back to article 'Facebook and eBay need to be subject to greater scrutiny' - Margaret Hodge

Former chair of the Public Accounts Committee Margaret Hodge has renewed calls for greater transparency of global companies' tax affairs - following revelations of Facebook and eBay's recent tax affairs. Companies House filings revealed this week that Facebook's UK business generated an £11.3m tax credit last year while …

AFAIK UK companies have to deposit their annual reports with Companies House, where anyone can see them for a small fee. Most of the FTSE ones publish them on the web.

Anyway, her argument isn't with FTSE businesses, it's with foreign-owned multinationals who have the ability to move profits around the world and reduce Corporation Tax payable in the UK (although they still have to pay VAT, rates, employer's NI etc etc). But it's a fundamental principal of the global tax system that profits should be taxed in the country where they're generated. And it's difficult to argue that the bulk of (say) Apple's or Uber's profits are generated anywhere other than California.

It's also often conveniently forgotten that businesses are taxed on profits, not revenue - Amazon (last time I checked) have never made a global profit, preferring to invest any surplus in their business. So the fact that Megacorp had a billion pounds in revenue in the UK and only paid a million in CT does not imply a tax rate of 0.1%. Margaret Hodge understands this perfectly well, as her own family business - Stemcor, a global steel erector - paid very little UK tax on its worldwide revenues of c $10 billion, for the simple reason that they made a loss.

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All correct, but not the root cause

The issue which everyone is having with most large multinationals (with the exception of Amazon - they do as exactly as you described - no global profit, reinvest everything) is different.

The regional profit of let's say the Eu wholly owned entity is wiped out deliberately via a transaction paying into no-profit tax jurisdiction for the use of trademarks, copyrights and/or non-functional (usually business method, design, etc) patents.

When I pay my mom for the copyright of her creating me (she has had a role after all ya know - it can be claimed under copyright law) all of my profits (she lives in a country with an effective tax rate of 25%) and file that as a "legitimate" expense with HMRC the HMRC will tell me to f*** off and pay. This is called "related parties transaction" - IT CANNOT BE USED to reduce effective income or corporate tax rate.

This is the issue here - both using a related parties transaction for tax rate reduction and being allowed to do so by one or more complicit tax offices. There is a clear case of selective enforcement here which is both a violation of competition law and in some cases smells of corruption too.

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"Margaret Hodge understands this perfectly well, as her own family business - Stemcor, a global steel erector - paid very little UK tax on its worldwide revenues of c $10 billion, for the simple reason that they made a loss."

Didn't you know you're supposed to do as she says, not as she does. And for good measure, stump up for her little book.

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But it's a fundamental principal of the global tax system that profits should be taxed in the country where they're generated

And there's the problem; profits are taxed. I can take £100 million in the UK, send £99 million to my HQ in another country for licensing, services and anything else I can think of, and I am left with just £1 million profit which gets taxed.

Hodge can look all she wants but there's nothing illegal being done, it's all by the book, all within the rules; I am paying all the tax due on my profits.

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And there's the problem; profits are taxed. I can take £100 million in the UK, send £99 million to my HQ in another country for licensing, services and anything else I can think of

You - cannot. Me - cannot. Joe on the street cannot. Related parties transaction.

Apple, Google, Facebook - can.

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@Voland's RH

You're broadly correct, but there are a couple of caveats. The first is that these transfers are subject to 'fair and reasonable' tests, you can't just charge a billion for 'supply of paperclips'. Starbucks took a lot of stick other this, but it turns out they charge their own (fully owned) shops exactly the same as their franchised operations (which must, by definition, make it a commercial rate).

Secondly, these profits do tend to end up parked in low tax states. The reason for this is that, under US tax law, companies pay no tax until the profits are repatriated, when they're subject to a fairly punitive (by international standards) tax of up to 40% (there's a small element of state tax, so it can vary). Hence US companies tend to stash their cash in tax havens in the hope that tax rates will come down. Note that this means they can't distribute the profits - Apple have a 12-digit sum squirrelled away.

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Re: @Voland's RH

If memory serves, the US occasionally have amnesties too. So it makes perfect sense for a company such as Apple to wait until the next amnesty, even if it won't happen for a long time.

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"lthough they still have to pay VAT, rates, employer's NI etc etc"

Don't know in UK, but in most jurisdictions most of those are costs of running a business, and thereby often deductible (fully or partially) from revenues - decreasing the tax a business pay on net income.

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"but there's nothing illegal being done"

True, or they would be already incriminated. Yet, it doesn't mean it's "right", and rules cannot be cannot be changed to make it illegal, because it has been assessed it represent a damage to society.

Like closing the loopholes like that which allows to tariff "services","brands" and "goods" within the same companies ownership at prices outside their market values, to create artificial costs and losses.

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Re: "lthough they still have to pay VAT, rates, employer's NI etc etc"

In the UK the tax incidence via payroll (inc. things like VAT from the stuff your employee buys with their wages) is about 3 times higher than corporation tax.

So if Facebook was paying it's UK staff less they would be paying more corporation tax but the actual tax revenue to the UK would be lower... ...Facebook happens to have very well paid UK staff so the fact the corporation had a negative tax bill is of absolutely no importance at all.

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Re: All correct, but not the root cause

> And it's difficult to argue that the bulk of (say) Apple's or Uber's profits are generated anywhere other than California.

I disagree: Total Profits / Total Units Sold * Units sold in UK = UK Profit

If a company had no UK presence I'd agree, but for Apple or Google or Facebook to have offices and shops in the UK but then deny that they bear any responsibility for UK sales is fraudulent.

Part of the problem is different accounts are allowed for shareholders and for the taxman. That should stop.

Also, there is still an issue with "No profits because we re-invested everything." Capex is excluded from the "cost" calculations (which is why corporations prefer opex) which determine profit. There's a tax break for moving things to opex, of whatever the corporate tax rate is: 25-45% which is then amortised via depreciation, but you don't get that back for years. The only way this might work (in AWS's case) is if you "re-invest" by hiring more people (opex). If you build a DC, that's capex and has to be depreciated.

Now we see why "as-a-service" is so popular.

Small businesses can depreciate IT capex costs immediately, turning them into opex. Perhaps there is a case for allowing all IT to be classed as opex. That might help stop us skewing IT towards the incumbent, foreign-owned-and-profit-sucking businesses who are large enough to run the multinational "we are not resident anywhere" ploy. Allow the startups to compete, it really doesn't cost the taxman in the long run.

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Anonymous Coward

Oh look it's not the companies. it's your lax govt...

Chris Miller < -- part of the problem.

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Been here before

The deja vu is strong with this one

Free publicity

Skinny non-entity who was once 'famous by association' gets free publicity, has she got a book coming out ?

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Well fix the law then

You're in luck, soon you won't have to convince the rest of Europe anymore.

In principle, I understand why having to pay tax in every single country where they do business would be a prohibitive cost for small companies, and I assume that's the (official) reason why the rules were written in this way.

I am not convinced that the politicians who wrote the rules could not predict global corporations taking advantages of those rules. In particular, I believe that the UK politicians thought this was going to be a boon for UK and its low corporate tax, and they just felt totally betrayed when corporations chose dirt-cheap Ireland instead of London.

Maybe the rules could be amended in some sensible way, forcing companies to pay taxes in countries where they have a sizable workforce?

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Anonymous Coward

Re: Well fix the law then

When we leave the EU the MPs currently talking nonsense are going to learn how tax actually works, that'll be a wake up call.

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Re: Well fix the law then

The only real solution to this is to abolish corporation tax and nudge up VAT slightly ( including the free and low rates ).

The consumer, owner and worker pays anyway. A corporation tax is just asking to be avoided.

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Anonymous Coward

Re: Well fix the law then

Raising VAT is a bad idea. We already pay through the nose for being a little island of imports.

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Re: Well fix the law then

The current solution is that small businesses pay tax, multinationals don't. Through that, we're subsidising multinationals and making them cheaper than our own local companies.

Abolishing corporation tax and only increasing VAT by the amount necessary to offset that would result in, on average, prices remaining the same.

Any company exploiting that to increase their profits will find their competition taking their customers away from them.

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Anonymous Coward

Taxes are for poor people...

...not the mega corps and millionaires.

Now get back to paying income tax, value added tax, car tax, road tax, fuel tax......you proles.

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"The most controversial example of companies appearing to negotiate tax deals with the government behind closed doors was the £130m settlement with Google last year. The PAC has said it is not possible to judge whether the £130m in back taxes deal - owed since 2005 and which took six years to agree - was a fair deal for taxpayers."

No I would say that isn't a fair deal for taxpayers given the huge amount of money they make and move to other countries to avoid paying tax in the UK.

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Anonymous Coward

Again, media misreports corporation tax as all the tax companies pay and politicians make lots of noise about how they'll fix it in wonderland. Leaving nobody better informed about the actual state of affairs.

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Ha

I did actually buy the book and I am slowly struggling through it. Unfortunately I spend a lot of time putting it down and shaking my head that someone like this is allowed near taxation. So much talk of moral and fair and obligation while being amazed that these businesses legally follow the law but dont just give the gov money out of some candy floss idea. Her amazement that businesses see tax as an expense left me shocked at how hopeless her views must be on such an important topic. It is an expense and would be accounted in the expense column and totalled against expenses so it is an expense!

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Re: Ha

Part of me thinks someone should point out to her that if the companies are following the law and she doesn't like the outcome then perhaps her time would be very much better spent trying to change the law (seeing as she's a politician, so that's her responsibility) rather than writing books saying how unfair it all is. Then a much larger part of me thinks that her doing anything other than modifying tax legislation is a very good idea indeed.

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My Ebay

She should should add those companies to her Watch List so that she doesn't forget about them.

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I can't see them doing that.

They will want to keep them onside so that when our personal data is no longer protected by the EU, they won't complain when asked to provide it.

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