US multinationals owe £4.6bn in unpaid tax

HMRC is chasing US-based multinationals for £4.6bn in underpaid tax last year, up a third since 2017, as the clampdown on companies diverting profits overseas ramps up

The tax gap was up 35% from £3.4bn in the previous year, according to research from Pinsent Masons, which calculates US-based multinationals account for 17% of the total amount of tax that HMRC was targeting last year, with a total of £27.8bn in underpayments by large corporates.

According to its analysis, Swiss-based businesses represented the second highest source of underpaid tax at 6%, followed by Ireland (3%) and France (2%). 

The diverted profits tax (DPT), set at 25%, is designed as an incentive to groups to adjust their transfer pricing, as paying more corporation tax at the lower rate of 19% can eliminate a DPT liability.

DPT raised £388m in 2017-18, against an estimate of £360m forecasted when the tax was introduced.

Pinsent Masons says multinational technology groups have been a focus for HMRC’s diverted profits initiatives. This is because digital business models enable the company to generate revenues in places where it has little physical presence and therefore, under current international tax rules established in a pre-digital era, a limited tax liability. 

Jason Collins, partner at Pinsent Masons, said: ‘HMRC is under enormous pressure to collect extra revenue and that is leading to more pressure on businesses both from domestic and foreign authorities.

‘Often the large amount HMRC initially believes has been underpaid boils down to basic misunderstandings with businesses and past experience is that HMRC will only collect half the amount it initially sets out.

‘It is not just multinational businesses on HMRC’s radar - the affairs of all large businesses are under growing scrutiny. The amount of tax HMRC thinks was underpaid last year was a record high and it will be looking to act on this.’

HMRC has opened a new 'profit diversion' compliance facility that gives businesses the opportunity to restructure cross-border arrangements that divert profits overseas and pay back any tax that they owe.

If a business makes a disclosure, then they will face lower penalties and will not be subject to investigation. Penalties could be up to 30% of the tax that HMRC considers is owed and up to 100% in cases of fraud.

Pinsent Masons said that HMRC already has a 'hit list' of businesses it suspects are diverting profits and intends to issue 'nudge letters' to those it has identified as non-compliant.

Collins said: ‘Although making a disclosure under HMRC’s facility can be time consuming for businesses as it means carrying out an intensive investigation and preparing a detailed report, this is not on the same scale as the cost and disruption caused by a full-blown HMRC investigation.

‘HMRC is already putting a huge amount of resource into counteracting profit diversion. No business operating cross-border to a significant extent can afford to be complacent.’

Digital services tax

As part of its efforts to increase the tax paid by technology groups, the UK government has proposed a new digital services tax (DST) which will come into force in April 2020. DST is a 2% tax on the revenues of businesses that are considered to derive significant value from the participation of their users, including search engines, social media platforms and online marketplaces, many of which are also US multinationals.

Collins said: ‘The implementation of DST is fraught with difficulties, like how a business works out what proportion of its revenues are linked to the participation of UK users when those users are not paying to use the platform and some will be much more active than others.

‘DST is only intended to be a temporary tax, until the OECD can come up with a solution which gets international buy-in. It would be much better if the UK and the other countries pressing ahead with their own measures, held fire until an internationally agreed solution emerges.’

The OECD intends to reach a solution by the end of 2020.  France, Italy, Spain and Austria are all proceeding with their own measures for a 3% tax on the revenues of certain digital companies.

Pat Sweet

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