Some years back one of my clients established an Indian subsidiary to undertake ongoing programming work that had been undertaken in the UK. My client was a loss-making business, VC backed, in a technology sector, and it decided to outsource these functions to India to reduce its cash burn rate.
We were staggered to receive a report from the Indian division of a Big 4 firm advising that the profits the Indian authorities would expect the Indian subsidiary to declare were the profits that would be made by a US firm providing the same service. That sounded to me like nonsense – if the notional US firm made a 10% uplift on a $2m cost base comprising staff cost and little else, the Indian authorities, on a cost base equivalent to no more than $400K, would be required to make a 50% uplift. I couldn’t believe that independent software companies in India were winning overseas business that would generate anything like that kind of number.
And so it transpired. Working with another Indian accountant, we identified a collective of local independent software businesses offering the same type of service. We analysed their results, we adjusted them to reflect the fact that our Indian company was fully protected by its parent against almost all business risks to which they were exposed, and we concluded the profits the Indian company should declare were equivalent to a 10% mark-up on cost.
Strictly in accordance with OECD guidelines. Obviously we’d have been on stronger grounds were India a member of the OECD, but at least we had a result based on an analysis justifiable by internationally recognised standards. Importantly, we had a result that would be acceptable in the UK as well as being defensible in India.
Roll the clock forward a few years, and what do we find? Here, in the UK, a founder member of the OECD, we have politicians grandstanding about global companies not paying their fair share of tax, we have protest movements invading multinationals’ retail outlets and cajoling consumers to purchase elsewhere. Why? Because the global companies concerned, operating strictly in accordance with OECD guidelines on Transfer Pricing, appear to suffer a lower rate of Corporation Tax on UK-generated business than that suffered by indigenous businesses operating only in the UK.
Take Amazon as an example. It has significant UK turnover – £7.6Bn in the past 3 years – on which it’s paid next to no Corporation Tax. It achieves that turnover because large numbers of UK citizens rate its service as excellent – it’s simply that much better than its competitors. But does it earn its profits here? Its business is predicated on its technology platform, which wasn’t developed here, isn’t owned here, and isn’t maintained here. Without that platform it has no business. It works on tight margins only improved through global purchasing procedures, again not based here. So why should profits attributable to facilities operating outside the UK be taxed here? The simple answer is they shouldn’t. If the UK seeks to tax those profits here, then what about the territories where those profits are being earned? Should they just accept a UK unilateral declaration that it is taking over taxing powers on profits attributable to them, or should they turn round to Amazon and continue levying tax as they do currently? Should Amazon be required to pay tax twice on the same profits?
Exactly the same scenario applies to Google. It’s the world’s favourite search engine, but it isn’t here and an insignificant proportion of its profits are attributable to UK activity. So why should it be subject to anything other than an insignificant amount of UK Corporation Tax?
But the grandstanding doesn’t stop at multinationals. The latest in the firing line is The Ritz Hotel. Mentioned in a BBC article. Why? Because its shareholders aren’t resident here, and the company, whilst profitable, pays no Corporation Tax.
But the UK business tax regime has never taxed profits as they appear in a company’s accounts. It taxes adjusted profits figures, and once those adjusted profits are determined, it allows tax losses in one group company to be offset against tax profits of another. Has that suddenly become a sin?
It’s time the media and the politicians found some other outlet for their spleen. Seeking to tarnish the names of legitimate commercial enterprise because the result of their obeying the rules doesn’t satisfy some ill-thought-through sense of what’s right simply establishes in the observers’ mind the sheer stupidity, even cupidity, of the protagonists.
