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Tax lawyers give cautious backing to OECD review

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  • Arm’s length principle is sound, say tax experts.
  • Strict formulary apportionment would almost inevitably be ‘wrong’.
  • Legality is not always ‘black and white’, says Margaret Hodge.

Peers questioned Steve Edge, Ashley Greenbank and Gary Richards, partners in Slaughter and May, Macfarlanes and Berwin Leighton Paisner. Margaret Hodge, chairman of the Commons public accounts committee, gave evidence in a second session.

Following discussion on the distinction between debt and equity, Lord Lawson asked the lawyers how Britain’s corporate tax system differed from that of its main competitors. Edge said the UK was like most other developed jurisdictions in that it gave relief for interest.

But local policies were intended to achieve particular policy objectives and there was one big distinction, he said. ‘The UK has had a foreign tax credit system – we have taxed foreign earnings with a ‘top up tax’ [charging UK corporation tax and giving credit for foreign tax on the same profits], and since 1984 we have also had a controlled foreign companies regime which has taxed [unremitted] foreign earnings. That has changed considerably, as we have gone on to a more territorial system, and that makes us very different, for example, from the US. But it has brought us more into line with other European countries.’

Edge said the US’s ‘willingness to allow major multinationals to reinvest overseas profits’ without tax liability unless the profits were repatriated was ‘a major advantage for US companies’. That was a policy decision, and the UK should not follow suit. ‘I think we’ve got the right system now,’ he said.

Lawson asked whether it was ‘undesirable’ that there was not a level playing field between multinationals and domestic businesses. Edge said: ‘If I was a food producer in the US, who was just selling food through domestic outlets and paying US tax at 35%, and competitors were selling the same food domestically but also had international operations and were paying less US tax on their foreign operations, I might question that.’

For the UK, he said, it was important to concentrate on what was right for its own economy. ‘If that produces unhappiness, between those who invest mainly in the UK and those who invest abroad, then you have a political question to deal with as well.’ The UK was now in a ‘good general place’, Edge argued, and UK-based multinationals were now ‘much less vulnerable to overseas acquisitions’.


Greenbank said there were ‘shortcomings’ in the international tax system, which did not deal very well with the modern economy. Globalisation, e-commerce and the increased importance of intangibles were relatively recent developments, he said. The OECD was looking at the right issues, but the allocation of taxing rights and transfer pricing were particularly important. The arms-length principle for transfer pricing was ‘fundamentally a good one’. The fact that it could produce some odd results under current guidelines did not mean that the principle was wrong.

The OECD project includes a review of ‘jurisdiction to tax’ – the rules allocating the right to tax cross-border business – and issues relating to digital goods and services. But Richards suggested that HMRC would be applying the existing rules to examine closely the prices charged by Google and Amazon to their overseas group companies for services provided in the UK.

Lord Shipley asked whether the panel was in favour of a formulary apportionment system for taxation of profits. Richards said that if was right to attribute value to intangible assets, it would be wrong to allocate profits by reference to sales, employment costs and tangible assets only. ‘Unitary taxation’ would also entail some loss of sovereignty, he said. Greenbank said a strict formula would almost inevitably be wrong. It would provide a very simple answer, but he questioned how one formula applied across all sectors could produce ‘the right sort of answer’.

Margaret Hodge

Hodge began by pointing out that she was not a tax expert, but she hoped to share some of her committee’s thoughts on corporation tax. Lord McGregor noted the distinction between illegal evasion and legal avoidance. He asked Hodge whether she agreed that a distinction should be drawn between companies not properly observing the rules and those ‘legally minimising their tax bills in the interests of their shareholders by organising some of their operations to exploit the different rules in different countries’. Where companies are operating legally and legitimately, he asked, ‘isn’t the real problem the design of the tax systems?’

Hodge replied: ‘It isn’t as clear to me, as it sometimes is to some of the experts, that legality is all black and white.’ The spectrum between sensible tax planning and evasion was one with ‘blurred edges’, she said. Her committee believed that HMRC’s judgments tended to be ‘weaker’ in relation to multinationals than they were for small and medium-sized businesses, she claimed. On the other hand, there was an onus on governments to ensure the law was fit for purpose. Simplification would help, she suggested, and there was a need to re-examine the taxation of companies operating globally.

Andrew Goodall is a freelance tax writer and journalist: