Friday 1 February 2013

E&Y blame outdated rules

The UK head of tax at Ernst & Young, the accountancy firm that audits Google, Amazon and Facebook, has admitted that international guidelines that allow online firms to pay much lower corporation tax than their rivals are outdated and in need of urgent reform.
John Dixon told a committee of MPs that the Organisation for Economic Co-operation and Development (OECD), which drafts the politically contentious rules, was facing a "difficulty … [it] needs to address" because the codes established decades ago never envisaged an explosion in online commerce.

Confronting Britain's top four tax experts at Thursday'shearing, Margaret Hodge, chair of parliament's public accounts committee, said: "What really depresses me is you could contribute so much to society and the public good and you all choose to focus on working in an area which reduces the available resources for us to build schools, hospitals, infrastructure."
She joins a long list of top politicians around the world prepared to publicly attack the tax industry. Last week David Cameron joined in, using a speech at Davos to rail against "an army of clever accountants … [helping] companies navigate their way around legitimate tax systems". However the prime minister has also expressed enthusiasm for taking UK corporation tax to "the lowest rate of any major western economy".
While he declined to comment specifically on Amazon or any other client, Dixon told the committee: "In modern parlance, the way contracts are usually made is online … If the contract is made online, and the server is based outside of the UK, that is not creating a taxable liability in the UK."
In a thinly veiled reference to Amazon, Richard Bacon MP asked if this could be true even if a UK consumer buys goods from a ".co.uk" website and the product is delivered from a warehouse in Britain. "Absolutely," said Dixon. "In the context of corporation tax, it is the location of the server [that matters] … The effect of the OECD principles … is that as far as the inbound part of the supply chain is concerned – into the UK – a small amount of the profit is currently allocated to that activity. And that is what the OECD needs to address."
In the meantime, suggested Hodge, "you have exploited the loophole". Dixon replied: "Sorry, I don't agree."
Dixon's comments contrast with those of Google boss Eric Schmidt, who recently brushed aside criticisms of the group's elaborate corporate structure, which involves an international company in Ireland and a parent company in Delaware and has seen it shift revenues of about $9.8bn (£6.2bn) into a shell company in Bermuda, where they are sheltered from tax. "It's called capitalism. We are proudly capitalistic. I'm not confused about this," said Schmidt.
Dixon appeared alongside counterparts from PricewaterhouseCoopers (PwC), Deloitte and KPMG – each of them stoney-faced while taking a volley of brickbats from angry MPs of all parties for two and a half hours.
All the tax experts from the big four agreed the OECD rules governing how multinational firms were taxed in different jurisdictions were outdated and needed changing – though each denied accusations that they had helped clients exploited the weaknesses at the expense of the UK taxpayer. Proposals for reform are expected from the OCED later this month.
Hodge – who once worked for PwC, though not in tax – noted that between them, the big four make almost £490m annually from public sector work. "I think it is questionable whether you should get public contracts," she said. Dixon disagreed, claiming the four companies were "one of the biggest contributors to tax in the UK."
The MPs grew increasingly frustrated as the accountants attempted to explain some of the arcane and linguistically perverse tax concepts at the root of some the controversy. "A warehouse is not a 'permanent establishment'," explained Dixon at one point. "An internet-based business, where essentially the website and the server are based outside the UK, is also not a 'UK permanent establishment'."
Internationally, Dixon said the accountancy group employed 29,000 people offering tax advice, for which E&Y receives revenues of $6bn – just over a quarter of group revenues. As well as advising Google, Amazon and Facebook – each with controversial tax structures that result in little UK tax – E&Y are auditors to pub group Greene King, which was named by MPs because of an avoidance scheme defeated at tribunal by HMRC.
E&Y is also the auditor to Hewlett Packard, which was recently savaged at a US senate committee hearing for its aggressive approach to tax avoidance. Parliamentary committees in Australian and New Zealand are now expected to launch their own inquiries into multinational taxation.
PwC's Kevin Nicholson attacked the complexity of tax rules and suggested it was up to politicians to change the 1970s and 1980s guidelines on so-called "transfer pricing" – OECD principles governing where economic value is said to have occurred in cross-border trading within a multinational group.
"One of the challenges now is we're seeing a lot of discomfort, unrest and unhappiness around the fact that businesses are selling a lot in the UK but they are not seeing the profit [in the UK]. And part of the reason for that is the way the international rules were designed puts the value in different places. One of the debates we need to have now is how do you get tax and profits in the right places."
But Hodge challenged all four tax experts on their firms' relationship with government, waving two brochures from KPMG that she said offered advice on minimising tax. She noted that the tax experts cited in pamphlets entitled Controlled Foreign Company Reform and Patent Box: What's in it For You named KPMG tax experts Robert Edwards and Jonathan Bridges respectively, both of whom had previously worked on secondment at the Treasury, advising on the relevant legislation.
Hodge said this was "inappropriate and wrong … It is poacher, turned gamekeeper, turned poacher again." KPMG's head of tax, Jane McCormick, denied this characterisation, saying advice had been offered to government. Bill Dodwell, head of tax at Deloitte, noted experts from his firm were frequently seconded to government without payment.
Separately, Oxfam published a report on Thursday suggesting tax evasion – illegal non-payment of tax due, as opposed to tax avoidance was depriving the UK economy of at least £5.2bn a year, or almost £200 for every household. The charity said the unpaid tax could go a long way towards helping "rescue millions from the poverty trap"

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