Three stories on tax and multinationals hit the press last week. They attracted varying levels of attention – from BBC news headlines to erudite debates on the tax Twittersphere – and were of varying degrees of importance. As usual there was, if anything, an inverse correlation between their importance and the noise they generated. But all three stories suggested to me that we are losing our collective and corporate memory.
£5.8 billion tax “lost”?
On Wednesday 25 October, the FT front-page headline screamed at me across the breakfast table: “Tax lost to multinationals shifting profits overseas climbs to £5.8bn”. From reading the article it soon became clear that the story here was about the “tax under consideration” in HMRC’s enquiries into transfer pricing by multinationals. This is HMRC’s estimate of the amounts of tax potentially at stake in the enquiries it is undertaking in this area.
Pinsent Mason regularly makes Freedom of Information requests on this topic. The response to its most recent request indicated the amount had risen significantly, to the figure quoted. This represents nearly a quarter of the total £25bn potentially tax at stake on enquiries into large businesses.
The FT article itself is sensible, and in the online edition the headline is more careful. But whatever the outcome of HMRC’s enquiries might be, what’s certain is that £5.8bn of tax has not been “lost”. In fact this is a good news story (except perhaps for multinationals), the fruit of additional investment in transfer pricing experts and a toughening up of the law in this area.
And we have been here before. Some of the coverage during the day took me back to the end of 2011, when the Sun headlined with “£25bn black hole” – again referring to this figure of tax under consideration (the figure has gone down and then back up since then).
Of course, I don’t expect journalists to remember the details and jargon of such a technical area. Recent experience with Brexit suggests the press finds it hard enough to keep track of political developments from day to day, let alone month to month or year to year. But given the predictability of FOI requests, and of misunderstandings by the press, HMRC could publish this kind of information more proactively, with the right framing as a good news story.
HMRC switches cloud procurement to Amazon
On the same day last week, the Times carried a story about HMRC procurement: a switch of contracts for cloud services in favour of Amazon had driven a smaller UK-based company out of business. (The story also appeared in non-paywalled media outlets.)
I should emphasise that I know little about Amazon Web Services, and have no “inside knowledge” on this deal. But I think this is a much bigger story than the “£5.8bn” discussed above, and raises deeper concerns.
HMRC will no doubt make “value for money” arguments, and point to EU procurement constraints. But I’d question whether they can justify a choice to concentrate provision in the hands of a big provider such as Amazon. And there are a number of specific questions I’d be asking if I were Meg Hillier, Chair of the Public Accounts Committee (PAC). These include whether the contract is with a UK entity or an offshore one. And while we are told Amazon have given an assurance that data will be stored in the UK, can HMRC be sure there will be no offshore back-up of data (which could pose security and retrieval issues)?
HMRC and its predecessors have a rather colourful history on procurement. Just as the new tax authority was being formed, in 2005, from the merger of Inland Revenue and Customs & Excise, the PAC was investigating the Mapeley (or “STEPS”) PFI contract covering most of its property estate. The PAC concluded: “It was a very serious blow indeed for the Inland Revenue to have entered into a contract with tax avoiders.”
Given the churn at the top of HMRC, are there any who remember the lessons from this this early procurement debacle?
Vestager enquires into UK tax rules
The third story emerged on Thursday 26 October, following a press release by Margrethe Vestager, the European Commissioner for Competition. It was reported in Friday’s FT and pre-briefed to the Guardian: Vestager and her team have launched an enquiry into the UK’s “Controlled Foreign Companies” (CFC) rules, to investigate whether they breach EU State aid rules.
Note that this is unlike recent State aid enquiries focussing on particular companies (such as Apple in Ireland) as it is investigating the rules themselves rather than the way they have been applied in a specific case. These rules are an anti-avoidance regime that targets the foreign subsidiaries of UK-based multinationals, and Vestager is claiming they may be too lax because of certain exemptions for financing activities.
While I can understand the view that the Government could have chosen to make these anti-avoidance rules tougher, it’s quite a leap to suggest that not doing so might amount to illegal State aid. And it’s particularly ironic given that a key reason for reforming the old rules was that they were butting up against European law – this time the freedom of companies to establish subsidiaries in other Member States. In the 2006 Cadbury Schweppes decision, the CJEU ruled that they were too restrictive and should apply only to “wholly artificial arrangements”.
The irony doesn’t end there. Following the Cadbury Schweppes decision, the UK government made immediate and fairly minor changes to the CFC legislation aimed at addressing the CJEU’s ruling. But in 2010 the European Commission started infraction proceedings against the UK, and announced them publicly in 2011, because they did not consider the changes had gone far enough. In their view, there was still a risk of subsidiaries with genuine economic activities (notoriously difficult to define and apply in practice) falling foul of them.
Of course, 7 years is a long time in both politics and tax avoidance: Brexit has intervened, and the EU has recently adopted an Anti-Tax Avoidance Directive. Even if the Commission, with hindsight, doesn’t consider the UK’s CFC rules will be in line with the Directive (which comes into force on 1 January 2019), a State aid investigation seems a heavy-handed way of dealing with the matter. So the suspicion must be that this is politically motivated.
But the question remains whether, before launching the investigation, the 2017 Commission consulted the Commission’s own corporate memory of the 2010 infraction. And that assumes, of course, that the Commission has a corporate memory …