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Taxing the multinationals: We need a balanced international debate, say lawyers

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A consensus about allocation of taxing rights in the modern global economy is the right way ahead and the need for a balanced debate is now urgent, say Freshfields Bruckhaus Deringer partners

‘Beating up multinationals’ because of their tax conduct has become a popular sport and HMRC has become an ‘easy target’ for not doing enough to stop them, according to London-based partners at one of the world’s largest international law firms.

‘What is needed is a balanced international debate and consensus about the allocation of taxing rights in the modern global economy, said Will Lawes and David Taylor, partners at Freshfields Bruckhaus Deringer.

Taxing the multinationals: Companies need to embrace transparency, says KPMG

Writing in The Times (30 November), they noted that this was what George Osborne and his German counterpart Wolfgang Schäuble had called for at a meeting of the G20 last month. ‘This is surely the right way ahead. It is also now urgent,’ they added.

In the joint statement Osborne and Schäuble called for ‘concerted international cooperation to strengthen international standards for corporate tax regimes’. They asked G20 countries to support the OECD’s work on ‘identifying possible gaps’ in the international standards, as a first step in promoting ‘a better way of dealing with profit shifting and the erosion of the corporate tax base at the global level’.

‘Britain and Germany back the BEPS (tax base erosion and profit shifting) initiative of the OECD and expect its first analysis report to the next G20 meeting in Russia in February 2013. Britain and Germany will continue to work together, and with our partners in the EU, G7 and G20, to maintain momentum on strengthening international standards,’ they said.

The Times reported on 24 November that Osborne, Schäuble and their French counterpart Pierre Moscovici had written to the OECD, calling on it to ‘urgently address loopholes that allow Amazon, Google and Starbucks to legally avoid tax’. They urged the OECD to ‘work quickly to address the changes in global business practices that allow tax avoidance to occur’.

Lawes and Taylor argued that it was ‘easy to join in with the criticism’ of multinationals, but ‘a great deal’ had been achieved recently to curtail corporate tax avoidance in the UK.

‘The complaint is largely about US-based groups that make use of basic principles of tax law and international standards when choosing whether or to what extent they operate in the UK with a taxable presence – or what to charge for the goods, intellectual property or services that their UK subsidiaries acquire or use, or whether to fund into the UK with deductible interest-bearing debt,’ they wrote. ‘They often end up without much of a UK tax bill. But if they go too far there is law, especially a transfer pricing regime, to control them.’

Tax campaigners argue that the current system allows groups of companies to use tax havens or low-tax jurisdictions to avoid tax without breaching transfer pricing guidelines, and that an overhaul of the system is needed.

Lawes and Taylor wrote: ‘There may be enough treasure buried or waiting to be buried in low-tax countries to justify a compromise between governments and the multinationals on sharing it.’

Francesca Lagerberg, head of tax at Grant Thornton UK, observed last week that the ‘mauling of a few global corporates’ by MPs and media had ‘shed light on how offshore structures can legitimately be used to apparently significantly reduce UK tax’. The temptation of government ‘to be seen to be acting’ may be too strong for the coalition to resist, she wrote in Tax Journal. ‘My hope would be that any action arising is no more than an opening of a sensible debate around this area rather than a knee-jerk proposal that makes the UK uncompetitive.’

Apportionment

‘Well-conceived apportionment’ of profits is ‘the best – perhaps only – answer’ to the problem presented by businesses that operate in several tax jurisdictions, according to John Kay, Financial Times columnist and a visiting professor at the London School of Economics.

The Tax Justice Network has campaigned for many years for a system of formulary apportionment of profits.

Kay said last week that it was ‘not difficult to understand why ordinary people on wages and salaries, and small British companies that pay tax at the normal rate on their profits, are angry’ that many multinational companies that appear to be operating successfully in Britain pay ‘little or no’ UK corporation tax. But the origin of the problem was simpler to describe than to address: ‘If a business operates in many countries, and makes a profit, in which country is the profit earned?’

He warned that the outcome of ‘tax competition’ between countries was a ‘beggar-my-neighbour process’ in which ‘the winning country’s gain is necessarily smaller than its rival’s loss’.

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