Royalties and interest on debts, set against profits, are allowing companies to bypass the UK taxman
Most of the cash that bypasses the UK tax authorities en route to a tax haven leaves the country via a royalty payment or as interest payments on a debt.
It is legal for Google to charge a royalty to all its subsidiaries and for that royalty to roughly equal the profits that would otherwise have been generated by the subsidiary. A whopping royalty payment means no profits – so no tax to pay.
If the subsidiary owes its parent money for the original set-up costs, then this debt interest is also offset against profits and tax.
Hundreds of billions of pounds have found their way to tax havens after being siphoned out of subsidiary companies using one or both of these methods.
The figures dwarf the amount of money lost through fraud, tax evasion (illegal), and tax avoidance (legal) by the super-rich.
Google, Amazon and Apple use these methods via offices in Ireland. Others, such as McDonald’s, use Switzerland. The effect is the same.
But the OECD now believes it can bring the multinationals to account. If the appetite exists among the G20 nations, then, the OECD says it can use intellectual firepower to shoot down these schemes.
Pascal Saint-Amans, the OECD’s head of tax, says it is possible to write rules that limit excessively high royalty payments. He also envisages rules that force companies to charge royalties for software and services from the place where they were developed. In the case of Google, Amazon and Apple, that would be California, not Ireland.
With two barrels from his policy shotgun, royalty payments could be dispatched to the tax cemetery. (If that sounds a little far fetched, rules currently under discussion would at least limit their ability to reduce taxable profits.)
Saint-Amans says multinationals which set up subsidiaries and load them with debt, ostensibly for set-up costs and services provided by the head office, can also be governed by rules that prevent firms imposing this excessive burden.
He warned companies using financial tricks to create a debt in one country and squirrel away the interest to a tax haven, that their room for manoeuvre could be severely limited.
A debt is useful, as the private equity industry demonstrated, to offset against tax. But how to limit the tax on the interest payments to the parent company? City boffins found they could turn the debt into a share and thereby turn the surplus cash into a dividend – which in a tax haven is not taxed.
Saint-Amans is confident the G20 can clamp down on both wheezes and that there is the willpower to carry it through.
“We put an end to bank secrecy in 2009, we can do this too,” he said.