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News & Press: Blog

Commercial nonsense – why tax avoidance schemes are stifling competition in the UK

01 March 2013  
Posted by: IOE Executive Board Member Tony Ridge
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IOE Executive Board Member Tony Ridge explains how these tax avoidance schemes work and shares his views on what could be done to eradicate them.

Our members will be acutely aware of the recent headlines about multinationals such as Starbucks, Amazon and Google avoiding corporation in tax in the UK. These tax avoidance schemes have angered both customers of these corporates and SMEs – and caused concern about fair competition.

How do they work?

In a typical tax avoidance scheme, multinational companies route the goods or services they supply to UK consumers through a third party. The ‘third party’ could be a supplier or distributor in a different country; the link is created purely to exploit the advantageous tax regime of that country.

The UK branches of the multinational are invoiced for the goods or services that come through the other country, reducing or eliminating the taxable profit in the UK.

HMRC cannot treat the set-up as a sham because tax experts make sure that the goods and services are charged at ‘arm’s length’ rates to make the scheme ‘commercial’.

Think carefully about where you drink your coffee

So for example, if a coffee chain supplies its branches with coffee invoiced through a group company in Switzerland, they can afford to retail the coffee in the UK at cost. The multinational makes a profit in Switzerland and benefits from tax advantages there. This practice means that the coffee chain doesn’t have to make a profit in the UK.  A UK based company doesn’t have this option of routing through Switzerland.

This practice puts UK firms at a disadvantage because it means they also have to operate at cost in order to be competitive so are left with nothing to invest and distribute to shareholders.

It also means that the UK becomes a ‘dumping ground’ for coffee traded profitably in Switzerland. In reality, the coffee is only traded on paper; the product never actually goes to Switzerland. The multinational, by virtue of its artificial arrangements, has a built-in advantage which distorts the market.

The object of the Competition Act is to ‘make provision about competition and the abuse of a dominant position in the market’.  It outlaws anti-competitive concerted practices between separate undertakings.  Normally a multinational group is regarded as a single undertaking – but in this context the group companies are operating as separate undertakings, trading at arm’s length, so why may they not be treated as such?

Is it really in the interests of the UK consumer that local traders are forced out of business by a multinational, not because its products are superior or better value, but because it can take advantage of a tax dodge not available to them?

Solution

So I suggest the Office of Fair Trading should take a good look at any these tax dodging practices which distort competition.  If fines were to be imposed, an appropriate penalty might be a payment of the amount of tax saved by this objectionable practice. The result would be that multinationals would be required to stop any practice put in place simply to save tax. So in the case of coffee, the multinational companies would have to stop routing purchases through third parties which would remove the anti-competitive effect.

The EU Commission could use its powers to take similar action throughout Europe, and we would see an end to this commercial nonsense.

Have the recent headlines about tax avoidance had an impact on where you drink your coffee?  What are your views on tax avoidance schemes and the effect on UK competition? Leave us a comment below or tweet us on @IOExport.