Lords committee hears evidence from inquiry into how to tax global companies

Helen Jones, senior vice president of global tax at GlaxoSmithKline (GSK) confirmed that the company would be building its first factory in the UK for 40 years as a result of the improvements in the UK corporation tax regime. John Bartlett, group head of tax at BP, whose headquarters is in the UK, said that the UK was a great place to do business in and from.

The Committee heard evidence from the tax directors of Reed Elsevier, BP and GSK and the heads of tax at accountants' representative groups the Association of Chartered Certified Accountants (ACCA); the Institute of Chartered Accountants of Scotland (ICAS); the Institute of Chartered Accountants of England and Wales (ICAEW), and from the Confederation of British Industry (CBI).

The committee had received written responses from the interviewees on the rationale for the existing system of taxing corporate profits. In relation to multinationals, the committee had asked whether there was a need to reform the basis of the international allocation of multinational profits between countries.

In the context of recent press coverage of the tax affairs of multinational companies including Amazon and Starbucks the Committee asked was how easy it was for multinationals to avoid paying tax on profits generated in the UK and, to what extent, corporation tax had become a "voluntary tax".

The tax directors at GSK, BP and Reed Elsevier all agreed that corporation tax is clearly not a voluntary tax; it is a complex tax which is not easy to avoid paying. It was acknowledged, however, that multinationals in the current age have a great choice as to where to locate their activities and especially with digital businesses, companies can be doing business in the UK without actually being in the UK.

The tax directors believed that the UK is on the right path in terms of the reform of the corporation tax system although when asked how the system could be improved they answered that it could be simplified and clarified, whilst acknowledging that modern business is complex. It is "certainty and predictability which are very important in business decision making, rather than simplicity in itself" said Paul Morton, head of group tax at Reed Elsevier Group.

The Committee asked whether the use of tax avoidance schemes had increased or decreased over the past decade. Frank Haskew, head of tax faculty at ICAEW said that the use of tax avoidance schemes had decreased over that time for a variety of reasons. He said these included the Disclosure of Tax Avoidance Rules, targeted anti-avoidance rules, the banking code of conduct and the fact that HMRC is more aggressive than before in taking forward tax cases. It was also acknowledged that the General Anti Abuse Rule (the GAAR) was a sea change in how HMRC looks at tax avoidance and that it would be likely to catch the most abusive schemes.

When asked about so called "sweetheart deals" with HMRC the interviewees reported that this was far from common and they were open in their praise for HMRC which they said does "a very good job despite limited resources" and which had greatly improved their understanding of how businesses, in particular large businesses, work. When asked whether this led to a softer approach, Elspeth Orcharton, director of taxation at ICAS was clear that HMRC's approach led "to better relationships [with large businesses], not softer."

"It was good to see a more measured debate on tax policy, with questions focusing on the fundamentals of system design rather than the inquisitorial style of the Public Accounts Committee," said Heather Self, a tax expert at Pinsent Masons, the law firm behind Out-law.com. "The difference between the tax treatment of debt and equity was a recurring theme, but while this may be an interesting academic issue for economists, all of the witnesses were clear that the current UK system is broadly appropriate with sensible safeguards. The work which has been done to create a competitive UK system could easily be undermined by knee jerk responses to perceived problems."

"Although there are stresses in the international tax rules, there are no silver bullets - as one of the respondents said, if you change the allocation of taxable profits between countries, which country is going to volunteer to reduce its share of taxable income?" said Self.

A further evidence session will be held on Tuesday 21 May.