Margaret Hodge's Public Accounts Committee have both HM Revenue & Customs and Amazon before them this afternoon.
Of the two, HM Revenue & Customs is much the most interesting. They are there. ostensibly, to discuss their 2013 report and accounts,and that's exactly what this committee should be doing. It's their job to hold HMRC to account. But it's also time to move on a little, I suggest. The shock and horror of a year ago is now well known. We are aware that there is a crisis in UK taxation now, and a crisis at HMRC too. The issue now is what can be done about it. In that case these might be my questions for HMRC if I was to be given the chance to grill them this afternoon:
Governance
1. Your board is now dominated by people from the private sector, big business and big accountancy. Doesn't that impair your objectivity, freedom for manoeuvre, credibility and independence and if so isn't it time for a total re-think of the governance structures of HMRC?
2. Some of your directors have been directly linked to past and recent tax abuse stories. Do you think that appropriate?
3. Why is that almost no one who has been trained within HMRC is promoted t its board? What is wrong with the training and the leadership of HMRC that it cannot apparently train its own leaders when that is the moral pattern in most organisations in the UK?
4. Why don't you recognise the tax avoidance of companies like Google, Amazon and Starbucks in the tax gap reporting that you undertake? Doesn't you denial of an obvious truth undermine the credibility of everything you have to say on this issue?
5. Over the last few years you have suggested that the VAT tax gap is about 12%. Small parts - and I stress, small parts - of this are due to organised crime and bad debt. The vast majority is down to tax abuse, whether avoidance of evasion. Despite this your own data suggests that the UK shadow economy might be only 1.3% of the UK economy. The ONS estimate it at 1.7%. In the light of that VAT gap, which is tax lost on the UK's top line, neither of those estimates of the shadow economy is credible is it? VAT applies to vast amounts of activity - even many government services. How can you say if 12% or more of VAT is lost the shadow economy is only 1.3% of UK GDP. Aren't you massively underestimating the tax gap?
6. Hundreds of thousands of UK companies literally disappear each year and are struck from the register of companies without ever paying tax or filing accounts. How do you know they don't owe billions of tax when they disappear from view? How many of them do you investigate? Why not more? What are you going to do to increase tax collection from these phantom companies?
7. The figures you use for moonlighters and ghosts in the shadow economy are, in your own words 'illustrative estimates'. When are you going to do some real research on this issue and dedicate the resources needed to tackle this issue?
Staffing
8. Can you tell us staff numbers at HMRC over the last few years and what changes there have been?
9. Can you tell us how many senior tax inspectors have left HMRC over the last few years? How has their experience been replaced?
10. What is the age profile of senior investigative staff at HMRC? How has this changed over time?
11. What is a well qualified tax inspector at HMRC paid? Is this competitive? How are you going to keep staff if you are not willing to pay appropriate rates of pay?
12. It's claimed that £900 million is being invested in HMRC. But how has HMRC's budget really changed over the last five years? What proportion has gone to tax investigation?
Investigations
13. We often focus on big business and the last time we hear there was £25 billion of tax in dispute with them. What is the figure now? How and why has it changed? What proportion of any change is down to fewer cases being investigated? How many senior staff have left the department preparing this estimate in the last two years?
14. Tax evasion s a small business problem. VAT is a particular issue. How many small business VAT visits are there a year? How has this number changed over the last five years? How many staff are engaged on this activity and how has that changed over recent years? What is yield per person? How has it changed? Why aren't you investing more?
15. We hear a lot about task forces. So taxi drivers are looked at in Yorkshire and plumbers in Somerset. Doesn't that just signal to plumbers in Norfolk that they can get away with it for the time being in that case? If there's a problem with a sector why not employ the resources to look at it nationally? Why this token gesture approach?
16. How many PAYE investigations are undertaken each year? How has the number changed? What is the yield per visit? Why are so few done in that case? Wouldn't you find more moonlighters and ghosts if you did more such visits?
17. We hear little of IR35 these days and yet contracting has grown in the UK economy, and with it the problems of tax abuse caused by umbrella companies and the loss of revenue due to national insurance avoidance IR35 was meant to tackle. What are you doing about these challenges? How are you confronting them?
Minimum wage
18. People on low pay in this country are dependent upon you to protect them by ensuring the minimum wage is paid. Despite that we hear time and again of minimum wage abuse in things like social care. Why are you failing the low paid of this country?
19. How many people monitor the minimum wage in HMRC? Is that a serious commitment to ending exploitation in this country?
20. How many people have you prosecuted for abuse of the minimum wage? Why such a low rate? Are you serious about fulfilling the duties parliament has given you?
International reform
21. The G8 has spoken on international tax and so has the G20. What is you estimate of the extra tax that could be raised if the reform processes they have begun were to be put in place?
22. The G8 has called on the OECD to introduce country-by-country reporting. Why isn't HMRC out in the business community demanding this information from multinational corporations now, and why can't it be made a specific UK requirement that all companies supply country-by-country reports on all their activities to HMRC before any international consensus is reached?
23. Does arm's length pricing work for transfer pricing purposes? If not - as seems clear to use - why aren't you promoting unitary taxation?
24. Why isn't HMRC calling for reform of international rules on tax permanent establishment so that Amazon, Google and others can be taxed on what they do in the UK? Isn't it your job to be vocal on this issue?
24. How many information exchange requests have you made to the UK Crown Dependencies and Overseas Territories (by place please) in the last five years and how many have the replied to satisfactorily in each case? Are you happy with that?
25. How will the new FATCA style agreements with the Crown Dependencies and Overseas Territories change the data you receive from these places? What resources are you going to dedicate to examining the new data you receive? What extra tax yield do yo expect to recover as a result? When are they plans being finalised and put in place?
26. Why has the Swiss tax deal failed to collect the tax you claimed it would deliver? What is happening now to remedy the faults?
I am sure I could write many more.
Right now though that will do.
I wonder how many might be asked? I am not an optimist.
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One more:
Is it true that Amazon currently receives more in subsidies to do business in the UK than it pays in tax?
I believe it is
What subsidies? And what is a corporation that earns enough to finance a small continent being subsidised anyway?
Major subsidies to build a distribution centre in Scotland, for example
A company that makes billions is receiving subsidies? Well, so much for the “free” market. Of course, this is not the only example by any means. Big farming is one of the more obvious one’s, receiving large subsidies every year. So, as I understand it, do civilian airports. They receive subsidies for fuel for airliners!
In 1999 one of the witnesses before the PAC this afternoon , Edward Troup, HMRC’s Tax Assurance Commissioner and Permanent Secretary for Tax (i.e. Hartnett’s replacement and the de facto boss of HMRC) writing in Financial Times (Why the chancellor is missing the point”, Financial Times, July 15, 1999) said: “Taxation is legalised extortion and is valid only to the extent of the law.”
Do you have a url please?
I’m afraid not; it was before the FT went online fully. However, the fuller quote is as follows:
“The aim of government should not be to adopt a high moral tone but to ensure that the ‘return’ from tax planning is as low as possible … Tax law does not codify some Platonic set of tax-raising principles. Taxation is legalised extortion and is valid only to the extent of the law. Tax avoidance is not paying less tax than you ‘should’. Tax avoidance is paying less tax than Parliament would have wanted. Avoidance is where Parliament got it wrong, or didn’t foresee all possible combination of circumstance. The problem of avoidance is reduced to the problem of finding an answer to the question of what Parliament intended and making sure that it is complied with.”
… of course Edward Troup was head of ‘Tax Strategy’ at the City law firm Simmons & Simmons at the time.
Well it pays sweet fanny adams in tax so any no doubt any subsidy it receives will be more than the tax it pays
“Is it true that Amazon currently receives more in subsidies to do business in the UK than it pays in tax? ”
This is hardly surprising. Given that, overall, Amazon is a loss making company.
As you well know Tim corporate and tax losses do not coincide
Nor do we have country-by-country reporting to show why they are loss making and where
In which case your argument makes no sense
Yet you want unitary taxation. Which, since Amazon globally makes losses, means no tax for anyone from Amazon.
Not at all
You clearly do not understand how unitary would happen in practice
But why should we assume they are profitable in the UK even though they are loss-making overall? More detail of where the losses are would not turn them into profits.
If the loss arises because of aggressive market expansion in US – as reported – why is it loss making here?
That could well mean that the UK operations are profitable, yes. Although unless and until we have numbers it’s impossible to tell.
So I can see why you’re calling for country by country reporting, so you can check this.
On the other hand, you’re also calling for unitary taxation, to which this is irrelevant. I can’t see how one can simultaneously apportion the global profit across jurisdictions based on “key allocation drivers”, and tax the actual profit as reported country by country. Surely they are mutually exclusive?
Companies are never taxed solely on accounting profit
It is adjusted
And country-by-country reporting is a tax risk assessment tool that facilitates unitary approaches – but is not a tax system in its own right and never will be
Not mutually exclusive at all
I know how companies are taxed at the moment – I’m a CTA in practice.
As I understand it, the unitary approach is to move away from territorial taxation to a deemed apportionment of the global result. But the practicalities of it seem to make it unworkable. Sol Picottio’s article in Tax Adviser a few months ago semed to me to weaken it so much as to essentially be a call to make more transfer pricing adjustments under the existing system.
So far as I can tell, all country by country reporting would do is allow one to sense-check the transfer pricing. And the “unitary” approach doesn’t seem to be much more than a label for the process of making more TP adjustments.
We are pragmatically accepting that UT will not happen yet: we are delivering a path to better international taxation
Is that such a bad thing?
The theory of UT is obviously right. But if we can’t have that yet are we wrong to ask for realistic and wholly appropriate reforms that take us towards that goal?
But Picottio’s route to better international tax seems to be to carry on the same thing, only rebranded and with lots of complaints that before it was re-branded it was all wrong.
The lack of any actual change seems odd.
Transfer pricing rules, under which countries look at intra-group transactions to determine the correct profit allocation, are ineffective; but unitary taxation, under which intra-group transactions are examined by countries to determine the correct profit allocation, is the panacea.
You clearly have not pursued this properly
Read again
No, I clearly have I have pursued this in some depth, and come to different conclusions from you. Picottio is clearly arguing that the transfer pricing position must be replaced by something which looks exactly like the current transfer pricing position.
Merely telling me to look at the question again until I agree with you is unlikely to be successful. Telling me why you think I am wrong might, though.
There is no way on earth you could come to that conclusion
Sorry – you’re just wrong on that
I’m… gobsmacked.
I read what you write, I read what Picottio writes, I apply my experience of transfer pricing and tax law generally, and I draw my conclusions.
And then you simply tell me I am wrong, with no argument?
I am saying it is not possible to draw those conclusions from what Sol wrote
We differ
That’s what it comes down to
But I do not think you have read Sol correctly – as a matter of fact
Me: “Telling me why you think I am wrong…”
You: “…you’re just wrong…”
If you’d like to debate this sort of thing I’m perfectly willing to be convinced of your side of the argument, but by reasoned argument, not by mere assertion.
But I have given the reason
Not in this thread you haven’t.
You’ve said that Picottio’s approach is a compromise to improve the system without getting to a unitary position yet, but you haven’t at all said why I am wrong to think that it is not actually much of a change from the current one.
Everything he says should be done (profit-split methods, APA, mutal agreement procedures) is something I have already come across being done in practice, apart from the unitary formula. However, he doesn’t say that a formula should be used as yet, he just says that one should ultimately be devised from the existing methodology – presumably (though he doesn’t seem to say so) so that at some point in the future it can be used instead of them. But if the formula is useful because it gets the same results as your existing methods then it seems a bit of a waste of time to stop using those methods.
The removal of ALP as the basic model of TP is a massive change
So is the assumption that profit split replaces it
If you think not, let’s agree to differ
I think that the arm’s length principle is alive and well within Picottio’s proposals, even though he doesn’t acknowledge it.
To determine the profit split you either apply a formula, or you split it on some other reasonable basis. Picottio talks about using existing practice to determine some proper formula, so obviously in the early stages we must get the profit split from some reasonable basis, and then the formula from the profit split.
What reasonable basis will we use? He suggests APAs, and profit split as used for APAs in the financial sector. At the moment, APAs outside the finance sector are largely based on the arm’s length principle. So to get to a Unitary Formula we have to look at the arm’s length position.
In practice, even if the formula is adopted its success will be gauged based on whether it seems fair, and the arm’s-length principle will be the touchstone. Authorities who end up getting less under the formula will seek to adjust it to get back to the “fair” arm’s length position.
A formula is only as good as the information which goes into it, and as Picottio is talking about using operating expenses as part of the formula we get straight back the question of “what costs should be attributed to this country?”. The formula cannot help determine its own inputs, so some other basis is needed – what do we have other than arm’s length?
I note also that Picottio talks about using different formulas for different sectors. Different rules in different areas lead to asymmetries and anomalies, which in turn breed unfair tax positions. The “simple” unitary tax, as described by Picottio, has become more complex than the principle it seeks to replace – and fails to replace it anyway.
OK – but what you’re saying is something Sol would emphatically disagree with
In which case I am right to say you’re wrong in your interpretation
In which case I am concluding this rather pointless debate
I’m fairly sure Picottio would disagree emphatically with someone saying that his position seems to be fatally flawed, yes!
However, I have been going principally on what Picottio wrote in Tax Adviser. You’re simply saying that this characterisation of his views is wrong. Unless you can show me another source for his views that differs from that article, I think I’m better off sticking with his own writings than a simple assertion from a third party.
http://taxjustice.blogspot.co.uk/2012/12/adopting-unitary-approach-to-taxing.html
http://www.taxjustice.net/cms/upload/pdf/Towards_Unitary_Taxation_1-1.pdf
Tim, what happened to the free market working to ensure that loss making concerns go the way of the Dodo? You know creative destruction and all that….
Here’s a thought perhaps the “free” market isn’t so free after all – could it be that it’s rigged?
Thank you. I shall have a good read of that.
Not at all
You clearly do not understand how unitary would happen in practice
Perhaps you’d be kind enough to explain it to me then?
My assumption is that unitary taxation means that if a company makes a profit (well, a taxable one, obviously) then the rights to tax that profit are allocated by a formula. That formula being some combination of where the production is, where the sales are and where the staff of the company are.
OK.
But now you seem to be suggesting something else. That a company which doesn’t make a profit overall can still have to pay tax in some parts of its activities. So, imagine that Amazon does make a profit in the UK so therefore the UK taxes that profit. But Amazon as a whole is still making a loss. Is that what you’re suggesting is how unitary taxation will work?
Sounds rather like trying to get two bites at the same cherry if you ask me.
We know full well there is no chance of that full unitary apportionment as yet
So civil society is arguing for the use of key allocation drivers to allocate profit within the existing OECD profit split framework matched to a general anti-avoidance principle to allow obviously abusive transactions to be ignored
That’s one compromise bite at the cherry
We’re realists and are not dogma driven
But how do you allocate profit is there isn’t one?
You would presumably have to allocate gross income and costs on different bases. Is that the idea? Or would you be splitting the business into different sectors and applying different splits to them? So a profitable part of the business might have more allocated to the UK than a loss-making one?
The system we are accepting is likely starts from the point of view that subsidiaries do exist, because that is the reality we know we cannot ignore at present. This means local realities will have to be respected – and some locations are more profitable than others
Mind you fictions – like profit in Bermuda – will still be ignored if key allocation drivers for profit splitting are used
So it’s not unitary taxation, then? You’re not allocating the total result, you’re breaking it down in a different way, instead of “company by company” as is currently done?
Surelythe only way to respect the fact that some locations are profitable and others aren’t is to abandon unitary taxation in favour of territorial tax? Which is in fact the system we have at the moment.
Or are you arguing for a unitary element, so having started from the actual results in a jurisdiction you then moderate them towards the global resul? So if a group is profitable overall, then the prima facie loss-making countries will get some of the profit allocated to them, but will still be deemed to do less well than the ones with an initial profit?
It’s a compromise, yes
How many times do I have to say that?
But it is so clear territorial fails what we propose is vastly better
We would not have the fiascos we have now if we had what we propose
That we are expected to believe that Amazon is apparently a loss-making company is clearly ludicrous!
“So civil society is arguing”
Not quite Richard, not quite. A certain segment of civil society is so arguing. That’s really very much not the same as “civil society”. You don’t get to define that as being just the people who agree with you.
I am as much a part of civil society as you are, the ASI is as much as the Tax Justice Network.
Indeed, the average citizen is just as much a part of civil society as you or I are. That’s what the phrase means.
Accepted
Except your side never uses the term
No Tim, you, the ASI and other right wing think tanks stand for a very small part of civil society, I would say about 0.1%. You don’t represent the vast majority ordinary decent people in the street. You pretend too, but when the veil is lifted something distinctly uncivil emerges!
“My side?”
I argue for lower taxes for the poor, land value taxation, a carbon tax at the full Stern Review rate, a citizen’s basic income.
Aren’t those all things that would traditionally put me on the left? Certainly they put me on the left of modern British politics don’t they?
Pull the other one Tim
As ever you ignore all the evidence that is relevant
Are you saying that I don’t advocate such things? Or that such things would be good for the poor?
I’m saying you’re so partial with the truth in your comments here that the framework in whuch you suggest these ideas is being ignored by you and no such claims can be substantiated as a result