Commercial awareness: think like a professional about... corporate tax

Our banker, lawyer, accountant and consultant take on the tricky issue of what corporates owe to governments

The tax affairs of three of the world's most high-profile companies were put under the spotlight in Westminster recently. The cross-party parliamentary Public Accounts Committee quizzed executives from Amazon, Google and Starbucks on their UK tax payments - or lack of them.

First up was Starbucks' interrogation, in which global chief financial officer Troy Alstead tried, but failed, to convince the committee that the multinational coffee house chain made little profit in the UK. Next Andrew Cecil, Amazon's director of public policy, came under fire as he tried to explain why transactions largely taking place in the UK should be taxed under the much more corporate-friendly laws of Luxembourg. Finally, chief executive officer of Google UK Matt Brittin, did probably best out of the three, winning praise from a belligerent Margaret Hodge for giving marginally clearer answers than the representatives of the other two organisations. However, his answers didn't prevent her from stating that a boycott of all three companies by UK consumers would be justifiable.

This grilling, resembling in places an early dose of Christmas pantomime, was the latest manifestation of growing public and governmental outrage about the tax affairs of corporates and high net worth individuals. A number of groups have started campaigning on this issue in recent years, for example, the Tax Justice Network and UK Uncut. The coalition government has responded to public sentiment, announcing earlier this year that, following a public consultation on the issue, it intends to introduce a new general anti-abuse rule (GAAR) "to tackle artificial and abusive tax avoidance schemes". However, some business groups, such as the Confederation of British Industry (the CBI), have argued that toughening the UK's stance on corporate tax avoidance could risk driving away international companies and their investment in the British economy.

Thinking like a banker

Swap shop

Tax often makes the biggest splash in my line of work in connection with transfer pricing. These transfers for tax purposes are regulated in most countries, and we have to make sure we follow these rules when we work on transactions for our clients. For example, on a big M&A deal, our decision about which entities within a corporate group will borrow the money used to finance the transaction may be constrained by transfer pricing considerations. And M&A deals usually also involve a significant reorganisation of the assets of the parties involved, and transfer pricing regulation can affect this process too.

Thinking like a lawyer

Slap on the wrist

The Public Accounts Committee doesn't actually have any formal legal authority over the three companies, which were officially only at the hearing to "give evidence". But it does have the not inconsiderable power to very publicly censure them for what some of its members clearly regarded as immoral, if not technically illegal, behaviour. However, legality and moral norms look set to come closer together in the way in which corporate taxation is regulated in the UK in the future. The introduction of Osborne's GAAR rule will mean that corporate tax is regulated not only by a set of technical rules, but also by more indeterminate set of ethical principles.

Thinking like an accountant

All around the world

Stricter corporate tax regulation in the UK could mean that multinational companies simply choose to take their business elsewhere. So tax planning professionals like us often argue that international co-ordination on tax is the most effective way forward. The OECD is currently tightening transfer pricing regulation, and UK chancellor George Osborne and German finance minister Wolfgang Schäuble recently together called for better international co-operation and support for the OECD's efforts. But tax regimes currently vary hugely in the EU alone, and while the EU economy continues to suffer, economy-boosting corporate-friendly tax rules in countries like Ireland and Luxembourg are unlikely to change any time soon.

Thinking like a consultant

Bucking the trend

The recent parliamentary hearing gave some fascinating insights into the strategies of large multinationals. Starbucks' claim that it makes no money in the UK, where apparently a quarter of its stores are running at a loss, seems to have caught everyone's attention. This problem apparently stems from a flawed UK expansion strategy - getting into a new mature market is never easy. So why stay if you're not making any money? Starbucks claims the UK market is so significant globally that they need a presence here for PR reasons, though the current threats of boycotts and protests can't be doing them much good on that front.

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