Lords committee launches inquiry into how to tax global companies

As part of its inquiry the committee is asking for written evidence on a range of questions about the effectiveness of the UK corporation tax system.

The committee asks for written responses on the rationale for the existing system of taxing corporate profits and asks who currently bears the burden of corporation tax and what proportion of total tax receipts should come from corporation tax.

In relation to multinationals, the committee asks whether there is a need to reform the basis of the international allocation of multinational profits between countries. It asks for views on whether profit allocation should be based on existing conventions as suggested by the OECD or whether there a need for more fundamental reform.

Heather Self, a tax expert at Pinsent Masons, the law firm behind Out-law.com said “It is to be hoped that the committee will recognise that the taxation of multinationals is a complex topic which needs co-ordinated international action, not knee jerk changes in response to political pressure”.

“There is a risk that this continued focus on tax paid by multinationals is a distraction from the action that needs to be taken to get the economy moving," she said. “It is not clear that another select committee wading into the debate about the reform of corporation tax is going to be worthwhile.”

The committee has asked for evidence to reach them by 30 April.

A report from the Organisation for Economic Cooperation and Development (OECD) on Base Erosion and Profit Shifting (BEPS) published in February 2013 warned that some large international businesses were paying as little as 5% in corporate taxes, while smaller businesses that were not able to use the same "strategies" were paying closer to 30%. The report said that out-dated rules designed to protect companies from paying tax twice were "too often" being used to "allow them to pay no taxes at all".

The report was considered at the meeting of the G20 finance ministers in Moscow in February.  "The global economy has changed massively over the last decade, but global tax rules have stood still for almost a century," said Chancellor of the Exchequer George Osborne on the UK Treasury's official Twitter account after the meeting. "Britain will lead the international effort to bring them into the twenty-first century."

The OECD is working with governments and the business community to produce an 'action plan', setting out ways to reinforce the integrity of the global tax system. As part of this work, three committees chaired by the UK, Germany and France and the US will consider issues relating to transfer pricing and 'base erosion', or the reduction by companies of their taxable income and assets.

After the G20 meeting Heather Self said: "Any proposed changes to transfer pricing rules will produce both winners and losers among members of the G20, and it will not be easy to achieve consensus," She said "Transfer pricing rules have not kept up with global business, particularly with the explosive growth in e-trading.

The tax affairs of multinational companies including Amazon, Starbucks and Google have come under press scrutiny in recent months following accusations of 'profit shifting'. This refers to the practice of deliberately transferring profits from high tax jurisdictions to those with lower rates of tax.