The Public Accounts Committee’s (PAC) grilling of three executives from Amazon, Google and Starbucks, on 12 November, in many ways ‘lived down’ to expectations. These committee sessions, at least the high profile ones, seem to be political theatre as much as anything; and it doesn’t actually seem right to use them to voice (and seek to whip up) opinion on the morality – or alleged lack of it – of those hauled in to appear, rather than concentrating solely on the fact-finding.

Let’s get back to the subject though, which is overseas multinationals and UK corporation tax. There are two essential questions here.

First, how exactly do the UK’s tax laws, together with its tax treaty arrangements with other countries, operate to subject the activities and profits of such multinationals to UK corporation tax? And second, how effectively does HMRC, the government department with responsibility, ensure that multinationals pay the full amount of corporation tax they are liable for, pursuant to such laws (and treaties)?

The first question is the more interesting one. But it is pertinent to note, in passing, that the second question is of considerable importance, and one too that more naturally falls within the remit of the PAC (according to the parliamentary website, the committee’s role is to focus on ‘value for money criteria’, in particular relating to the ‘effectiveness and efficiency’ of government departments).

Given that at an earlier PAC hearing HMRC representatives declined to discuss the tax affairs of specific companies, citing customer confidentiality, but assured the committee that HMRC was doing all that it should be doing, one might have expected the PAC to pursue this when it had three such customers sitting before it.

An obvious line of enquiry, to glean insight into the rigour with which HMRC is discharging its duties, would surely have been: ‘Have your UK tax returns been the subject of detailed enquiry by HMRC? What major areas did HMRC discuss with you? What adjustments, if any, to the tax computations in those returns resulted?’

There was instead a limp question from the committee, towards the end of the session, along the lines of ‘are any of your submitted tax returns still to be agreed with HMRC?’, but with no follow-through.

Business structures

But to return to the first question, and consider the information that emerged about these companies’ business structures. Take Starbucks first. This is a business that our tax system ‘understands’: it has a very physical presence in the UK – it earns its UK income from sales in coffee shops in our towns and cities.

The overseas parent of such a business might decide to structure, or might to a large extent be obliged to structure, the UK business using any or all of the following:

• loans from the parent, on which interest is charged;

• licensing by the parent of its intellectual property, or of the benefit of its franchise, in return for royalties;

• the supply of other goods and services by the parent, for which charges are made.

All of these will of course drain income out of the UK business (and reduce what might otherwise form part of the calculation of UK profit, and the associated liability to UK corporation tax). But in principle they are all entirely proper and legal, and indeed may be absolutely necessary in order to operate the UK business, and do so with maximum efficiency.

In front of the PAC, global CFO of Starbucks, Troy Alstead, reported that Starbucks UK pays royalties to the Dutch group company, Starbucks NL (at 6% of turnover, but reduced to 4.7% after intervention from HMRC); and purchases coffee (and takes other services) from Swiss group company, Starbucks CH, at a 20% mark-up (one doesn’t begin to understand how the Swiss coffee market operates, but it is perhaps not immediately clear – in terms of ‘risk assumed’ by Starbucks CH – how such mark-up gets validated).

There are long-established transfer pricing rules in tax legislation, whose purpose is to police all of these matters. And more fundamental questions are being asked these days too. Should debt be tax-deductible at all? Should (non-recoverable) withholding taxes on interest and royalties become the norm? But reform here would necessitate international co-operation, and may not come any time soon.

Let’s turn to Amazon and Google, both internet-based businesses. Take Google, whose representative before the PAC was a little more forthcoming than his Amazon counterpart, director of public policy, Andrew Cecil.

In contrast to Starbucks, Google UK is not a purchaser, or net purchaser, of goods and services from overseas parent or sister companies. As Google UK’s chief executive Matt Brittin explained, it is actually the reverse. Google UK appears to have the rather boring business of providing support services to its only client, Google Ireland, and it charges Google Ireland fees for such services (currently £400m a year).

The real Google business, distinct from the UK business, is the highly sophisticated search engine business, on the back of which Google generates its revenues. That is the ‘outward-facing’ business which is the equivalent of Starbucks’ coffee shops business; but it is not carried on by Google in our high streets, nor indeed in our homes and offices.

It is certainly carried on somewhere (we can see it on our screens), but not, it appears, to any extent in the UK. The principles that underlie the UK tax system developed without the internet and the ways in which businesses operate through the internet. Arguably, it struggles to deal with this – or at least struggles to tax what many might view as a ‘fair share’ of the incomes generated by internet-based businesses.

The point is often – and rightly – made that we must keep in mind the wider perspective, and the benefits (including other taxes) that these multinationals do clearly bring to the UK. But as we read of retailer John Lewis warning that Amazon’s low tax bills provide it with the extra ammunition to increasingly ‘out-invest’ and, ultimately, ‘out-retail’ the traditional retail operators, pressure, perhaps from the affected business community rather than from the public, may build on the government to find a means to meet this particular fiscal challenge too.

Mark Cawthron, tax writer, CCH, a Wolters Kluwer business