CURRENT AFFAIRS pg 13 Business tension as tax landscape shifts FINAL

Businesses face a stark tax environment as political, social and market forces move to impinge on those legal, but often murky, practices that drive down tax bills. Here in the UK, Starbucks has become synonymous with corporate tax avoidance by multinational companies, and has been repeatedly censured for its tax structure, shifting cash offshore in order to lower its bill – an allegation it has always vehemently contested.
In February, the Seattle-based coffee house booked a taxable profit of £1.06m in the year to September 2014 – its first since it arrived on these shores in 1998 – while in the previous year it recorded a £20.5m loss, closing shops with high rents, improving service and rolling out its higher-quality Reserve coffee range. The profit means it paid £11.4m tax in total, up from £3.7m in 2013.
Meanwhile, in order to combat structures put in place to shift cash offshore, a diverted profits tax – or ‘Google Tax’ – was proposed. The 25% levy is aimed at multinationals that move UK profits out of the country.

An erroneous tax liability
The measure contains a two-pronged attack on the perceived avoidance structures used by companies such as Google, Amazon and Starbucks. The first test targets multinationals using a “conduit structure” through jurisdictions which have double-tax treaties with low-tax nations. These enable the companies to potentially escape UK corporation tax altogether on almost all their profits.
The second targets those with arrangements that use so-called tax havens to avoid tax which can then be repatriated by the multinational to its tax base. If either of those criteria is satisfied, then the UK will apply a 25% levy to profits generated in the UK by the multinational.
But CBI director-general Katja Hall has claimed the legislation as it stands “will subject many groups who do not engage in abusive tax arrangements to – at best – an additional layer of compliance, and – at worst – an erroneous tax liability”.
At the same time, she added, the broad scope of the rules has resulted in real concern that HMRC “will not be able to cope with the quantity of notifications from companies, causing long periods of business uncertainty”.
“To alleviate the burden, we recommend that a ‘gateway test’ is added into the legislation to allow companies to self-assess at the outset whether they fall within the scope of the tax,” Hall explained.
Hall also added the CBI’s voice to those concerned that the move will undermine the OECD’s base erosion and profit-shifting (BEPS) work, designed to prevent tax leakage occurring through the exploitation of the discrepancies between different jurisdictions’ tax rates.
“As this measure precedes OECD’s BEPS initiative findings … it may encourage other countries to take similar unilateral action, resulting in a patchwork of complex uncoordinated legislation,” she said.

Tax avoidance on an ‘industrial scale’
Nevertheless, Labour MP and chairwoman of the Public Accounts Committee Margaret Hodge (pictured) said in February that the behaviour of multinationals and the accountancy firms that advise them meant the government “must take a more active role in regulating the tax industry, as it evidently cannot be trusted to regulate itself”.
“We [the PAC] believe there is no clarity about the boundary between acceptable tax planning and aggressive tax avoidance. Multinational companies do not need to conduct any business of substance in the countries where they shift profits to in order to avoid tax,” she said.
PwC was singled out by the PAC for promoting corporate tax avoidance on an “industrial scale” and Hodge accused the Big Four firm of “misleading” the committee in January 2013.
The committee also cited a more recent hearing in December as evidence, when it accused the firm and pharmaceutical group Shire of “scamming the British people” through the drug manufacturer’s tax structure.
The arrangement was just one instance from a cache of almost 28,000 documents unearthed by the International Consortium of Investigative Journalists describing tax deals struck with Luxembourg, which showed that the tiny EU state was facilitating more than 1,000 multinationals in tax avoidance activities. Those arrangements – which are entirely legal – were signed off by the grand duchy. The leaked documents primarily related to clients of PwC.
But while both Shire and PwC – through head of tax Kevin Nicholson – refuted the claim, and told the committee that the commercial purpose of the Luxembourg structure was to reinvest cash “properly and efficiently”, the PAC has rejected their position.
Hodge said: “Contrary to its denials, the tax arrangements PwC promotes, based on artificially diverting profits to Luxembourg through intra-company loans, bear all the characteristics of a mass-marketed tax avoidance scheme.”
PwC said it stood by the evidence it gave the PAC and disagreed “with its conclusions about the work we do”. But it did say it recognised that it must “do more to explain the positive role we play in the tax system and in helping businesses to operate successfully”.