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Another multi-national corporation in the tax spotlight

A pile of money under a spotlight

Marion Hodgkiss, Kaplan Head of Tax and Michael Steed, ATT President muse over the latest developments in respect of international tax planning and the “Google tax”.

It’s one horror headline after another – it seems as though everyone’s at it!

The latest is IKEA which stands accused of diverting profits out of big European markets, including the UK, and the profits ending up inside a shadowy trust structure in Liechtenstein.

In a study commissioned by the EU Greens/EFA group in the European Parliament, the workings of IKEA’s international tax planning has been laid to public scrutiny. Quite literally billions of euros of profit are being siphoned out of Member States where IKEA does business and end up being subject to very little tax in countries like Liechtenstein, according to the report.

There’s nothing new in this, it’s just another expose of how Multi-National Corporations (MNCs) control their tax bills, and we’ve already seen large MNCs like Google being put through the mill to account for themselves.

This is already happening in the UK by the Public Accounts Committee (PAC) in Parliament.  This was led for years by Margaret Hodge, but she has now retired from the post and it’s being led by Meg Hillier.

The PAC is determined to make its mark and has already hauled both HMRC and Google in over the purported “sweetheart deal” by which Google settled corporation tax at £130m with the UK’s tax authorities.

Marion said: “It’s not surprising that the new PAC will want to make its mark and some of this looks like heat without a lot of light.  Although the PAC scored some points off Google, expressing some incredulity that the chief executive didn’t know how much he earned, the real issue is that this is not just a UK issue, it’s an international issue and it will only be solved with international co-operation”.

Michael agrees: however, as he says: “the UK does have a track record of going it alone and the new Diverted Profits Tax (DPT) follows the earlier precedent of being the first country in the EU to price carbon into its tax canon, with the carbon price floor legislation being woven into the Climate Change Levy law”.

They both agree that it will take a bit of time to see how the new DPT will affect MNC behaviour.  Its core is simple; that an MNC will effectively have a choice – either to pay UK corporation tax on profits earned in the UK or pay the diverted profits tax on such profits at 25% if such profits have been artificially diverted out of the UK.

The BEPS (Basal erosion and Profits Shifting) OECD project (which effectively spawned the DPT) and adopted by the G20 countries, will create a new environment against which G20 countries will measure the behaviour of MNCs that do business in their territory.

So how do the MNCs get profits out of countries like the UK?

“Let’s be clear about this”, said Michael; “there’s nothing illegal about what the MNCs have done; whether what they have is moral is quite another matter”.

Marion agrees: “The classic leakage mechanism is for big royalty payments, to be levied on the companies in the relevant countries and sent to places like Luxembourg and the Netherlands and onwards to other destinations with little or no tax, thus reducing national profits to near zero. But this is likely to come under increasing fire from national tax authorities and the media alike”.

So what does the future hold?

Marion is quite clear about this; “MNCs will have to balance tax planning against national and international pressure to pay a proper amount of tax in the territories where they do business. Not do so will put them on a collision course with increasingly belligerent national tax authorities”.

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