Alex Dunnagan

The Diverted Profits Tax and Tackling Offshore Promoters of Tax Avoidance

1st December 2021 by Alex Dunnagan

The Finance Bill 2021-22 was published earlier in November, legislating for tax changes announced at the Autumn Budget. This briefing focuses on two aspects of the bill, amendments to the Diverted Profits Tax and measures relating to the promotion of tax avoidance schemes.

The Diverted Profits Tax

The Diverted Profits Tax (DPT) was introduced in 2015 to target contrived and artificial arrangements implemented by multi-national companies to divert profits out of the United Kingdom. It is a tax on tax avoidance designed to reduce the incentives on companies to implement avoidance schemes.

It should be noted that the UK government did not need a DPT to recover tax lost to artificial arrangements designed to divert profits out of the UK. Under long-standing tax principles, HMRC is able to disregard the tax effect of contrived avoidance schemes and impose taxation and penalties on companies using such schemes.^[1]See TaxWatch: Is Tax Avoidance Legal? https://www.taxwatchuk.org/is_tax_avoidance_legal/

However, the DPT was designed to act as an additional disincentive on companies using artificial avoidance schemes due to the higher rate of tax charged.

At the time it was introduced, the government estimated that the tax would bring in up to £400m a year. However, the latest forecasts from the Office for Budget Responsibility (OBR) show that the tax brought in £100m last year, but that this will be reversed this year, and that there will be no income generated from the tax over the following five years.^[2]Figures available from: https://obr.uk/download/october-2021-economic-and-fiscal-outlook-supplementary-fiscal-tables-receipts-and-other/

The Treasury response to the news that the DPT is no longer forecast to raise any revenue, as reported in the Observer, is to suggest that the tax had been successful in provoking multinationals to change their behaviour.^[3]Jon Ungoed-Thomas and Toby Helm, Osborne’s ‘Google tax’ on overseas profits now raises zero revenue, Treasury reveals, The Observer, 31 October 2021 … Continue reading

However, according to the HMRC annual accounts, published this November, HMRC are currently carrying out 100 investigations into multinational companies under the DPT, with a total tax under consideration of £3.8bn.^[4]HM Revenue and Customs, Annual Report and Accounts 2020 to 2021, p.52

The low out-turn figures presented by the OBR may therefore be a function of HMRC settling disputes with multinationals without applying DPT.

In 2019, HMRC introduced a new “profit diversion compliance facility”. This was “aimed at arrangements targeted by the DPT”, and allowed multinationals to come forward and pay the taxes they should have paid, and any penalties, without suffering DPT.^[5]HM Revenue and Customs, Guidance: Profit Diversion Compliance Facility, 10 January 2019, … Continue reading

The resolution facility is open to companies even if they are currently under investigation by HMRC in relation to DPT, as such it represents an easy route for companies to avoid the application of DPT if they believe HMRC will apply the tax following investigation. The availability of the disclosure facility to companies currently under investigation calls into question how voluntary that disclosure really is.

The technical amendments in this year’s Finance Bill appear to facilitate the settlement of disputes without DPT being charged, by extending the time period when a company can amend previous tax returns in order to get out of the DPT charge.

If OBR figures are predicated on the expectation that most, if not all of the 100 companies currently under investigation will settle under the favourable terms, this raises serious concerns about tax compliance.

As is clear from the details published by HMRC at the time the disclosure facility was made available, a number of DPT investigations relate to fraudulent conduct.

In the Profit Diversion Compliance Facility Guidance, HMRC stated that it had found that companies had adopted cross border pricing arrangements based on “an incorrect fact pattern”. In some cases this arose out of arrangements not implemented “as originally intended or declared to HMRC”, leading to a divergence between “the fact pattern” presented to HMRC and “what is happening on the ground”. This included transfer pricing arrangements based on “misleading statements”. This description clearly covers tax fraud committed by multinational companies against the Treasury.

The government therefore needs to be careful that the operation of disclosure facilities and the DPT does not lead to multinationals being allowed to escape any accountability for tax fraud by retrospectively amending their tax returns and making an after the event disclosure. The DPT should not become an amnesty for tax fraud.

Promoters of tax avoidance schemes

Clauses of the bill relating targeting the promoters of tax avoidance scheme provide HMRC with additional powers to wind up companies involved in the facilitation of tax avoidance, freeze the assets of people subject to proceedings under DOTAS legislation, and to publish information relating to tax avoidance schemes.

It is vital that HMRC is able to take swift action against the promoters of tax avoidance schemes in order to protect the public. However, it is clear that many promoters are engaged in criminal activity. As the government accepted in its recent response to its call for evidence on tackling disguised remuneration tax avoidance: “The Government recognises that the design of arrangements that are sold as avoidance schemes may in fact enable fraud”.^[6]HM Revenue and Customs, Call for evidence: tackling disguised remuneration tax avoidance summary of responses, 23 March 2021, para 2.34 … Continue reading HMRC needs to use the powers it has to enforce the law in this area.

At second reading the government was asked what it was doing to prosecute people involved in the promotion of loan schemes. The answer from the Financial Secretary to the Treasury was as follows:

“An issue I have raised directly with HMRC is how we can further prosecute and bring these people to justice. Unfortunately, I understand that many of them are located offshore, but we will be doing everything we can to ensure that those who are responsible for promoting this are brought to justice.”

It is important for HMRC to specific about what is meant by the term “offshore”. If offenses are committed by people resident, or that have escaped to, the Crown Dependencies, then there is no impediment to enforcing the criminal law of the UK.

For example, it is well known that many disguised remuneration schemes are run from the Isle of Man. The government published a series of anonymised disguised remuneration case studies which are available on gov.uk.^[7]Anonymised Disguised Remuneration Case Studies, available from: … Continue reading This detailed four case studies, of which three were identified as being schemes involving the Isle of Man. The remaining scheme did not identify any jurisdiction.

Section 13 of the Indictable Offences Act 1848 allows warrants issued in England and Wales for Indictable Offences to be executed in the Isle of Man (IoM) and the Channel Islands (i.e. Guernsey, Jersey, Alderney and Sark). Section 4 of the same act allows the enforcement of a warrant issued in Scotland to be enforced by the local IoM police.

The crime of Cheating the Revenue is an indictable offence. As such, if HMRC have reasonable grounds to suspect that the promoters of any Isle of Man or Channel Islands based schemes have committed the offence of Cheating (which constitutes any dishonest conduct that results in prejudice to the revenue), then all that is required is to issue a warrant for their arrest.

Section 5 of the Isle of Man Act 1979 enables someone in the IoM to be arrested for offences committed in the UK. While the act refers to specific “common duties” offences, such as customs, excise, and UK VAT, section 1 (2) allows for the treasury add “any duty or tax which is under the care and management of the Commissioners of Customs and Excise”.

These provisions have in the recent past allowed HMRC and other agencies to take action to arrest suspects located in the Isle of Man. In 2015, Operation Braid saw the confiscation of £500,000 from an Isle of Man businessman suspected of money laundering and a £21m VAT fraud in the UK. This action was part of a wider investigation into VAT fraud and money laundering, which saw seven arrests, 13 properties raided, and £1m in cash seized, in a joint HMRC-National Crime Agency investigation involving police forces across the UK, as well on the Isle of Man.

We have written to the Financial Secretary to the Treasury Lucy Frazer QC MP setting out the position.

Although there is no legal impediment to the enforcement of the criminal law in relation to tax on the promoters of tax avoidance schemes, there is a concern that HMRC are not adequately resourced to take on the job.

According to HMRC’s latest annual accounts, the number of criminal investigations declined steeply as a result of the pandemic, with HMRC concluding 437 criminal investigations in 2020-21, a 49% reduction on 2019-20 when the department concluded 864 investigations.

This reduction in activity is mirrored in the data from the Crown Prosecution Service (CPS) on how many offences they had charged relating to specific revenue offences related to tax fraud.

The figures TaxWatch received following an FOI to the CPS are reproduced below. They show a clear decline in prosecutions for almost all forms of tax fraud over the last five years, with the number of prosecutions being reduced substantially in 2021 as a result of the impact of the pandemic.

	2016-2017	2017-2018	2018-2019	2019-2020	2020-2021
Common Law (Cheating the Public Revenue)	144	113	127	79	19
Criminal Law Act 1977 { 1(1) } (Conspiracy to Cheat the Public Revenue)	9	13	49	27	1
Taxes Management Act 1970 { 106A }	173	127	62	69	21
Value Added Tax Act 1994 { 72(1) }	228	184	161	129	48
Value Added Tax Act 1994 { 72(3)(a) }	100	65	69	33	18
Value Added Tax Act 1994 { 72(3)(b) }	17	1	0	1	0
Value Added Tax Act 1994 { 72(8) }	1	3	2	1	0
Value Added Tax Act 1994 { 72(11) of and paragraph 4(2) of Schedule 11 }	119	196	96	137	23

As we move beyond the pandemic, HMRC will have to deal with the backlog of cases built up during the last 18 months, together with the substantial amount of furlough fraud. In order to adequately take on tax crime, HMRC will need significant extra resources to ensure that those responsible for cheating the revenue are brought to justice.

Read the full briefing in PDF format here.

References[+]

References
↑1	See TaxWatch: Is Tax Avoidance Legal? https://www.taxwatchuk.org/is_tax_avoidance_legal/
↑2	Figures available from: https://obr.uk/download/october-2021-economic-and-fiscal-outlook-supplementary-fiscal-tables-receipts-and-other/
↑3	Jon Ungoed-Thomas and Toby Helm, Osborne’s ‘Google tax’ on overseas profits now raises zero revenue, Treasury reveals, The Observer, 31 October 2021 https://www.theguardian.com/politics/2021/oct/31/osbornes-google-tax-on-overseas-profits-now-raises-zero-revenue-treasury-reveals
↑4	HM Revenue and Customs, Annual Report and Accounts 2020 to 2021, p.52
↑5	HM Revenue and Customs, Guidance: Profit Diversion Compliance Facility, 10 January 2019, https://www.gov.uk/government/publications/hmrc-profit-diversion-compliance-facility/profit-diversion-compliance-facility
↑6	HM Revenue and Customs, Call for evidence: tackling disguised remuneration tax avoidance summary of responses, 23 March 2021, para 2.34 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/972080/Call_for_evidence_tackling_disguised_remuneration_tax_avoidance_-_summary_of_responses.pdf
↑7	Anonymised Disguised Remuneration Case Studies, available from: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/784201/Appendix_2___Anonymised_Disguised_Remuneration_Case_Studies.pdf

Budget 2021 – Four tax takeaways

2nd November 2021 by Alex Dunnagan

On Wednesday 27 October, the Chancellor Rishi Sunak unveiled his Autumn Budget 2021.

This budget was billed as one looking ahead to the “post-Covid” era, with a lot of focus on growth and the economic outlet. Numerous news outlets have covered the major stories coming out of the budget. At TaxWatch, what we have scrutinised is the perhaps lesser covered tax stories.

1 – Additional Compliance Work

An additional £292m across three years was announced for HMRC, with the goal of ‘bearing down on tax avoidance and evasion’.

The Taxpayer Protection Taskforce, announced in the Spring 2021 budget, is to see an additional £55m of funding next year. This is in addition to the previously announced £100m investment. It is not clear whether this £55m is part of the aforementioned £292m.

This taskforce will seek to recoup money wrongly claimed from pandemic support schemes, such as furlough.¹ The spring announcement on the Taxpayer Protection Taskforce stated that it will be staffed by “HMRC operatives” suggesting that staff are to be moved from elsewhere within HMRC.

The March 2021 Budget revealed that the extra spending on compliance would actually lead to less in tax being collected year on year until 2023-24, with one reason given being “impacts on compliance yield reflecting reprioritisation (including to respond to COVID19).”²

Budget 2021 policy decisions (£ million)

HMRC is set to see a “£0.9 billion cash increase over the Parliament to £5.2 billion in 2024-25”. Spending Review 2020 revealed that £1bn would be going to HMRC “to reform and enhance the UK customs system after the end of the transition period, including investment in vital physical and IT infrastructure and additional support for UK traders”.³ So while the £0.9bn cash increase sounds impressive, it’s worth bearing in mind that the vast majority of this will not go towards tackling tax fraud, but rather to deal with the additional complexities surrounding the UK’s departure from the European Union.

2 – Clamping down on promoters of tax avoidance

The budget also revealed that the forthcoming Finance Bill 2021-22 will feature legislation for further measures to clamp down on promoters of tax avoidance.

Section 5.74 of the budget announced that the measures will:

allow HMRC to freeze a promoter’s assets so that the penalties they are liable for are paid
deter offshore promoters by introducing a new penalty on the UK entities that support them
provide for the closing down of companies and partnerships that promote tax avoidance schemes, and
support taxpayers to steer clear of avoidance schemes or exit avoidance quickly, by sharing more information on promoters and their schemes.

In September 2020 we submitted evidence to HMRC as part of their consultation “Tackling Disguised Remuneration Tax Avoidance”,⁴ calling for those who sell disguised remuneration tax avoidance schemes to be investigated for tax fraud.

These proposed measures stop short of HMRC applying the full criminal law to prosecute those who design, operate, and promote dishonest tax avoidance schemes. TaxWatch’s view remains that the best deterrence is to put those who promote fraudulent schemes before a jury.

3 – R&D reliefs need to be made ‘fit for purpose’

Plans to increase R&D investment to £22bn per year, as outlined in the March 2020 budget, have been pushed back from a targeted May 2024 to 2026-27, with the government acknowledging that current R&D reliefs are not fully “fit for purpose.”

It has long been known that the cost of the R&D expenditure credits is far greater than what was originally anticipated, with a February 2020 NAO report highlighting that the actual costs were more than double those forecast.⁵

Costs compared with forecast for the research and development (R&D) expenditure credit

Sunak stated in his speech that:

“Companies claimed UK tax relief on £48bn of R&D spending. Yet UK business investment was around half of that, at just £26bn. We’re subsidising billions of pounds of R&D that isn’t even happening here in the United Kingdom. That’s unfair on British taxpayers.”

While it’s correct that there are issues with R&D reliefs, the cause of the problem isn’t necessarily research conducted abroad, but whether or not the research is conducted at all.

The total number of claims for R&D tax credits for 2019-20 was 85,900, with £7.4bn in relief claimed on £47.5bn of expenditure. The ONS estimates that businesses only carried out £25.9 billion of privately-financed R&D in the UK in 2019.⁶ Overseas expenditure can qualify for tax credits, and HMRC previously produced an initial estimate of £4 billion to £7 billion for overseas expenditure in the year ending March 2018. It is highly unlikely that the amount of overseas expenditure in 2019-20 was £21.6bn, the difference between UK R&D and total R&D claimed. Rather, the data points to large scale abuse.

The government said it would set out separate plans to combat abuse of R&D tax reliefs “later in the autumn”.

4 – Climate change given short shrift

With the UK hosting the 2021 United Nations Climate Change Conference, known as COP26, it seemed a little odd that there was so little on climate in the budget. A week prior to the budget, the UK Government had published its Net-Zero Strategy,⁷ with talk of “Removing dirty fossil fuels from the global economy.”

The chancellor failed to use the word “climate” even once during his budget speech. He did, however, reveal there would be a cut to the rate of air passenger duty on domestic flights, along with the cancellation of the planned rise in fuel duty.

Image by mohamed Hassan from Pixabay

1 Fraud and the Coronavirus Job Retention Scheme, Taxwatch, 12 May 2021, https://www.taxwatchuk.org/furlough_fraud/

2 Budget 2021, HM Treasury, March 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/966868/BUDGET_2021_-_web.pdf

3 Spending Review 2020, HM Treasury, 15 December 2020, https://www.gov.uk/government/publications/spending-review-2020-documents/spending-review-2020

4 TaxWatch to HMRC: Prosecute sellers of disguised remuneration schemes, TaxWatch, 02 October 2020, https://www.taxwatchuk.org/hmrc_loan_charge_fraud/

5 The management of tax expenditures, National Audit Office, 14 February 2020, https://www.nao.org.uk/wp-content/uploads/2020/02/The-management-of-tax-expenditure.pdf

6 Research and Development Tax Credits Statistics, HMRC, September 2021, https://www.gov.uk/government/statistics/corporate-tax-research-and-development-tax-credit/research-and-development-tax-credits-statistics-september-2021

7 Net Zero Strategy: Build Back Greener, Department for Business, Energy & Industrial Strategy, 19 October 2021, https://www.gov.uk/government/publications/net-zero-strategy

Video Games Tax Relief – 2021 Update

14th October 2021 by Alex Dunnagan

Key facts and figures:

£180m paid out in VGTR last year

48% increase in VGTR on the previous year

55 claims for over £500,000 represent 87% of the total value of payments

Video Games Tax Relief (VGTR), a form of subsidy to the UK videogames industry, has seen a 48% increase in the past year. Originally forecast to cost £35m a year, VGTR cost £180m in the 12 months to March 2021.

The reason given for the increase is “large payments for a small number of very high-budget games and underlying growth in the value of claims1”. The intent of the scheme is to promote British culture, and to foster innovation amongst small independent games developers through subsidies. The reality however is that this scheme is increasingly being captured by large, successful, multinationals.

In 2020-2021, 55 claims of more than £500,000 equated to 16% of all claims made. These claims were worth £156m, or 87% of the total amount paid out – again an increase from last year, where claims over half a million were worth 80% of the total.

While almost half of these claims were for under £50,000, these claims are only responsible for around 2% of the total amount paid out.

It would be unfair to say that the claims paid to multinationals has a negative effect on independent, British SMEs, as it appears that the pot of money available is effectively limitless, with costs increasing year on year.

Figure 1: Amount of video games tax relief paid (£ million, receipts basis) 2014-15 to 2020-21

In order to access VGTR games must pass a test and be certified as ‘Culturally British’ by the British Film Institute (BFI). Previous TaxWatch research has demonstrated how the ‘cultural test’ administered by the BFI is meaningless, as games are able to gain subsidies regardless of the subject matter, and even if they are produced overseas.2

The Guardian revealed in 2019 how four large multinationals – WarnerMedia, Sony, Sega, and Rockstar – had claimed close to half of all VGTR.3 In the past we have analysed the accounts of videogame multinationals, finding that regardless of whether or not they turn a pre-tax profit, the companies paid no corporation tax.4 VGTR is set up in a way whereby the scheme is almost bound to ensure that the UK games industry will not pay corporation tax.

Rockstar North, a UK based and American owned videogames developer responsible for the Grand Theft Auto Series, has in previous years been the largest beneficiary of VGTR. Their latest accounts, dated January 2020, revealed that the company claimed £37.6m in Video Games Tax Relief that year, taking its total to £80m since the scheme was introduced. Of the 1,110 VGTR claims made up until that point, Rockstar accounted for a quarter of all the relief, despite only making two games that qualify as ‘culturally British’.5

Companies House shows that Rockstar North’s accounts are over six months overdue, so we are unable to comment on how much money the American owned company has received in the most recent financial year.

Figure 2: Rockstar North accounts showing as overdue on Companies House. Image taken 13 October 2021.

So what?

The cost of this tax relief is increasing year on year, with just shy of 90% of the money going to games claiming over half a million. We have seen in the past how games such as Grand Theft Auto have claimed tens of millions.

In establishing the relief, the UK argued to the European Commission that British games were in decline, and that “culturally significant games may have production costs equal to global games but a significantly smaller market”.6 Seven years from the introduction of VGTR, questions need to be asked as to whether this is achieving its initial aim, creating culturally significant games and helping British developers, or is it a scheme gone awry, with hundreds of millions in taxpayer cash subsidising successful multinational enterprises?

1 The “growth in the value of claims” is likely regarding the fact that a company has two years to make or rectify a claim once a project is finished.

2Swedish goats, Japanese hedgehogs and Batman: the £324 million tax bung to the ‘culturally British’ gaming industry, TaxWatch, 18 November 2019, https://www.taxwatchuk.org/cultural_test_tax_relief/

3Revealed: global video games giants avoiding millions in UK tax, The Guardian, 02 October 2019, https://www.theguardian.com/games/2019/oct/02/revealed-global-video-games-giants-avoiding-millions-in-uk-tax-sony-sega

4Global Video Games Giants: Playing the system or paying their fair share?, TaxWatch, 20 November 2019, https://www.taxwatchuk.org/video_games_giants_tax_report/

5Rockstar takes the pot, TaxWatch, 19 January 2020, https://www.taxwatchuk.org/rockstar_2019_tax_relief/

6Commission Decision of 27.03.2015 on the state aid scheme SA.3619 (2013/C) (ex 2013/N) which the United Kingdom is planning to implement for video games, European Commission, 27 March 2014, https://ec.europa.eu/competition/state_aid/cases/248371/248371_1557990_171_2.pdf

Photo by Sigmund on Unsplash

US set to raise $8.5bn from four tech companies following global tax deal

7th October 2021 by Alex Dunnagan

New analysis from TaxWatch reveals how the US Government is set to be the big winner from increases in taxes on big tech arising from the global tax negotiations currently underway under the auspices of the G20/OECD.

In our latest research, we have analysed the gains that the US Government can expect from imposing a global minimum tax of 21% on Facebook, Google, Apple, and Microsoft. This would result in an extra $5.4bn in taxes from just these four companies, whereas we estimate the total additional tax these companies would pay in all other countries under Pillar One would be $2.5bn under the terms of the G7 agreement set out earlier this year.

The figure of 21% is used because the stated intention of the US Government is to impose a global minimum of 21% on companies headquartered in the US, regardless of the minimum level set through the OECD led process.

Furthermore, we find that the US Government would also benefit from the removal of tax incentives on royalties received by US parents from overseas operating companies (the Foreign Derived Intangible Income incentive, or FDII).

The removal of the FDII incentive is facilitated by the increase in global minimum taxation and therefore should be seen as a benefit of it.

We estimate that just four tech companies will see taxes increase in the US by $3bn per year as a result of the removal of the FDII.

Taken together, this means that the package of reforms will mean a yearly increase in US Tax of $8.4bn from just four companies, as against a benefit of $2.5bn shared between all other countries.

What is significant is that both the global minimum tax and the FDII only impact profits that arise from revenues made overseas, in countries like the United Kingdom where sales are made. The analysis therefore demonstrates that the G7 / OECD deal resolves the question of who gets to tax the offshore billions of tech companies decidedly in favour of the United States, with relatively little being distributed to the countries where these companies operate. This was not necessarily the outcome expected from the OECD led BEPS process, which had a stated goal of making tech companies pay a fair share in the countries where they operate.

The full report, ‘A Fair Distribution’, is available as a web page here, and as a PDF here. This research was featured in The Guardian as an op-ed by our Executive Director George Turner, available here.

TaxWatch calls for scrutiny over “sweetheart” tax deal between HMRC and GE

23rd September 2021 by Alex Dunnagan

The deal

TaxWatch has written to the Public Accounts Committee (PAC), the National Audit Office, and the Treasury Committee, requesting that inquiries be held into an out of court settlement between HMRC and General Electric (GE).

Following a lengthy tax dispute regarding a tax avoidance scheme that saw billions of dollars transferred around the world, it was revealed in the trade press on 15 September that the two parties had reached an out of court settlement, with HMRC settling for a deal that involved no cash payment and just £82m added to GE’s deferred tax charge, and agreeing that there had been no wrongdoing by GE.

GE revealed in their 2020 accounts that if HMRC were successful in their claim, they could face a liability of $1.1bn, before accounting for interest and penalties, stating:

The United Kingdom tax authorities disallowed interest deductions claimed by GE Capital for the years 2004-2015 that could result in a potential impact of approximately $1.1 billion, which includes a possible assessment of tax and reduction of deferred tax assets, not including interest and penalties.¹

Civil penalties for the deliberate non-payment of tax can be up to 100% of the tax owed, doubling the potential liability.

A GE spokesperson said the company is “pleased to have reached an agreement with the U.K. tax authority, resolving this dispute in its entirety with no fault attributed to either party.” The spokesperson added that “as part of the settlement, GE has agreed to a reduction of interest expense that results in a deferred tax charge in discontinued operations of about 10 percent of the potential impact previously disclosed in [its] filings.”² [emphasis added]

The All Party Parliamentary Group on Anti-Corruption & Responsible Tax took to Twitter to criticise HMRC, stating that “Sweetheart deals like this one see the taxpayer lose out on millions in lost tax revenue.” HMRC’s press office responded to the tweets, stating that “HMRC does not do sweetheart deals. All settlements must be fully in line with the Litigation and Settlement Strategy.”

Although HMRC are claiming that this is the best outcome they could have expected, given the seriousness of the allegations, the deal raises a number of questions as to how HMRC ended up settling for such a small amount.

The case

As detailed in our report, Around the world with $5bn, GE moved $5bn between the US, Luxembourg, the UK & Australia in just four days as part of a complex “hybrid arbitrage” tax avoidance scheme, that allegedly generated a tax benefit for GE in the UK of up to £760m over a period of 10 years.³ These multi-billion dollar transactions allowed GE to claim deductions against tax in three different jurisdictions – a so-called “triple dip” scheme.

The UK has long had rules in place to prevent these kinds of schemes from having any effect. However, in this case HMRC cleared the transactions and agreed that it would not apply anti-avoidance legislation after receiving assurances from GE that the structure was not designed to avoid UK taxation, and that any tax benefit arose in Australia. However, after receiving information from the Australian Tax Office, which revealed that GE had told the ATO that the scheme was designed to avoid taxation in the UK, HMRC started proceedings against GE in the High Court asking the court to annul the agreement on the ground that GE’s failure to inform them of the nature of the scheme amounted to misrepresentation. Although the allegations included doctored documents by GE, initially HMRC argued that GE’s failure to inform them of the nature of the deal amounted to an innocent misrepresentation. Later, HMRC sought to change their claim to allege fraudulent misrepresentation.

In April, HMRC suffered a setback in their case when the Court of Appeal found that the tax authority had run out of time to bring their claim under the Limitation Act 1980. HMRC applied to the Supreme Court for permission to appeal the decision of the Court of Appeal.

In support of HMRC, TaxWatch took the preliminary step to intervene in the case.⁴ TaxWatch’s submission argued that the Limitation Act excludes the recovery of taxes from time limits imposed under the act, meaning that HMRC is not prevented from bringing a claim based on an allegation of fraud in this case.

After considering HMRC’s application to appeal and TaxWatch’s submissions, in July the Supreme Court agreed to hear the case in a full hearing.⁵ But before the Supreme Court could hear the case HMRC and GE settled the substantive case out of court.

Unanswered questions

The deal raises serious questions about HMRC’s conduct in relation to this case. The Court of Appeal recently held that HMRC was not able to introduce the allegations of fraud in this case as the evidence they relied upon had been uncovered over six years ago. This issue would not have arisen in the first place if HMRC had alleged fraudulent misrepresentation at the start of proceedings when it inexplicably alleged only innocent misrepresentation.

Why did HMRC wait years before introducing their claim?

HMRC was appealing this decision to the Supreme Court, which had agreed to hear the appeal having taken into account submissions from TaxWatch in support of HMRC. TaxWatch had also applied to the Supreme Court for permission to intervene in the case to make submissions in the public interest on a point of law that would have enabled HMRC to introduce the allegations of fraud regardless of the outcome of its arguments with GE. HMRC was opposing our intervention, despite the fact that our intervention would benefit HMRC.

Why did HMRC agree to a settlement which exonerated GE before the appeal was heard?

The behaviour alleged by HMRC would clearly constitute a criminal offence if proved, so why was there no criminal investigation into the scheme? It emerged in the proceedings in the High Court that the matter was referred to HMRC’s Fraud Investigation Service three times but they failed to conduct a criminal investigation.

These kinds of settlements between large multinationals and HMRC have been the subject of intense controversy in the past, and following a highly critical report by the Public Accounts Committee in 2011, HMRC committed to more transparency and revised its Litigation and Settlement Strategy.⁶

Given the very large amount of money at stake in this case, and the broader consequences that this settlement may have for the tax system, we believe it is of the utmost importance that Parliament and the NAO reviews this settlement.

1GE 2020 form 10-K General Electric, pg 89, https://www.ge.com/sites/default/files/GE_AR20_AnnualReport.pdf

2HMRC Settles $1B General Electric Tax Fraud Lawsuit, Law360, 15 September 2021, https://www.law360.com/articles/1421663/hmrc-settles-1b-general-electric-tax-fraud-lawsuit

3Around the world with $5bn – HMRC’s allegations of tax fraud at General Electric revealed, TaxWatch, 04 August 2020, https://www.taxwatchuk.org/ge_hmrc_tax_fraud_allegations/

4TaxWatch intervenes in GE tax fraud case, TaxWatch, 21 May 2021, https://www.taxwatchuk.org/taxwatch_intervenes_ge_fraud/

5GE Tax Fraud Case to be heard by Supreme Court, TaxWatch, 28 July 2021, https://www.taxwatchuk.org/ge-tax-fraud-case-to-be-heard-by-supreme-court/

6Public Accounts Committee – Sixty-First Report, HM Revenue & Customs 2010-11 Accounts: tax disputes, Public Accounts Committee, 14 December 2011, https://publications.parliament.uk/pa/cm201012/cmselect/cmpubacc/1531/153102.htm

Undue influence by multinational corporations in the UK

23rd September 2021 by Alex Dunnagan

TaxWatch research has been published by Transparency International, looking at the UK’s reform of its Controlled Foreign Company (CFC) regime in 2012, which exempted some UK-based multinational companies from anti-tax avoidance rules. The research piece analyses potential lobbying through professional service providers, and the ‘revolving door’.

Controlled foreign company rules are an important feature of many tax systems around the world. CFC rules allow a tax authority to impose a corporate tax charge on the foreign subsidiaries of any multinational corporation headquartered in their country. This prevents multinational enterprises from moving profits into tax havens because any profits made by that company will be taxed in the headquarters jurisdiction, rather than at the tax haven rate.

This case study looks at the UK’s reform of their CFC regime in 2012, which was introduced following years of intense lobbying from the business community. The 2012 changes radically reduced the scope of the UK’s rules and facilitated the use of avoidance structures by UK-based multinational companies.

In 2019, these changes were found to be unlawful by the European Commission, which found they constituted State Aid.

The full report, ‘The Right Incentives? The risks of undue influence in tax policy’, was produced by Transparency International with the financial support of the European Union.

Photo by ben ullman from FreeImages

Tax Fraud Gap at least £15.2bn in 2020

16th September 2021 by Alex Dunnagan

An analysis of HMRC’s latest Tax Gap estimates by TaxWatch has found that the amount of tax lost to fraud in 2020 was at least £15.2bn.

The figures produced by TaxWatch are based on an evaluation of HMRC’s analysis of taxpayer behaviours underlying their annual estimate of non-compliance with the tax system.

HMRC attribute all non-compliance to eight behavioural categories: criminal attacks; evasion; hidden economy; avoidance; legal interpretation; non-payment; failure to take reasonable care; and error.

In their paper, The Tax Fraud Gap, published today, TaxWatch proposes an alternative categorisation of non-compliance based on the three behavioural categories defined in law: fraud, negligence, and honesty (which includes honest mistakes).

This categorisation would bring the figures presented by HMRC in line with the DWP’s categorisation of overpayments in the benefits system, which are simply categorised as arising from “fraud, official error, or claimant error”.

TaxWatch’s analysis of the definitions underlying HMRC’s behaviours finds that several arise from from fraudulent behaviour, specifically “Criminal Attacks – £5.2bn”, “Evasion – £5.5bn”, “Hidden Economy – £3bn” and “Avoidance – £1.5bn”. Taken together, these behaviours account for £15.2bn in tax losses, 43% of the entire Tax Gap.

Avoidance is included given HMRC’s particular definition of avoidance, which excludes tax planning and is limited to non-compliance arising from tax schemes that attempt to “exploit” the tax system through “contrived or artificial” transactions that have no commercial purpose other than to gain a tax advantage. This can be characterised as dishonest, or fraudulent behaviour on the part of professional advisors that design and market the schemes.

TaxWatch’s analysis also finds that some categories defined by HMRC will include a mix of both honest and fraudulent behaviour. In particular, the second largest category in the Tax Gap – Legal Interpretation (£5.8bn) – can include disputes that arise from either honest or fraudulent interpretations of tax law.

In addition, some forms of tax fraud, such as fraud in relation to profit shifting by multinational companies (Base Erosion and Profit Shifting, or BEPS) appear not to be included in HMRC’s Tax Gap, and fraud in relation to Covid-support schemes is not included at all.

This means that in reality, the amount of tax lost to fraud will be significantly more than the £15.2bn identified by TaxWatch and an estimate of at least £20bn would not be unreasonable.

Commenting on the figures, TaxWatch Executive Director George Turner said:

“HMRC’s presentation of their Tax Gap significantly underplays the amount of tax lost to tax fraud. Our analysis, which puts the tax lost to fraud at least £15bn, demonstrates that fraud is a significant problem in the UK and a much larger problem than many previously understood.

“HMRC regard the Tax Gap as an important part of their accountability to the public and Parliament. It is therefore vital that HMRC presents their analysis in terms that are understood by ordinary decent people.

“Presenting the tax gap as arising from either honest, fraudulent or negligent behaviour would significantly improve public understanding of tax non-compliance.”

The full report can be found as a web page here, and as a PDF here.

This research featured in Public Finance and The Guardian among others.

GE Tax Fraud Case to be heard by Supreme Court

28th July 2021 by Alex Dunnagan

In an order dated 8 July 2021 The Supreme Court has granted permission to HMRC to appeal a decision of the Court of Appeal preventing the tax authority from making allegations of fraud against GE in relation to an ongoing tax dispute.

A previous decision from the Court of Appeal found that the allegations made by HMRC were made too late to be considered by the court.

TaxWatch made submissions in support of HMRC’s application for permission to appeal, arguing that there is no time limit on making allegations of fraud in relation to agreements reached between HMRC and companies like GE in relation to taxes.

After considering HMRC’s application to appeal and TaxWatch’s submissions, the Supreme Court has agreed to hear the case in a full hearing.

TaxWatch will now make a formal application to intervene in the case to make submissions in the public interest in the hearing.

Total value of taxes, penalties and fines HMRC is seeking from GE is worth over $1bn

Commenting, Executive Director of TaxWatch George Turner said:

“The dispute between HMRC and GE involves represents a watershed moment. It is the first time that the tax authority has alleged that a tax avoidance scheme operated by a major multinational relied on fraud in order to work.

“If HMRC are successful in making their case, then it will represent a complete change in the way our government approaches tax avoidance by large multinationals.

“For that reason there is an obvious public interest in HMRC’s case being heard and it would be wrong to prevent them from making their case when no legal barrier for bringing fraud claims exists with regard to tax disputes.

Background to the case

The case, IGE USA Investments Limited and Others v Commissioners for HMRC involves a dispute between HMRC and GE on whether HMRC is allowed to rescind an agreement with the US-headquartered multinational due to an alleged fraud committed by GE.

The agreement meant that HMRC would not apply anti-avoidance rules to a set of financial transactions entered into by UK based subsidiaries of GE, on the basis of reassurances granted by the company that the transactions were genuine commercial transactions and not part of an avoidance scheme.

However, HMRC now allege that employees of GE fraudulently misrepresented the true nature of the transactions to HMRC and knowingly withheld information that would have revealed details of the avoidance scheme.

The tax authority is now seeking to rescind the agreement and apply the anti-avoidance rules to the transactions. GE have stated in their accounts that if HMRC prevail in their arguments it would be liable for “approximately $1 billion… not including interest and penalties.”

In April, HMRC suffered a set-back in their case when the Court of Appeal found that the tax authority had run out of time to bring their claim under the Limitation Act 1980. HMRC applied to the Supreme Court for permission to appeal the decision of the Court of Appeal.

TaxWatch’s submission, which is different from HMRC’s, argues that the Limitation Act excludes the recovery of taxes from time limits imposed under the act, meaning that HMRC is not prevented from bringing a claim based on an allegation of fraud in this case.

If accepted, TaxWatch’s arguments have wider significance as HMRC frequently enter into agreements with multinational enterprises over tax.

If this appeal is successful, then the allegation of fraud levelled by HMRC against GE will be heard in an open court. It is thought that this would be the first time a major multinational corporation will have had to answer allegations of fraud regarding a tax avoidance scheme in a public court in the UK.

With a High Court hearing set for October 2021 on the substantive issue of whether HMRC can rescind the 2005 agreement and apply the anti-avoidance rules to the transactions, the case will be heard regardless of whether or not the allegation of fraud can be heard. However, without the fraud element HMRC’s chances of winning the case are weakened, putting at risk a huge sum of money.

Public interest interventions are common in various areas of law, such as human rights and environmental law. However, we believe that this is the first intervention made by an NGO concerning UK tax law.

We previously published a report, Around the world with $5bn, which looked at HMRC’s allegations of tax fraud.

Tech giants undermine African countries by failing to collect VAT

12th July 2021 by Alex Dunnagan

African countries are missing out on significant tax revenues because multinational tech giants are failing to collect and pay VAT on services, according to new research.

A new report published by TaxWatch finds that Microsoft, Google and Facebook are not collecting VAT on sales made to customers in most African countries, even in some countries where they have a local office.

The companies say that they will only collect VAT and sales taxes in countries that have levied specific taxes on digital products, claiming that it is up to the customer to pay any taxes due.

However, analysis from TaxWatch shows that these companies should be required to register for VAT under existing VAT rules in many African countries if they make significant sales.

VAT, a tax on the final consumption of goods and services, is an important source of revenue for tax authorities. An analysis from the OECD shows that on average VAT accounts for 30% of tax revenues in Africa, as opposed to taxes on individuals, which make up just 15.4%. Taxes on corporations account for 18.6% of tax revenues on average.

Since 2013 a number of African countries have changed their laws so VAT is collected on products, such as advertising, sold to customers.

The report does not make any estimate of the amount of money that could be raised if digital companies registered for VAT, as this would require detailed knowledge of the amount of sales made in each country. However, evidence from countries that have enacted a digital sales tax shows that the gains could be significant.

In 2014 South Africa became one of the first countries in the world to introduce specific legislation on VAT and digital services. The South African Revenue Service has said that it has collected an additional R600m a year since the introduction of the rules.

TaxWatch Executive Director, George Turner, said: “Big tech has for years traded on the myth that because they invoice their clients from offshore, they somehow have no obligation to pay any taxes. Our research demonstrates that this simply is not the case. If these companies have made significant sales in any country that levies VAT, then they should register to pay VAT locally.

“Google, Facebook and Microsoft wouldn’t get away with such an approach in Europe or North America anymore.

“I would encourage tax authorities across the continent to cast a close eye on the activities of these companies in their jurisdiction, and pursue them for any VAT payments that should have been made. This is likely to be a far more significant issue than any corporate tax avoidance engaged in by tech companies, as VAT makes up a far higher proportion of tax revenues than corporate profits.”

When questioned on the findings of this report, a Microsoft spokesperson stated: “Microsoft is fully compliant with all local laws and regulations in every country in which we operate. We serve customers in countries all over the world and our tax structure reflects that global footprint.”

Google did not respond to our requests for comment.

The report is available on our website here and in PDF here.

This research was featured in Law360 and PQ Magazine.

Will Facebook, Google, eBay and Amazon pay more in UK tax under the new global tax deal?

8th June 2021 by Alex Dunnagan

TaxWatch analysis shows that package agreed at the G7 would lead to a tax cut for tech companies subject to the Digital Services Tax

On Saturday 5th June G7 finance ministers announced an agreement on changing the tax rules for global multinational companies. The deal was a significant change to the current global tax rules, introducing unprecedented restrictions on the use of tax havens, and a new system of apportioning profit made by large multinationals between countries.

Talks on reforming the global tax system started almost 10 years ago in the UK at the Loch Erne G8 conference. The process was set up in response to a number of scandals that had broken about the use of tax havens by global tech companies in particular. For that reason much of the focus of reform has looked at the tax affairs of global technology giants such as Facebook, Amazon and Google.

In this note we set out our analysis of the consequences of the deal for the UK Tax liabilities of the largest global technology companies that would be covered by the Digital Services Tax (DST).

Our analysis is based on the known shape of the deal as announced by the G7 on Saturday 5th of June. The terms of the deal may still change, and some details still need to be negotiated and are as yet unknown.

In order to analyse the position of the companies in our study we have relied on historical data and had to use some estimates of revenues generated in the UK. For these reasons the figures we have produced should not be taken as the definitive answers to how much tax liabilities will increase under the deal. However, we believe our research provides a strong foundation for an analysis.

We have used data from 2019, as that is the latest year that UK accounts are available for the companies in our study.

We find that the tax liabilities for Amazon, Facebook, Google and eBay in the UK arising from the so called Pillar One proposals are below or at the same level as their current UK tax liabilities. This means that if the new liabilities from Pillar One are additional to current tax liabilities these companies will see their tax liabilities increase. If the Pillar One allocation is not additional, but offset against existing liabilities, there will be very little change to the tax liabilities of these companies in the UK.

However, when looked at as a whole, the package of reforms announced in the G7 Finance Ministers and Central Bank Governors Communiqué could result in very substantial tax cuts for some digital companies due to agreement to remove the Digital Services Tax, which would raise significantly more from these companies than any new liabilities faced under the Pillar One proposals.

No additional revenues would be raised from tech companies in the UK under the Pillar Two proposals.

Pillar Two

The element of the deal that has attracted the most attention is the so-called Global Minimum Tax Rate. This will see countries impose a minimum 15% tax rate on the profits of multinational enterprises. The global minimum will be imposed by the home nation of a multi-national enterprise. This means that if there were any liabilities arising from Pillar Two on tech companies, they would be paid to the United States Government.

Pillar One

Under the Pillar One proposals companies see a portion of their global profits re-allocated to countries where they have a market where they are charged at the local rate.

The allocation formula set out is that a company gets an allowance of 10% of their revenues. Any profit above this is considered to be a “super-profit” and 20% of these super profits are reallocated to countries where they operate.

Currently the proposal is that Pillar One would only apply to one hundred of the largest companies in the world.

We have sought to analyse what this would mean for the companies in our study based on their 2019 accounts, the latest year for which we have full data. We have then allocated the distributable super profit to the UK based on the UK market share these companies have from our estimates undertaken for previous analysis.

We have then compared the tax charge that would arise in the UK from these allocations to the current tax charge these companies have in their UK companies. Again this figure is taken from our analysis of profit shifting by big technology companies.

For Amazon, we have limited the analysis to Amazon Web Services. This is because Amazon as a whole falls out of Pillar One due to its profit margin being below 10%. However, there is an idea being considered to apply Pillar One to particular business segments within large companies. Amazon Web Services, which in 2019 had revenues of $35bn and accounted for over 50% of Amazon’s global profits would likely qualify for Pillar One in itself if it was agreed to apply Pillar One to individual business segments.

Pillar One proposals 2019 analysis	eBay	Amazon (AWS only)	Google	Facebook
Global revenue	$8,636,000,000	$35,026,000,000	$161,857,000,000	$70,697,000,000
Global profit margin	20.25%	26.27%	24.48%	35.10%
“super profit” (margin -10%)	$885,400,000	$5,698,400,000	$23,439,300,000	$17,742,300,000
20% of super profit	$177,080,000	$1,139,680,000	$4,687,860,000	$3,548,460,000
UK portion of total sales	15.00%	6.25%	9.00%	5.45%
UK portion of super profit	$26,562,000	$71,207,147	$421,907,400	$193,406,303
Exchange rate on balance sheet date	0.75	0.75	0.75	0.75
UK Pillar One charge (@19%)	£3,803,864.07	£10,197,361.22	£60,420,088.81	£27,697,134.56
UK current tax charge	£5,260,000	£14,582,000	£58,987,000	£40,049,000

The Digital Services Tax

The UK Digital Services tax was first announced in 2018 and came into effect in April 2020. The tax applies to the UK sourced revenues of large multi-national companies providing social media services, search engines or online market places. The tax is levied at the rate of 2% on revenues above £25m, with a discount for any corporation tax paid.The tax is counted as a business expense, and so deductible against revenues for the purpose of working out profit for corporation tax liabilities. This means that if a company books their revenue in the UK, they will see a reduction in their corporation tax bill as a result of the DST.

The purpose of the DST was to target companies that the government determined were not paying a fair share of tax in the UK. The then Chancellor Phillip Hammond said of the DST in his Budget 2018 speech – “It is only right that these global giants, with profitable businesses in the UK, pay their fair share towards supporting our public services.”¹ It was always intended as a stop-gap ahead of a global deal on international tax reform.

The communiqué released by the G7 Finance Ministers and Central Bank Governors states that “We will provide for appropriate coordination between the application of the new international tax rules and the removal of all Digital Services Taxes [emphasis added], and other relevant similar measures, on all companies.”²

The removal of the UK DST is therefore part of the package of reforms announced by G7 ministers. The impact of removing the DST must therefore be considered when analysing the proposals.

We have tried to estimate the UK DST that would be placed on eBay, Amazon, Google and Facebook, using our previous work on looking at the sales these companies make in the UK.

For Amazon, the DST would only apply to the fees generated from sellers on the Amazon Marketplace. The Amazon 10-K disclosed that in 2019 Amazon made $54bn in fees to third party sellers. To estimate the UK portion of these fees, we have applied the percentage of Amazon’s total revenues that come from the UK which can be derived from their 10-K form to their disclosed figures for third party seller services.

Both Facebook and eBay book a substantial amount or all of their fees through a UK company. This means that the DST would be an allowable expense to deduct from their pre-tax profits and they would get a discount against their corporation tax liability arising from the DST. We have tried to account for this in our calculations of the total tax liability arising from the DST.

Our analysis shows that for every company that is subject to the DST, the Pillar One proposals would lead to substantially less money being raised in taxation in the UK. If the UK therefore goes forward with the removal of the DST, as the G7 communiqué strongly suggests it will, the package of reforms will lead to a net loss of tax in the UK from eBay, Amazon, Google and Facebook. While not the only companies likely to see a UK tax reduction as a result of the removal of the DST, these four are almost certainly the largest. Between them, based on 2019 revenues, these multinationals look set to pay £232.5m less in tax than they would under the DST.

DST 2019 analysis	eBay	Amazon (Marketplace only)	Google	Facebook
UK Revenues	$1,323,000,000	$3,359,046,970	$14,567,130,000	$3,853,290,000
£/$ rate	0.75	0.75	0.75	0.75
UK DST @2%	£19,443,458	£50,135,685	£219,091,036	£58,086,111.84
Discount on CT for UK booked sales	-£3,789,257	£0	£0	-£8,213,543
Total DST	£15,654,201	£50,135,685	£219,091,036	£49,372,568
UK Pillar One charge	£3,803,864	£10,197,361	£60,420,089	£27,697,135
Benefit from removing DST	£11,850,336.64	£39,938,323.60	£158,670,947.00	£22,175,433.80
Reduction from removing DST	75.70%	79.66%	72.42%	43.90%

Conclusions

The removal of the digital services tax as part of the agreement reached by the G7 creates significant winners and losers. Companies that are subject to the DST will all see a substantial taxcut arising from the G7 proposals.

This is because in all cases the DST liability is more than any increase in taxes under the Pillar One proposals.

There are some companies that will receive a particular benefit, being companies that are too small to fall under Pillar One, but would have been subject to the DST. This includes smaller social media platforms and online marketplaces.

However, the UK DST is narrowly defined and there will also be companies that do end up paying more in UK tax if they fall under the new Pillar One rules and were not part of the DST regime.

One key issue that needs to be addressed by negotiators is whether corporation tax currently being paid in a jurisdiction will count towards any liability arising under Pillar one. If it does, then all of the companies in our study will not see any significant change in their corporation tax liability in the UK arising from the agreement.

Detailed methodologies

Facebook

In order to estimate Facebook’s real revenues in the UK, we looked at Facebook’s average revenue per user (APRU), which is published in a chart, broken down by region, appended to the company’s US stock market filings. We then took the mid-point between the US APRU and European APRU basing this calculation on the assumption that the UK would be at the top end of the European APRU range, but less than the US. Using the online tool Napoleon Cat, we calculated an average of 42,000,000 Facebook users in the UK for 2019.

On the basis of these numbers we estimate Facebook’s revenues from the UK to be £2.9bn in 2019.

Facebook’s US 10-K shows a pre-tax margin of 35%.

Facebook bills larger UK clients via its UK company. As a result it can deduct a portion of its DST from its revenues before corporation tax is applied. We calculated that this would have led to a £8.2m discount on 2019 corporation tax liabilities at Facebook UK. This results in a total DST impact of £49.4m.

With the new Pillar One proposals, the amount owed would be £27.7m. The removal of the DST therefore results in a net tax cut of of £22.2m based on 2019 figures.

Google

Until 2016 Google reported the revenues it made from the UK in its US 10-K filing. On average, around 9% of Google’s global revenues came from the UK between 2014 and 2016. We applied this average figure to Google’s 2019 global revenues to estimate the revenues generated from the UK in 2019.

Based on 2019’s revenues, Google would stand to pay £219m in DST.

With the new Pillar One proposals, the amount owed would be £60.4m – a tax cut of £158.7m.

Should the percentage of Google’s global revenues arising from the UK have decreased since 2016, the result would be the same. The DST would remain higher than the pillar one charge. The proposals represent a tax cut for Google.

eBay

The online marketplace eBay launched in the UK back in 1999. eBay’s 10-K shows a global pre-tax margin of 20%, and UK revenues of £997,172,883 for 2019.

All of eBay’s fees are earned via a UK company, which means they would be able to deduct the DST from their taxable profit. This would result in a £3.8m discount leading to a total DST impact of £15.7m based on 2019’s revenues.

With the new Pillar One proposals, the amount owed would be £3.8m – a taxcut £11.9m.

However, it is possible that eBay would not fall into Pillar One, as it is much smaller than Facebook, Google and Amazon, and may not end up being one of the world’s largest, most profitable companies. If that was the case than the package of reforms would be of even greater benefit to the company.

Amazon

Amazon’s 10-K shows a global pre-tax margin of 5%. As such, it would not qualify for Pillar One, which only bites when a company has a profit margin of more than 10%.

However, Amazon Web Services, which accounts for more than 50% of Amazon’s pre-tax profits, has a margin of 25%, and so could qualify if the proposals applied to business segments within companies.

With regards to the DST, this would only apply to Amazon’s fees to third party sellers using its platforms.

Amazon publishes its total revenues from the UK market in its 10-K. It also publishes the total fees it generates from 3rd party sellers, and total revenues and profits at AWS.

We applied the proportion of Amazon’s business that takes place in the UK (6.25%) to AWS’s profits and fees generated from 3rd party sellers to calculate the DST liability and the pillar one liability for the UK.

Based on 2019’s revenues, Amazon would stand to pay £50.1m in DST.

With the new Pillar One proposals, the amount owed would be £10.2m – a taxcut of £39.9m.

This analysis is available as a PDF here.

1 Budget 2018: Philip Hammond’s speech, Gov.uk, 29 October 2018, https://www.gov.uk/government/speeches/budget-2018-philip-hammonds-speech

2 G7 Finance Ministers and Central Bank Governors Communiqué, Gov.uk, 05 June 2021, https://www.gov.uk/government/publications/g7-finance-ministers-meeting-june-2021-communique/g7-finance-ministers-and-central-bank-governors-communique

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