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By | OUT-LAW.COM 22nd January 2013 09:01

UK taxmen turn heat on tax-swerving big biz, hope to smoke out £1bn

HMRC probes surge in 'profit shifting' trick

HM Revenue and Customs (HMRC) has increased its focus on international businesses it suspects of using profit shifting techniques to avoid taxes in the UK, according to figures obtained by Pinsent Masons, the law firm behind Out-Law.com.

A freedom of information (FOI) request made by the firm showed that the department's large business service (LBS) was investigating tax worth £1 billion linked to transfer pricing issues in July last year, up 47 per cent from the £680 million under consideration in 2011. Transfer pricing looks at the charges made between different companies in a group for goods, services or intangible assets such as intellectual property supplied between group members.

The rules permit the tax authorities to adjust the amount of income earned for tax purposes or expense incurred on transactions between affiliates where it appears that the transaction was not at 'arm's length'.

"There has been a lot of public discussion around companies' UK tax bills, and these figures show that HMRC has been taking an increased interest in where multinationals with UK operations pay their taxes," said tax expert Heather Self of Pinsent Masons.

"With increased pressure from the government to bring in more revenue, and more resources to investigate potential avoidance and evasion, HMRC has been investigating more and more tax payments."

The figures did not show that more companies were necessarily using transfer pricing to avoid or evade taxes, but rather that the department was being "more thorough with its investigations", she said. The £1bn under consideration refers to both potentially underpaid tax, and the risk to the Exchequer from companies litigating over amounts of tax that they have overpaid.

"HMRC will investigate a company where it thinks it has crossed a line on transfer pricing, and HMRC will demand extra taxes from companies that do have a genuine case to answer," she said. Multinational companies including Amazon, Starbucks and Google have all been accused of deliberately transferring profits from the UK to lower tax jurisdictions to reduce their UK tax liability in recent months.

The Public Accounts Committee (PAC) referred to evidence of the companies' "outrageous" tax arrangements as part of a highly critical report into HMRC's annual accounts, published last month.

Both PAC chair Margaret Hodge and former City minister Lord Myners suggested in November that multinational companies should be subjected to some form of 'turnover tax' on the actual value of their goods and services sold within the UK. However, Heather Self said that calls by politicians and other figures for changes to the law to prevent the "abusive" use of transfer pricing by multinationals were unnecessary, and that any such changes would be ineffective without international action.

"The UK has to accept that it cannot change the law on transfer pricing or the taxation of revenues unilaterally," she said. "There is already a tax on turnover in the UK, and it is called VAT. EU law does not allow the UK to create new turnover taxes. If the Government followed through on the calls by MPs and campaigners to change unilaterally tax laws governing multinationals, the UK's reputation as a stable place to do business would be put at risk."

Rules on transfer pricing are set at an international level by the Organisation for Economic Co-operation and Reform (OECD), which is currently carrying out work to identify and address possible gaps in international tax standards. The rules allow tax relief on loans between companies in the same group, providing that the company can show that the loan would have been available commercially on the same terms.

Tax expert Heather Self said that, due to the contraction of the commercial lending market as a result of the recent global economic slowdown, fewer companies would be able to prove that their inter-company loans met these conditions. This in turn could have led to the increase in transfer pricing investigations by HMRC.

"It is often cheaper for multinational businesses to borrow on a group basis and make inter-company loans to trading subsidiaries," she explained. "Tax relief will have been claimed on these loans, but HMRC will have suspicions that similar financing would not have been available on the open market, given the current lending drought."

Copyright © 2012, Out-Law.com

Out-Law.com is part of international law firm Pinsent Masons.

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