant for determining existing taxes on profit.’

However, Devereux’s letter suggested that the FT editorial’s second point – that public anger might be directed at the way the tax system treats multinationals – was ‘more justified’.

‘Broadly, the principle currently used to allocate worldwide profits of multinational groups between countries is to ask where the profit was generated,’ he wrote. ‘But that principle is ultimately devoid of any useful meaning since profit can depend on activities that take place in many countries. One response to this would be to introduce an allocation mechanism based on a simple formula, as you advocate. Ironically, perhaps, a good case could also be made for a reform that allocates taxes on profit according to where sales are generated.’

Devereux is a member of HM Treasury’s business forum on tax and competitiveness.