CIOT Tax Policy Director John Cullinane was part of a panel of three quizzed by the House of Commons Treasury Committee today as it begins its consideration of whether radical changes are needed to corporate taxation.
Cullinane was joined by John Whiting, Tax Director of the Office of Tax Simplification (and himself a former Tax Policy Director of CIOT), and Richard Murphy, Director or Tax Research LLP, for the three hour hearing, which was led by Treasury Committee Chair Andrew Tyrie. While the hearing was not specifically about Google’s tax affairs, the company’s activities were discussed and that is clearly the context in which the Committee’s enquiry is taking place.
Tyrie began by asking the panel whether they were concerned that the UK’s corporate tax base appeared to be being eroded. Whiting responded that had to be prepared for its tax base to have to evolve over time, but taxing profits was still convenient. We still had to be prepared to look for alternatives, he added. Murphy did not agree fully with the premise. He took the view that there was no evidence profits were disappearing from the UK. We are not losing profits, we are losing the ability to capture them, he said.
Cullinane said he saw things a bit differently again. While there had been some fall in the take as rates had been reduced he saw no evidence the CT base was reducing, quite the contrary. He did not think the base was as vulnerable as supposed. He also noted that people who run multinational companies are highly incentivised to maximise accounting profits and do generate quite large chunks of them. He felt the more aligned the tax base is with accounting profits the more successful we have been in getting some of that for the Exchequer and the less scope there is for arbitrage.
Stephen Hammond MP asked what the main areas were that companies are exploiting to avoid tax. Whiting said he thought the rules around permanent establishment (PE) were the most exploited. This was a 1920s idea that had not really kept pace. Cullinane said that, globally, it was probably mismatches between tax codes. In particular while most tax authorities look at where the company is managed and controlled from, the US looks at where it is incorporated. Without that difference arguably Google’s Bermuda arrangements could not exist. Murphy said that the hundreds of thousands of companies simply not filing accounts with HMRC was probably a bigger abuse that base erosion and profit shifting. He argued the international tax system was built on a fiction of independent companies trading with each other even though they are under common control.
Apportioning profit and tax
In response to a question about the best way of levying business tax Cullinane said the key was international consensus. Whiting agreed. The chain is as strong as its weakest link, he said. Murphy advocated a unitary system where tax would be apportioned by a formula taking into account sales, people and assets, but not intellectual property (IP). Whiting said it would be tricky getting agreement on any formula.
Cullinane said that while the idea of dividing up tax based on sales was popular because Google has lots of sales in the UK there were big drawbacks. He gave the example of a Zambian copper mine – the idea that someone could phone up from London and buy all that mine’s copper for the year and suddenly all the tax would go to the UK seemed unfair. It was fairer to stick to activity than sales, he argued. Introducing employees as a factor presented all sorts of problems, he said. Would it be absolute numbers? Pro rata to salaries? Full-time equivalents? Lots of possibilities would open up for gaming it. Every detail would need to be agreed internationally. Tyrie suggested this might be exchanging one bucket with a lot of holes in it for another bucket with lots of holes in it.
Google and IP
The Committee explored whether IP has a role in profit allocation and with regard to Google in particular. Challenging Murphy’s suggestion that IP should be disregarded in determining where value had been generated by a company Cullinane said Google’s IP was ‘a real thing’ resulting from a great deal of work in California over the years and it did not seem equitable to make no allowance for that at all. Whiting agreed with the thrust of that – there should be deductions for royalties and interest if genuine.
In response to a follow up question on the basis for the Google-HMRC agreement, Cullinane said it seemed to be based on a calculation that roughly 15% of the profit on sales to UK customers was reflective of activity in UK from sales and marketing. If that 15% was accepted as a valid estimate the figures appeared to stack up. He added that it did not seem unreasonable to deem most of the value to have been created in California, even in respect of UK sales.
Helen Goodman MP asked whether the definition of IP used in the tax code was now too broad, using Starbucks brand as an example of dubious IP. Both Whiting and Cullinane said they thought the Starbucks name did have some value that had been earned by activity and innovation over the years. What the value was was open to discussion. Cullinane said BEPS would empower authorities to have a more substance based approach.
Asked by Rachel Reeves MP if there was a case for ending the principle for taxpayer confidentiality for large businesses as a result of cases like Google, Cullinane said this should be considered. He added that, assuming we don’t want all tax returns made public, that would require the drawing of a line. He wondered what effect that would have on companies put either side of it. Whiting agreed there should be a ‘proper debate’ on greater disclosure. It was key, he added, to understand what actually would be made public. The interest, he argued, was in reconciling accounting profit with taxable profit. Murphy said there were commercially sensitive items on tax returns. They were also very big and hard to extract useful information from. More explanation was needed.
Other areas probed by the Committee included:
· Whether companies have a legal duty to shareholders to minimise tax liability
· Which areas the Committee should focus on to make the most significant progress
· Which other countries the Committee should study as examples of best practice
· The effectiveness of the Diverted Profits Tax
· What UK should do about its overseas territories acting as ‘tax havens’
· Why companies like Google choose to keep large amounts of money in places like Bermuda
· Whether the panel were satisfied HMRC have adequate resources
· Reaction of US to any threat of UK or other tax authorities ‘fishing after their profits’
· Potential for use of a withholding tax on sales made in the UK by companies ultimately incorporated in low tax jurisdictions
· Size of the tax gap
· Role of EU in tackling avoidance
A full transcript is not yet available but the enthusiastic can watch and listen to the hearing here.
See also the CIOT's Q&A on corporate taxes and Google here.
CIOT Head of External Relations
Tuesday 2 February 2016