26 October 2017
Once again, an overseas company has come under scrutiny for the amount of UK Corporation Tax it pays. This time the focus is on Airbnb, the online accommodation reservation group. Its UK operations had combined turnover in 2016 of over £250m but paid only £188,000 in UK Corporation Tax.
A glance at the accounts of these companies shows, as you would expect, nothing untoward and Airbnb has defended itself, saying: ‘We follow the rules and pay all the tax we owe. Our UK office provides marketing services and pays all applicable taxes, including VAT.’
The company has nevertheless reduced its taxation liabilities by accounting for the commission it earns on UK business in another subsidiary company resident in the Republic of Ireland, where the rate of Corporation Tax is 12.5%. In the UK the average rate for the year in question was 20.5%.
The rate of Corporation Tax in Ireland is one of the lowest in the EU, (where the average rate is 24.5%), and has for some time caused problems for the European Commission. Both Ireland and Luxembourg have been accused of doing special deals to encourage major international companies to invest in their territories. You will no doubt remember that the European Commission ordered Apple Inc. to pay €13 billion to the Irish government last year, representing underpaid Corporation Tax on its profits. (See my blog of 1 September 2016). This was due to an alleged special arrangement that effectively reduced Apple’s tax rate to 1%. The Irish government has so far not claimed the tax and the matter has been referred to the European Court of Justice.
This highlights the basic mechanism whereby companies that trade internationally are able to move their profits to low-tax regimes, a strategy that has become much easier since the growth in internet trading and globalisation. The OECD estimates that revenue losses from such transactions are at least $100-240 billion annually, or the equivalent of 4-10% of global corporate income tax revenues.
There is evidence that public opinion is starting to have an effect on the behaviour of some of the Tech giants. Facebook, whose collection of data makes it one of the most influential organisations in the world, and which for better or worse is shaping both society and political events, paid £5.1m in tax in the UK last year, an increase of £0.9m over the previous year, having altered its structure to account for more advertising income via its UK office, instead of in Ireland. In 2014 Facebook paid only £4,327 so we appear to be moving in the right direction, but given the number of Facebook users in the UK and the advertising revenue they generate it is questionable whether the company is yet making a fair contribution to the public purse.[i]
Meanwhile the EU has ordered Amazon to repay €250m in back taxes after the European Commission said it had been given an unfair tax deal in Luxembourg. European Competition Commissioner Margrethe Vestager said the arrangement meant that Amazon had been allowed to pay “substantially less tax than other businesses”, which was “illegal under EU state aid rules”. She said that Amazon paid tax at only one quarter of the rate paid by other local companies.
Another major international tech group, eBay, paid only £1.6m in Corporation Tax last year, even though its US parent received total revenues from its UK operations of $1.32bn (£1bn). An eBay spokesman said its tax affairs were entirely legal but eBay’s UK accounts record only £200m in revenues, which came entirely from a Swiss parent company for acting as its advertising agency, so none of its UK revenues were reported in its UK subsidiary’s accounts. The company, however, acknowledged that its tax affairs were under scrutiny in several countries.
As mentioned above, the tax avoidance strategies of multinational companies depend on exploiting the disparities between rates of tax in different locations. Companies can open offices and create subsidiaries wherever they wish, and they can choose where to report their profits and expenses. They can move their profits to subsidiaries where there is a low- or zero-tax regime, eg. a tax haven, and at the same time record their expenses in high-tax jurisdictions that often offer good rates of tax relief. This is done by a number of methods:
- Transfer-pricing – a subsidiary in a low tax area sells goods or services to a fellow subsidiary in a high tax jurisdiction at an artificially inflated price, thus effectively shifting the profit on those goods to the low tax area.
- Relocating sales – Some products can be easily relocated and they can be recorded as being sold from almost anywhere, and it is hard to prove that the claim is wrong. This is particularly the case with software and other such products sold on-line over the internet.
- Inter-company cross-border loan arrangements – Some multinationals create internal financing companies in tax havens. These companies then lend money to other subsidiaries in the group. If these subsidiaries are located in higher-tax-regime countries they benefit from offsetting the interest payments to the financing company against their profits thereby reducing their tax bill. At the same time the financing company pays a low rate of tax on the interest received.
- Location of assets – Fixed tangible assets can be bought by a subsidiary in a company with favourable tax reliefs on capital investment, but then hired to another subsidiary operating in a country with a less favourable regime. This can also apply to intangibles such as copyright, know-how and patents, where tax relief can be obtained by a subsidiary in one country and other members of the group located in other countries pay licence fees for the use of the intangible. The payment of the licence fee may attract tax relief at a higher rate than that paid by the recipient of the fee.
- Location of management – some companies base their management teams in countries with low payroll taxes. Management services are then provided to other group members situated in countries with higher payroll taxes in exchange for a management fee.
There are many variations on the above and few of them are actually illegal. In the UK HMRC has for many years had the power to investigate cases of artificial transfer-pricing and adjust the Corporation Tax charge of companies accordingly. Its hand was strengthened in 2015 with the introduction of the Diverted Profits Tax. Internationally. The OECD in conjunction with the G20 Group has introduced the BEPS (Base Erosion and Profit Shifting) Project which assists governments to close the gaps in existing international rules that allow corporate profits to “disappear” or be artificially shifted to low- or no-tax environments where companies have little or no economic activity. Of course nothing short of a harmonised tax regime adopted by all the major economies will eliminate the problem, and even the EU is nowhere near establishing such an arrangement within its borders.
At UHY we are proud of our ethical approach to tax planning, enabling our clients to fulfil all their tax obligations whilst benefitting from all the tax reliefs and incentives that are permitted by law. If this blog has prompted you to seek advice on your tax affairs please do not hesitate to contact me at firstname.lastname@example.org.
[i] Facebook stores about 300 petabytes of data, has almost two billion users, and generated almost $28bn (£22bn) in revenues in 2016.