31/01/22

UK: HMRC believes foreign firms are responsible for almost a third of underpaid tax.

As published on cityam.com, Monday 31 January, 2022.

New analysis released today has revealed that foreign companies are responsible for almost a third of underpaid tax in the UK according to HMRC, with large US-owned businesses making up the highest percentage.

Pinsent Masons found that foreign-owned companies are responsible for around 32 per cent of all the under paid tax by large businesses in the UK, making up £11.5bn from a total of £35.8bn unpaid.

Figures from HMRC suggest that large US-owned businesses account for around 47 per cent of the under paid tax from foreign-owned companies, hitting £5.4bn.

This is closely followed by firms operating in Switzerland (£825m) and the Republic of Ireland (£674m).

Pinsent Masons explained that large US-owned multinationals are a key target for investigations by HMRC, with the use of so-called ‘transfer pricing’ as a major focus.

Using transfer pricing, a multinational business can pay less Corporation Tax by charging an inflated price for services to its division in the UK; HMRC suspects that this practice results in some large businesses artificially reducing their tax liabilities in the UK.

There is also the issue of ‘base erosion’ – shifting profits from UK sales to lower-tax countries by claiming not to have a taxable presence in the UK.

Pinsent Masons’ partner Steven Porter explained: “Major US multinationals are now a constant target for HMRC. The tax authority believes some of them are paying substantially less tax than they owe in the UK.”

“Reducing losses to the Treasury from transfer pricing and base erosion is a key target, both for HMRC and for the Government. With Corporation Tax set to rise in just over a year’s time, they will be keen to make sure the extra revenue generated does not leak away to lower-tax jurisdictions.”

Porter said that the HMRC are now “aggressively” pursuing transfer pricing arrangements that it sees as artificial and tracks the toughened policy by the government department.

“Given the need to repair public finances after the pandemic, it is only likely to get even more active in terms of investigations in the coming years”, he added.

136 countries have signed The Organisation for Economic Co-operation and Development (OECD) deal, which agrees to enforce a minimum corporate tax rate of 15 per cent from 2023.

The deal will also allow countries to tax multinationals that make sales within their jurisdictions even if they do not have a physical presence there.