Easter is a good time for reflection and balanced thinking and never have these qualities been so necessary as in the contentious area of tax, particularly where multinationals and the large corporates are concerned.

The government and corporation tax

In 2011 the Chancellor, George Osborne made it clear that he wanted to make the UK more tax competitive. The government's policy in this respect has led to a cutting of corporation tax to an all- time low rate of 23% from 1 April, reflecting the fact that the UK is desperate to attract inbound corporate business and cannot do so unless corporation tax levels are reduced to compete with ultra-low tax jurisdictions such as Ireland (corporation tax rate 12.5%). However, side by side with this business friendly rhetoric has been the media and public outcry over Starbucks not paying its "fair share" of tax, which led to Starbucks offering to pay £10m in additional corporation tax. In fact, the majority of Starbucks' outlets are franchise businesses run by UK taxpayers – a detail that appears to have escaped the media and politicians anxious to highlight the evils of tax avoidance! The overall result is somewhat confusing because, on the one hand, the government is doing its utmost to promote UK PLC as a place for the multinationals to do business in and on the other trying to reassuring voters that it is cracking down on any 'undesirable' behaviour. In the latter respect, HMRC have become increasingly aggressive in their attempts to raise tax revenues.

Transfer pricing

Particular attention has been focused by HMRC on transfer pricing, where OECD guidelines provide detailed guidance on how "arm's length" pricing should apply to the provision of intra-group goods and services. It is of course not unknown for companies to arrange matters such that intra-group transaction prices shift profits to lower tax jurisdictions, whilst recording expenses in higher tax ones. Many subsidiary companies in low tax jurisdictions are vehicles for IP rights and make charges to other companies within the group for their use. There is no doubt that transfer pricing is a very difficult area to police and that it may be open to abuse, but is also right to say that companies are under a duty to their shareholders to minimise the tax payable and this will lead them inevitably to exploit the transfer pricing rules to their advantage. They must also stay competitive and tax is a huge business cost. HMRC therefore continue to devote significant time and resources in this area in a manner that is distinctly less friendly that the Government's business friendly rhetoric. Transfer pricing enquiries are time consuming and may have significant costs and resource implications for the companies concerned.

Are there alternatives?

Various alternatives which would reduce the importance of transfer pricing have been floated over the years, for example unitary taxation under which tax activities are taxed where they actually occur. Under this system companies would have to provide a single set of accounts and apportion their worldwide profits using a pre-set formula which would take into account assets, liabilities, turnover and other financial measures in each jurisdiction. This approach has, however, substantially been rejected by the OECD as politically unworkable. Another idea which has not caught on is country by country reporting under which a multinational company would have to provide details of the financial performance and tax liability of each of its subsidiaries as well as their name and location, which would therefore highlight any use of tax havens. The idea presumably is to increase the pressure on the multi-nationals by making them sensitive to the reputational risk in being seen to exploit lower tax jurisdictions.

An end to transfer pricing?

It seems, therefore, that transfer pricing disputes will be with us for a long time to come. Companies need to plan their affairs in a tax efficient manner. The government needs to maximise its tax revenues. Whilst transfer pricing enquiries are inevitable, it would be unfortunate if HMRC's aggressive stance has the effect of deterring investment into the UK from foreign companies and even more unfortunate if vital inbound investment is lost because of the current spate of anti-tax avoidance frenzy in the media. This is a global and increasingly competitive world. Nations both within and outside the EU are competing to attract inward investment and it is to be hoped that the UK does not lose out. A more thoughtful and informed debate about tax in the media and amongst our politicians would be welcome.