UK and International Tax news

HMRC Briefing On Taxing Multinational Businesses

Monday 22nd October 2012

HMRC has recently issued a high level briefing paper on ‘Taxing the profits of multinational businesses’ following recent stories in the media, which have suggested that some high profile multinational businesses do not pay their fair share of corporation tax on profits they make from their business with UK customers. The briefing explains how the profits of multinational businesses are taxed and how tax policy affects where multinationals choose to locate.

Given the complexity of international tax law, HMRC explains in its briefing that it works closely with tax authorities across the world to promote the adoption and consistent operation of tax rules that result in a fair and joined-up tax system.  In particular, the UK has transfer pricing rules which attempt to ensure that UK profits are not reduced by the mispricing of transactions between companies in a group. There are also anti-avoidance rules including controlled foreign company rules, which prevent groups based in the UK from shifting profits from significant UK based activities to a country with a lower tax rate.

HMRC emphasises in the briefing that it seeks to develop open and cooperative relationships with multinational businesses and in the vast majority of cases, it attempts to reach agreement about what the right amount of tax is. Where HMRC cannot reach agreement, a robust approach is applied including taking large businesses to court, where necessary, to secure the right amount of tax.

As far as identifying how much UK corporation tax is paid by multinationals, HMRC points out that whilst company accounts include references to tax liabilities, it is not generally possible to identify from the accounts how much UK corporation tax has been paid. There are differences between the way in which profits are calculated for accounts purposes and that used for tax purposes. Whilst an apparently low tax rate in a company’s accounts might indicate tax avoidance, it could also be the case that the business has acted entirely properly, by making use of specific tax reliefs and incentives designed, for example, to encourage capital investment or research and development.

If you would like further details on the briefing paper, please contact Keith Rushen on 0044 (0)20 7486 2378.

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