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Critics of firms' tax bills must be clearer about their objections, says expert

Out-Law Analysis | 05 Nov 2014 | 2:39 pm | 3 min. read

OPINION: There needs to be a better debate about what is meant by a 'fair' amount of tax for large companies to pay. Critics of companies' tax practices are often not really clear on whether their problem is with the company's behaviour, the tax system or the rules parliament have set.

It is important to realise that there can be perfectly legitimate reasons why large companies pay little tax in any given year and that those who complain that a company is not paying a 'fair' amount of tax may simply not understand the way the system works.

A company building a power station, for example, incurs a lot of cost before the profits are made, so may pay no tax in the early years of the project. It also gets tax relief for interest costs, which are a business expense, properly deductible by any business, large or small. If someone doesn't like the fact that the UK gives tax relief for interest, then that is a matter for debate in parliament, not grounds for accusing companies of not paying their 'fair share'.

If a company has done some highly artificial tax planning, which leads to an abusive result, then you may consider that to be immoral. In fact the CBI's statement of tax principles recommends that UK businesses should not engage in such planning. In my experience, many companies have now decided that the technical and reputational risks of such planning are too high, and so have decided not to behave that way.

A common view, supported by the Organisation for Economic Co-operation and Development (OECD) and by the UK government, is that companies should pay tax on their economic profits, wherever those arise. Leaving aside the difficulties of measurement, that seems a fair principle. But we must accept that companies may choose to put their economic activity somewhere other than the UK - there is nothing intrinsically evil about Amazon having 1,000 employees in Luxembourg, or Marks and Spencer locating their EU online sales HQ in Ireland. The UK only has a right to tax activity which actually happens here or, under the controlled foreign company rules, has been 'artificially diverted'.

Companies may also respond to incentives – if the UK Government offers a low rate of tax for certain activities, and as a result more high value jobs are created here, then the incentive is working as planned. And offering advice to companies, so that they understand and comply with complex rules and 'make the most of the patent box', is not immoral either.

It does get difficult when we come to digital companies, and this is an area being looked at closely by the OECD. I accept that many US digital companies pay very low rates of tax on their non-US income, using complicated structures such as the 'double Irish'. In my view, that issue is one which is largely due to flaws in the US tax system, which could be fixed by US politicians if they had the will to do so.

But if we look at the UK, is it really unfair that Amazon or Uber pay little or no corporate tax here? It is vital not to confuse turnover with profit - Amazon makes huge sales in the UK, but has just reported a global loss for the last quarter. What is a fair amount of tax on a loss? Zero, perhaps?

Uber is a digital app, using clever IP developed in the Netherlands and sold as a download to UK customers. It seems very likely to me that the proper place to tax its profits is the Netherlands, and not the UK, under current international rules. Of course, we could change those rules, and I agree that they need updating, but we cannot change them unilaterally - we need rules that work consistently across the OECD and beyond.

The risk for the UK is that we may lose more than we would gain – we might collect more tax on Uber or Google or Amazon, but would have to give up tax on overseas sales made by UK companies. We should be careful what we wish for.

If you think a company isn't paying a fair share of tax, you should be clear what you are really complaining about. Is it the way the company is behaving, the way the system works, or the way parliament has made the rules? That kind of clarity would make for a much better debate about this important issue.

Heather Self is a tax expert at Pinsent Masons, the law firm behind Out-Law.com. A version of this piece was first delivered as a speech at a conference organised by the UK parliament's Public Accounts Committee