Editorial: Multinationals must pay their share of UK taxes

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Tax arrangements that, while legal, allowed comedian Jimmy Carr to slash his contributions to the Exchequer were judged by the Prime Minister to be "morally wrong". The contortions of multinational companies – the service subsidiaries, the intra-group debt financing, the "double Irish" – are no less so.

Take Starbucks, for example. The Seattle-based coffee chain has paid just £8.6m in British corporation tax over 14 years, and none at all for the past three, despite turnover estimated at £3bn. The company says that an over-aggressive expansion strategy absorbed all sales revenues, pushing it into the red and out of range of HM Revenue & Customs. But the confusion of executives having talked to investors of UK profits – now explained with reference to "royalties" arrangements with the European arm in the Netherlands – has left the group under a cloud.

The good news is that the furore – justified or not – has prompted the House of Commons' influential Public Accounts Committee to investigate. Not a moment too soon. By some recent estimates, as much as £11bn may be missing from the public coffers thanks to foreign companies' avoidance strategies, typically using complex business structures to divert revenues to lower-tax jurisdictions elsewhere. Starbucks joins an illustrious list. Amazon UK acts as an order fulfilment arm for its parent in Luxembourg; Google UK is an "agent" of the US giant's subsidiary in Ireland; Facebook UK also sends its revenues to Ireland. All pay negligible British tax as a result. Similar allegations also dog eBay and Apple.

A central question for the PAC inquiry is how far HMRC itself is at fault, hence yesterday's appearance from chief executive Lin Homer. But to concentrate on the failings of the taxman is to miss the broader point. As with Mr Carr, there is no suggestion of law-breaking here, and the time and cost involved in HMRC pursuing complex but legal arrangements is both disproportionately high and unlikely to prove successful.

While the manoeuvres of Amazon et al may be within the letter of the law, they are most certainly against its spirit. The divergence used not to matter much. Looking for ways to minimise tax liabilities – either personal or corporate – was, until recently, normal practice and widely accepted as such. In the aftermath of the financial crisis, however, with austerity, debt and recession weighing heavy on the public purse, the moral climate is changing.

The power of public censure should, therefore, not be underestimated, particularly when so many of those being named and shamed present themselves as models of ethical, modern business (Google's company motto, after all, is "don't be evil"). But reputational pressure alone cannot solve the problem. And as ever more businesses use the internet as their shop front, and rely on intellectual property rather than physical assets, the question of geographical location will become thornier still.

The only solution is to change the rules. It is welcome, then, that the Chancellor and his German counterpart used last weekend's G20 meeting to call for international co-operation on the issue. Similar efforts already under way in Europe also warrant Britain's full support. But reform is needed at home, too. David Cameron has not lambasted corporations as roundly as he did Mr Carr; he has said only that he is "not happy" and called on HMRC to "look carefully" at individual cases. In fact, it is for George Osborne to look carefully at the system as a whole, to find a fairer way to assess profits that are generated in Britain – and to tax them accordingly.

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