Tax and Multinational Companies

3rd February 2016

The Financial Secretary to the Treasury (Mr David Gauke): I beg to move an amendment, to leave out from “House” in Line 1 to end and add:

“notes that the Government has taken action to promote international cooperation in relation to clamping down on tax avoidance by multinational companies, challenging the international tax rules which have not been updated since they were first developed in the 1920s, that multilateral cooperation at an international level has included the UK playing a leading role in the G20-OECD Base Erosion and Profit Shifting Project to review all international tax rules and increase tax transparency, and as part of that, the UK was the first country to commit to implementing the OECD country-by-country reporting model within domestic legislation, that the Government recognises the case for publishing country-by-country reports on a multilateral basis, that the Government has introduced more than 40 changes to tax law, that the various measures taken by the Government have included the introduction of a diverted profits tax aimed at targeting companies who use contrived arrangements to divert profits from the UK, stopping the use of offshore employment intermediaries to avoid employer National Insurance contributions, stopping companies from obtaining a tax advantage by entering into contrived arrangements to turn old tax losses or restricted use into more versatile in-year deductions, and requiring taxpayers who are using avoidance schemes that have been defeated through the courts to pay the tax in dispute with HM Revenue and Customs upfront, and that the Government is committed to going further, enabling HM Revenue and Customs to recover an additional £7.2 billion over the Parliament.”

It is a great pleasure to move the Government’s amendment. There is much that we have heard from the Labour party today on this subject that is wrong, confused and, to put it kindly, oblivious to the record of the last Labour Government. However, before addressing those points, I hope to strike a note of consensus. Both sides of the House believe that all taxpayers should pay the taxes due under the law. Both sides believe that taxpayers should refrain from contrived behaviour to reduce their tax liabilities, and all taxpayers should be treated impartially. That is why the Government’s record is one of taking domestic and international action to tackle tax avoidance.

I will set out details of that action, but first I want to address another issue. The shadow Chancellor’s approach has generated more heat than light, and often reveals a complete misunderstanding of how the corporation tax system works. Let me take this opportunity to explain to the House how it does, in fact, work.

The independent Institute for Fiscal Studies, in a paper it published last week, puts it well:

“The current tax rules are not designed to tax the profits from UK sales. They’re certainly not designed to tax either revenue or sales generated in the UK. They are instead designed to tax that part of a firm’s profit that arises from value created in the UK. That is the principle underlying all corporate tax regimes across the OECD.”

I make that point because it is fundamental to understanding the tax we are entitled to receive from multinational companies. It is not a point that the shadow Chancellor appears to have grasped.

Let me give an example of why this matters, and it is similar to the point made by my hon. Friend the Member for Dudley South (Mike Wood). The UK is home to one of the most successful video games sectors in the world. Would it be fair for a firm to design a game here, develop it here and take the risks here, but to go on to sell it overseas and then have to pay corporation tax on all that activity in the country in which it makes the final sale, and not in the UK? The current international tax arrangements are clear that such profits are taxed in the UK—the place of economic activity—rather than in the place where the sales are made. That is the internationally agreed and internationally applied concept of corporation tax. That is the law that HMRC applies. Quoting numbers to do with revenues or profits from sales, as opposed to activities, demonstrates a lack of understanding of how the tax system works, or—and this is worse—an understanding of the way the tax system works, but the hope that those following these debates do not.

John McDonnell: Is the Minister saying that Google employs 2,300 staff in this country on an average salary of £160,000, and they cannot be defined as involved in economic activity or as adding any value? What are they doing? Playing cards all the time? Are they not actually involved in economic activity—this sizable proportion of the Google workforce?

Mr Gauke: The point I am making is that the shadow Chancellor goes around quoting numbers based on profits from sales. To be fair, he went through the methodology carefully in the House today, but that methodology appears to be based on a complete misunderstanding of how the tax system works.

Rachel Reeves: I do not misunderstand how the corporation tax system is applied, but without information from HMRC, and without publication of the deal, it is difficult to know exactly how much tax Google should be paying. That is why we are seeking answers. Also, there have been $8 billion of royalty payments to Bermuda. Does the hon. Gentleman really think that that is where the economic activity is and where the value is being added?

Mr Gauke: I will deal directly with the issue of transparency in a moment.

On the issue of how our international tax system works, I have explained that it is based on economic activity. However, I would be the first to say that that international tax system needs to be brought into the modern world. That is the very reason why the UK has led the way on the base erosion and profit-shifting process. We should also be aware that there are particular issues with the US tax system, which is failing to tax intellectual property developed in the US in the way that it should.

I gave the example of video games companies. However, I recognise that there are many cases that are much more complex, and where it is not so easy to identify where the economic activity takes place. There is an issue about where multinational companies allocate their profits and where they identify economic activity as taking place. There is a need to address that, which is why we need tax rules that genuinely reflect where economic activity takes place, to ensure that profits are aligned with it. However, that is a very different matter from making big claims about profits from sales and saying that those sales profits have to be taxed where the sales take place. That is the misunderstanding I wish to address.

Mr Richard Bacon (South Norfolk) (Con): The Minister is right, of course, that these issues are sometimes very complicated. However, sometimes there are loopholes that are exploited. Will he identify some of the loopholes closed by this Government that were opened by the previous Labour Government?

Mr Gauke: There is a whole host I could draw attention to, but in the interests of time, I will not run through that lengthy list. I have it here, and there are quite a number of cases—there are 40 I can identify straightaway—where there were loopholes, and we have tried to address that.

The diverted profits tax—I will come back to this again in detail in a moment—is designed to ensure that, where companies divert their profits away from the UK, and where the economic activity is happening in the UK, we get some of the tax yield.

David Mowat (Warrington South) (Con): The difficulty with the economic activity test the Minister talks about is that it is intrinsically judgmental, and that gives us many of the issues that we try to grapple with. The test came in in the 1920s, way before the internet. Might it not be a way forward to move more towards taxing sales and, if necessary, dividends, with less on corporation tax, which would take these judgments away?

Mr Gauke: The first point to make is that this is a debate on the operation of the tax law as it stands, not on how people might want it to be, and to be fair to HMRC, it can only collect the tax that is due under the law as it stands, not as how people might want it to be. On reform of this area, there is no reason why we should not debate these matters. However, with regard to a move towards taxing profits on the basis of sales—there is a perfectly respectable case for reform in that direction—I would be worried about the impact on, for example, the UK’s creative and scientific sectors. I have mentioned the video games sector, and one could also look at pharmaceuticals. There are a number of areas where the UK—businesses in our constituencies—would lose out in those circumstances, so I would be a little wary about it.

Joan Ryan: May I bring the Minister back to the fundamental point about transparency? It would make this debate much easier and more useful if he published the details of this deal in full so that we can be sure that we are not talking about mate’s rates and a special tax loophole for Google.

Mr Gauke: I will come on to transparency, but let me first return to this Government’s record on changing domestic law and leading the way in updating the international system.

This Government have led internationally on the G20 and OECD base erosion and profit-shifting project, making the international tax rules fit for the 21st century. My right hon. Friends the Prime Minister and the Chancellor of the Exchequer, in particular, took on highly prominent roles in initiating those discussions and taking them forward through the G20 and the OECD. The outcome will be to level the playing field among businesses, give tax authorities more effective tools to tackle aggressive planning, and help us better align the location of taxable profits with the location of economic activities and value creation. This is a major step forward in addressing the underlying causes of aggressive tax avoidance.

We have been at the forefront of implementing this agenda, acting swiftly to change the rules on hybrid mismatches and country-by-country reporting. Because we consider it important not to rely solely on international rules, we have also legislated domestically to introduce a world-leading measure to address the contrived shifting of profit from this country—the diverted profits tax. The diverted profits tax targets companies that divert profits from the UK, principally those with substantial activities in the UK who are trying to avoid creating a UK permanent establishment. Under our rules, those companies either declare the correct amount of profits in the UK and pay the full amount of corporation tax on them, or risk being charged a higher amount of diverted profits tax at a rate of 25%. By the end of this Parliament, the diverted profits tax will raise an extra £1.3 billion, both directly and as a result of associated behavioural changes. The tax is already having that effect, and multinationals will pay more corporation tax as a result.

Stephen Timms (East Ham) (Lab): Of course, the diverted profits tax was referred to as the Google tax. My hon. Friend the shadow Chancellor has alleged that under the terms of the deal Google will not pay a penny. Is he right about that?

Mr Gauke: The purpose of the diverted profits tax, which came into effect in April, is to ensure that companies stop diverting their profits and pay corporation tax like everybody else. I repeat that I cannot talk about the Google case beyond information that is in the public domain, but if this tax is effective in driving companies to stop diverting their profits, it is a success.

Mark Durkan (Foyle) (SDLP): The Minister refers to the Government’s record over the past Parliament and this one, but he has not mentioned the changes to the controlled foreign companies rules, which favoured a number of companies at the expense of the Exchequer and, in net terms, at the much greater expense of exchequers in developing countries.

Mr Gauke: The controlled foreign companies regime was driving business out of the UK, whereas now businesses are looking to locate their headquarters in the UK, and I am pleased about that.

Robert Jenrick: The Minister is making a very important point about the diverted profits tax. It is important that Members on both sides of the House recognise that this extremely important development was brought in by this Government, and that it is not correct to say that Labour Members supported it, because at the time, a year ago, their position was that it was not wise to bring it in until the outcome of the BEPS process was completed, which it still is not. Had we taken the advice of the then shadow Chancellor and shadow Chief Secretary, there would be no diverted profits tax, and the points made by Labour Members would be irrelevant.

Mr Gauke: I am grateful to my hon. Friend, who reminds the House of an important point. When we brought in the diverted profits tax, the intention was clearly to make sure that we got more money being paid in corporation tax. We want to stop companies diverting their profits out of the UK, and we are leading the way in bringing forward legislation on this.

Let me address the shadow Chancellor’s point about resources for HMRC. We have invested heavily in HMRC’s ability to strengthen its anti-evasion and compliance activity, including through extra funding and hiring professionals whose area of expertise is multinational companies. For example, contrary to the impression that he gave, the number of people working in HMRC’s large business directorate has gone up, since it was formed in 2014, from 2,000 to 2,600 people. We believe in competitive taxes—that is why we have cut our rate of corporation tax so that it is the lowest in the G7—but we also believe in making sure that those taxes are paid.

I turn to the issue of transparency raised by several hon. Members. Taxpayer confidentiality is a fundamentally important principle of our tax system, as in the tax systems of every other major economy. We hear complaints that HMRC is not disclosing full details of the settlement. HMRC is prevented by law from disclosing taxpayer information. The resolution of tax disputes, however, is subject to full external scrutiny by the independent National Audit Office, which has reviewed how tax inquiries are concluded by HMRC. In 2012, it appointed a retired High Court judge, Sir Andrew Park, to investigate HMRC’s large business settlement process. Sir Andrew concluded that all the settlements he scrutinised

“were reasonable and the overall outcome for the Exchequer was good.”

I do wish that those who are so keen to accuse HMRC and its staff of sweetheart deals were as keen to look at what happens where independent scrutiny occurs in order to see that in fact there are no sweetheart deals. HMRC introduced—

Helen Goodman (Bishop Auckland) (Lab) rose

Mr Gauke: Let me just make this point. [Interruption.] I will give way to the hon. Lady.

Helen Goodman: I am grateful to the Minister, who is doing his best in a difficult situation. However, Ministers are not barred by law from publishing the minutes of meetings that they have, so could he now publish the minutes of all 25 meetings that Ministers have had with Google?

Mr Gauke: We have a very open and transparent arrangement for disclosure of meetings. I am very clear that when it comes to determining the tax liability of a company such as Google—or, indeed, any other taxpayer in this country—there is no ministerial involvement. HMRC is entirely operationally independent. There is no ministerial interference in such areas, and no suggestion that there would be. When it comes to determining the tax bill of any taxpayer, it is a matter of HMRC enforcing the law; it is not for ministerial involvement. HMRC introduced new governance arrangements for significant tax disputes in 2012 to provide even greater transparency, scrutiny and accountability. They included the appointment of a tax assurance commissioner to ensure that there is clear separation between those who negotiate and those who approve settlements. The tax assurance commissioner oversees the process and publishes an annual report on his work.

Let me absolutely clear. There are no sweetheart deals, and there is no special treatment for large businesses. HMRC resolves disputes by agreement only if the business agrees to pay the full amount of tax, penalties and interest. Otherwise, it is a matter for the courts—an arena in which HMRC has a strong track record of fighting and winning.

Wes Streeting (Ilford North) (Lab): I am grateful to the Minister for his assurance that there are no sweetheart deals, but if the process is so independent and Ministers are so far removed from it, how can he give us that assurance? Similarly, how was the Chancellor able to hail the deal as a major success?

Mr Gauke: We have in place strong governance. The NAO has looked in the past at settlements when accusations have been made of sweetheart deals, and those accusations have been dismissed. It is very clear that HMRC’s remit is to get the tax that is due under the law, and no one has ever produced a shred of evidence to suggest otherwise; they have merely displayed a prejudice against HMRC staff and a tendency to insult them.

Several hon. Members rose

Mr Gauke: I want to make a little progress, but let me give way to my hon. Friend the Member for Croydon South (Chris Philp).

Chris Philp: Does the Minister agree that the reason why this announcement is welcome is that we collected £130 million of tax from Google, while Labour collected nothing?

Mr Gauke: It certainly appears that next to nothing was collected in that case.

Chris Stephens (Glasgow South West) (SNP): Will the Minister give way?

Mr Gauke: I must press on. Tax avoidance is a global issue, which requires global solutions. Fruitful partnerships with other countries on the matter are part of the reason why the Government have been at the forefront of efforts to increase tax transparency. That appeared last year in the Conservative party manifesto, in which we pledged to

“review the implementation of the new international country-by-country tax reporting rules and consider the case for making this information publicly available on a multilateral basis.”

The Government are dedicated to increasing tax transparency, and we have already taken action. Just last week, the UK signed an agreement with 30 other tax administrations to share country-by-country reports from next year. We want such agreements so that information can be made public, as we spelled out in our manifesto. We will continue to lead any multilateral debates on tax transparency, as we have done in so many areas of international tax avoidance.

Reforming the international and domestic rules, investing in HMRC’s capacity and leading the way on global tax transparency—those actions were taken by this Government, but were sadly lacking during 13 years of Labour. The result of those actions has been £130 million to the Exchequer from Google, on top of the tax already paid. Under Labour, that sum was next to nothing. That is testament to the importance we have given to tackling the tax risks posed by multinational enterprises. Last month’s announcement represents an important result of our actions on the matter, and I assure hon. Members that we will continue to work hard on that agenda over the coming years, to give the Exchequer more money to fund the public services that we rely on. I urge the House to support the Government amendment.

3.32 pm

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