Why MPs can't be too outraged at US giants' tax affairs

Though legal, the morals of how firms like Starbucks run their affairs have been questioned. Photo: Johnny Green/PA Wire

Every day millions of people in this country spend some of their hard earned cash on Amazon, in Starbucks, or use Facebook. But over the last few months it's become quite clear that they are less than fond of paying tax in the UK despite billions of pounds of sales.

Today they are likely to have scorn poured on them by MPs on the Public Accounts Committee who are questioning them over their tax affairs. But what they are doing is perfectly legal, and in essence, not really new.

You might not like this, but it is the case that since Victorian times most countries have stuck to a principle that a foreign based company trading with the UK rather than carrying on business should not be taxed here but in the country where they are based. Companies pay tax on profits, not on sales. And tax on profits tend to be applied in the country where those profits are generated, normally in the country where a firm's HQ is. Companies can also write off debt interest on loans against tax, and capital investment, buying new kit for example. Those two traditions are to encourage companies to grow.

So in general, a British widget maker would pay tax in the UK on the profits he or she makes selling the products all over the world, rather than paying corporation tax in every single country he or she sells to. Most people probably think that is fair enough.

Amazon has a huge distribution warehouse in Hemel Hempstead, but an HQ in Seattle. Credit: Steve Parsons/PA Wire

But where huge companies are selling massive amounts of their product in one country and seemingly paying hardly any tax in that country at all, politicians and the public understandably get a bit prickly, and the morals of how they run their affairs comes into play.

There are also many different wheezes that companies can and do use to get their bills down as low as they can on top of that general principle. Two of the most common are applying 'management fees' and 'transfer pricing'. It's quite common for a head office of a company to charge national subsidiaries a 'management fee'. The subsidiary can then write off that fee as an expense. Or under 'transfer pricing', part of one company in one country charges another division in a different country for a service. Miraculously, the one that receives the cash tends to be in a country with lower taxes! There are complex rules that are designed to stop either of these practices being abused.

But perhaps as globalisation makes it easier for companies to move money around the world, and the rise of online trading makes it harder and harder to tell where companies are actually making their profits, it has become easier for companies to use the rules to their advantage. Politicians today will bristle at the firms' behaviour. But it is they who set the rules themselves within which companies have to operate. It's worth bearing that in mind as you watch their outrage.

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