HMRC’s published figures show it received $39.5bn of net corporation tax payments between 2012-2013. That sounds a lot of money, but compared to the amount of money Google alone generates in revenues in the UK – $4.9bn – it is not actually that high.
This is all highly controversial, but what these larger companies are doing is perfectly legal, and when you consider this alongside their argument that the level of investment they inject into the UK economy in terms of jobs creation and economic output far outweighs any tax shortfall, the argument becomes more complex. However, the days of being able to operate in this way are potentially drawing to a close. The Organisation for Economic Co-operation and Development (OECD) is calling for international tax rules, which currently allow multinationals to generate business in countries without having to establish a commensurate tax base, to be overhauled.
As HMRC continues to ramp up efforts to recover tax shortfalls, smaller businesses are being targeted more aggressively with initiatives to detect underpayments and tax avoidance schemes. It is therefore annoying for business owners to see via the media that some of the world’s largest and most successful companies – Google, Apple, Adobe, LinkedIn, eBay, Vodafone, Tate & Lyle, Starbucks and many more are legitimately paying minimal tax on millions of pounds of profits. In the case of Google, it paid an effective tax rate of just 0.5% on total foreign profits of $8.1bn, of which just £11.2 million were payments made to HMRC. Contrast this with the average rate of 20% tax paid by the vast majority of smaller companies and it seems hardly a level playing field.
What are the tax rules for international business?
Put very simply, companies pay tax on profits generated from their centre of management and control. Small companies are managed and controlled by their director shareholders who generally live in the UK; larger companies have much more flexibility as to where their centre of management and control is based and are therefore able to centralise their business taking into account the rates of tax payable in different jurisdictions. Let’s take Ireland as an example – Ireland is not officially a tax haven but it does have favourable tax policies – low rates of corporation tax (12.5%) and relaxed legislation relating to incorporation and the jurisdiction where tax is payable.
It is possible for a company to establish a centre of management and control in Ireland and then to take this planning one step further by using two Irish subsidiary companies; one of these being the official owner of a company’s ‘intellectual property’ with the other company’s role being to pay it ‘royalties’, which are offset as tax deductible expenses, thereby reducing the amount of tax it has to pay. All the royalties earned can then be diverted to a tax haven e.g. Bermuda or Cayman Islands, which means no tax is payable locally in Ireland. The advent of technology has facilitated the rise of such strategies because financial transactions can be conducted by a company across sophisticated ‘technology platforms’ based in the low or zero tax rate regimes.
How much tax do multinationals pay?
Consider the table below to highlight how this approach helps Adobe to cut its tax bills:
| Company | |||||||
| US Profits | Tax paid | Effective rate | Non US profits | Tax paid | Effective rate | ||
| Adobe | $1bn | $527.1m | 52% | $2.1bn | $144m | 6.9% | |
They are not alone, and many of the world’s top companies use these types of loopholes.
The point to all this is that nothing these companies are doing is illegal, but it is unfair. Smaller companies may be able to copy these strategies but do not have the resources to carry them out, nor the profits to make them cost effective.
As a result, smaller company owners read the press and look for ways to reduce their tax liabilities and inevitably come across ways that HMRC then target as tax avoidance.
There are of course a few Government backed schemes such as R&D tax credits, Enterprise Management Incentives, enhanced capital allowances and group tax reliefs which are all useful ways for smaller companies to obtain tax reliefs, but these are restricted to a minority of companies.
Tempting as it may seem when reading press reports, entering into tax planning strategies that could be considered aggressive and deliberate tax avoidance will only cause HMRC enquiries into your company’s affairs. Therefore the best we can do is to hope that the OECD will be effective in delivering a level playing field!
If you think your company is paying a lot of corporation tax and not taking advantage of opportunities to claim tax relief please contact Lesley Stalker by emailing las@rjp.co.uk.