Recent adverse publicity for Starbucks, Amazon and Google has put transfer pricing at the centre of a very public debate on the responsibility of corporates to pay not only the right amount of tax, but also the fair amount of tax.  This debate is set to continue as corporates find themselves under intense public scrutiny, not only in the UK. 

It is clear that the public perception of the tax paid by corporates is far from positive, particularly at a time when the Chancellor is announcing further cuts to public spending in light of downward adjustments to the speed of the UK’s projected economic recovery.  Most commentators blame the transfer pricing structures that multinational corporations employ for the unfair amount of corporate tax that they pay.  This is understandable when one looks at the very top and bottom lines of their financial performance in terms of the tax they pay compared to the revenue they make.  But this is to ignore a whole lot of substance inbetween those two lines.

It is a positive development that there is a public debate concerning the notion of fairness in corporate taxation.  This will lead to tax being a matter of much wider concern for many more corporates than simply being about effective tax rates.  An example is Starbucks making the decision to re-arrange its tax affairs over and above what it can and could legally pay, to what it feels it should pay in light of its wider business image and long term commitment to the UK. 

The above notwithstanding, it is worrying to note that at times the tone of the debate has taken on hysterical proportions and often poorly informed headlines have been taken as fact.  The truth of the matter is that transfer pricing is an effective tool for resolving double taxation and enabling tax authorities to better challenge for and collect taxes from multinational corporations in a way that ensures certainty and supports international economic endeavour.  For example, HMRC collected over £4bn of tax revenue through transfer pricing enquiries alone.  This debate should hopefully lead to better and more effective application of transfer pricing to assist multinational corporations and tax authorties alike.  Part of this will involve building an international consensus and George Osborne has just announced that the UK will be working with France and Germany to ensure multinationals pay their ‘fair’ share of tax.  This is particularly important at a time when the UK has the lowest corporate tax rates of the G7 (soon to be as low as 21%) and may otherwise find itself at the wrong end of public opinion in other G7 countries as investment (hopefully) shifts to the UK.

For multinational corporates, it is unmistakable that  an important part of their tax strategies going forward will take account of this fast developing concept of ‘fairness’ and a large part of that is increasing the transparancy of their international tax affairs as many already do.

With the Autumn Statement out today, let’s hope that the debate shakes off hysterical headlines and looks at fairness in light of multilateral consensus and well established international tax principles such as the arm’s length standard.