The EU Commission has today outlined its attack on the artificial hybrid structures used by multinational companies to reduce or entirely avoid their tax liabilities. Three companies – Tate & Lyle (sugar), FirstGroup (transport) and Linde (industrial gases) were specified as saving as much as $150m a year by lending billions of dollars to their own US subsidiaries and then exploiting legal differences between the US & UK to offset the interest payments against tax both in the US and the UK.
The hybrid structures work by inserting a new UK subsidiary, which typically has no employees, into the company’s US group. The new entity is then lent large sums by another British subsidiary, resulting in both interest payments and receipts in the UK.
But US tax rules allow the UK company to be treated as part of its US parent, thus allowing it to claim tax deductions on its interest payments in the US as well. Significantly, it is the EU, no the UK, which is trying to block this tax avoidance device, and the UK government may well try, under lobbying pressure from the City, to water it down in Brussels.
Another breakthrough is currently being promoted in the US. It is proposed in the US Congress that a 20% tax be imposed on the estimated $2 trillions of cash held overseas by American multinationals. The aim is to clamp down on the widely adopted practice of US companies keeping their profits overseas to avoid paying the 35% tax rate, one of the highest in the developed world, that is applied to repatriated cash.
But it is also being put forward to generate more than $200bn in revenue for the government to be used to replace spending cuts, stimulus measures, lower tax rates elsewhere, or shrink the deficit. In addition, it is argued, it would reduce distortions, make the tax code more competitive, eliminate the lockout effect, and obviously encourage jobs and investment in the US. So why is there no push for similar measures in the UK?
It is perfectly possible, if the government were so minded, to bring under control the full scale of profit shifting through international trade , which is very largely the mechanism used by multinationals to avoid tax. They should be required by law to undertake in their annual financial statements a country-by-country reporting of their activities. It should include the names of all its companies trading in each country in which it operates, its financial performance in each of these countries (sales and purchases split between third parties and intra-group transactions, labour costs and employee numbers, and pre-tax profit), its gross and net assets in total for each country, and the relevant tax information (the tax charge for the year split between current and deferred tax, the actual tax payments made to the government of that country, the tax liabilities and deferred taxation liabilities for the country at the beginning and end of each accounting period).
This is an abbreviated version of the format proposed and promoted by Richard Murphy, co-founder of Tax Justice Network. So why doesn’t the government do this? Because the political-finance nexus is the central component of the governing structure of this country, and the Tory party and the City of London are so deeply mutually embedded that they will never let it happen.
