Foreign companies face UK tax investigation

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Multinational companies are being investigated over £1bn of UK taxes that may have been avoided by transferring profits earned in Britain to their parent companies or to lower tax jurisdictions, it is disclosed today.

The issue has seen foreign giants including Amazon, Facebook (NasdaqGS: FB - news) and Google (NasdaqGS: GOOG - news) face increased scrutiny by HMRC’s Large Business Service over how much they contribute to the UK economy despite generating large revenues.

An accounting method, known as transfer pricing, can involve a parent company charging its regional divisions in the UK a royalty fee for its brand name and corporate marketing benefits, with the payments being transferred directly to the head office abroad.

In other firms, the brand name, trademarks or research and development services are registered not in the UK, but in another country with lower tax rates such Luxembourg or Ireland. This has the effect of magnifying profits in the lower tax jurisdiction and minimising them in the UK.

The £1bn under investigation represents a 47pc rise in transfer pricing investigations over the last 12 months. “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,” Heather Self, a partner at legal firm Pinsent Masons, said.

“This doesn’t necessarily mean there is more avoidance or evasion, but that HMRC is being more thorough with its investigations.”

However, Pinsent Masons said that calls for law changes to prevent “abusive” transfer pricing by multinationals, or for taxes on revenues rather than profits, were a knee-jerk reaction and that changes could already be prevented by international law.

“The UK has to accept that it cannot change the law on transfer pricing or the taxation of revenues unilaterally,” Ms Self said. “There is already a tax on turnover in the UK and it’s called VAT. EU law does not allow the UK to create new turnover taxes.” A review of the transfer pricing system is already being conducted by the Organisation for Economic Co-operation and Development (OECD).