Game over for Ritchie on tax avoidance

Posted by Christie Malry on October 12, 2012 at 11:08 am

Ritchie has been quick to add his name to those shrill voices campaigning against the "tax avoidance" practised by Google, Amazon and Facebook. So this latest document from HMRC on how multinational companies are taxed is very bad news for him indeed:

In broad terms, companies are required to pay corporation tax in the country where they carry on the economic activity that generates their profits, not where their customers are located. Many elements contribute to a multinational business’s economic activities including: sales, employees, technology, physical assets and intellectual property. Tax rules need to establish how much of a business’s overall activities should be treated as ‘belonging’ in a particular country. This is different from VAT, which normally depends on the location of the customer. 

In other words, "Ritchie, things might not be how you might want them. But you're wrong".

But there's more (emphasis added):

Non-resident trading companies which do not have a branch in the UK, but have UK customers, will therefore pay tax on the profits arising from those customers in the country where the company is resident, according to the tax law in that country. The profits will not be taxed in the UK. This is not tax avoidance: it is simply the way that corporation tax works.

Most major economies operate corporation tax in the same way as the UK, so UK-resident companies are treated in a similar way in other countries. In other words, UK companies do not pay corporation tax to another country on the profits from sales in that country, unless they trade through a branch based there. Instead, they pay corporation tax in the UK

For Ritchie's benefit, let's repeat that one more time:

The profits will not be taxed in the UK. This is not tax avoidance: it is simply the way that corporation tax works.

So, it looks like our retired chartered accountant will need to be making some fairly dramatic adjustments to his tax gap estimate. Because HMRC just dumped all over it. Big time.

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