George Osborne and Wolfgang Schäuble, the German finance minister, said that international action was needed to prevent large companies from "profit shifting" their taxable income to jurisdictions with more lenient corporation tax regimes. They called on colleagues to back work on identifying possible gaps in international tax standards, currently being carried out by the Organisation for Economic Cooperation and Development (OECD).
"Britain and Germany want competitive corporate tax systems that attract global companies to our countries, but also want global companies to pay those taxes," they said in a joint statement . "Global companies are a significant source of growth, investment, employment and tax in Germany, Britain and the EU as a whole. However, international tax standards have had difficulty keeping up with changes in global business practices, such as the development of e-commerce in commercial activities."
"As a result, some multi-national businesses are able to shift the taxation of their profits away from the jurisdictions where they are being generated, thus minimising their tax payments compared to smaller, less international companies," said the statement.
The statement came as Lin Homer, chief executive of HM Revenue and Customs (HMRC), appeared before the House of Commons' Public Accounts Committee (PAC) to discuss what MPs described as its "failure to get to grips with" tax avoidance by international companies. The session was called following press coverage of complex tax arrangements allegedly used by companies including Google, Starbucks and Amazon to avoid their UK tax liabilities. Representatives of each of the companies are due to appear before the PAC on Monday.
"It's important everybody pays their tax," Homer said in response to the PAC's questioning. "We can do things with big businesses, small businesses and individuals to make sure they understand those obligations and to make sure that we both encourage and if necessary forcefully encourage them to do that."
She added that she was unable to comment on individual taxpayers due to confidentiality constraints.
Tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com, praised the Chancellor for "focusing on multilateral solutions rather than a kneejerk UK reaction" to widely-publicised tax avoidance by international companies. However, she warned that any changes to long-established OECD principles would be "slow and painful".
"In the meantime, it is wholly unfair to expect HMRC to do anything more than to enforce the law as it currently stands," she said. "The level of comment is still very uninformed – quoting the turnover of multinationals gives no clue as to how much their profits are, and hence how much tax they should be paying. However, there is beginning to be a real unease about how easy it is for global companies - particularly in the e-commerce area – to shift their activities, and hence their tax bills, from one country to another."
Research by Pinsent Masons suggests that almost 44% of the £25bn of potential tax revenues from large companies that HMRC has identified as being “at risk” of not being recovered can be attributed to those based overseas. Last October, the PAC identified "specific and systemic" failures in the way in which HMRC handled tax disputes with large companies, however a report by the National Audit Office (NAO) in June into five such settlements concluded that each was "reasonable" and "successfully resolved multiple long-standing tax issues". The NAO did, however, express "concerns" about the way HMRC went about reaching those settlements. In response to these concerns HMRC last week issued its new code of governance for resolving tax disputes.
Eloise Walker, a tax expert at Pinsent Masons, said that the PAC seemed unable to "get their heads around" the difference between legal tax avoidance and illegal tax evasion.
"An individual has money stashed in an offshore account – innocently or not – that's tax evasion, effectively fraud. A corporation organises its affairs in such a way that it has high overheads - such as salaries, on which tax is paid - in countries with high tax rates so they have reduced taxable profit; that's good tax planning and there is nothing wrong with it," she said. "You have to feel sorry for HMRC - they try their best to maximise tax take for minimum effort, not wasting taxpayer money in futile litigation, and they get criticised for it. They simply cannot win."