HMRC redefines tax avoidance to exclude Google, Facebook, Amazon

Yesterday HMRC published an “Policy Paper”: ‘Taxing the profits of companies that are not resident in the UK.’ You can read it here.

It contains this extraordinary assertion:


In effect, say HMRC, if it is “the way that Corporation Tax works” then it is not “avoidance”.

There are a lot of problems with this statement.

The most glaring of them is that it has as its consequence that there is no such thing as tax avoidance. If the structure works it’s not tax avoidance. And if the structure doesn’t work, by definition it doesn’t avoid tax, and so it can’t be tax avoidance either.

Another is that it is contradictory to the definition of avoidance that HMRC itself adopts for the purposes of calculating the Tax Gap.


For this purposes of calculating the Tax Gap, HMRC say (and this time rightly) that even if a structure does deliver a tax reduction it can still be avoidance – “where it serves little or no purpose other than to produce a tax advantage.”

But the most extraordinary thing of all is that HMRC is going out of its way to provide political cover for businesses which engage in abusive tax practice.

Where is the public interest in HMRC saying, publicly, that it is not avoidance for businesses to establish with a view to minimising their tax liability these highly artificial structures?

Why on earth is HMRC acting as public relations agency for Google, or Facebook, or Amazon?

26 thoughts on “HMRC redefines tax avoidance to exclude Google, Facebook, Amazon

  1. J – I read the HMRC statement as an educational one. Some people and commentators believe that selling into a country or having customers in a country automatically = taxable presence which is not the way international taxation is currently constructed. In a way the digital business model is the 21st century equivalent of the mail order business model. Sales can be made into a country without – all other things being equal – creating a taxable presence in the country into which it is sold. The “bar” for creating a taxable presence will lower reflecting in a way the fault lines emerging between the interaction of 20th century tax principles and 21st century business models. For example, if you take a solely digital product in the B2C space, having a website and server and people in every country into which you sell into in order to solely create a taxable presence wouldn’t make business sense – why would anybody replicate their infrastructure like that when it can be centralised in a single sales location? I’m sure you will raise individual cases but I am trying to deal withe the broad principles. I think all HMRC were trying to do is to explain how the tax system works in a digital economy – it is in flux right now and will be different in the years ahead – but that’s how it operates now. I think more explanations and clarity on how the system operates and what the proposals are for changing that system can only improve the quality of debate. FO’R (too long for a tweet reply 🙂

  2. No. Thanks for the comment, but no.

    This is a very specific statement made at a very political moment by a very cautious branch of Government about a very contentious practice. It will have passed through dozens of hands before leaving Parliament Street. The statement contains no discussion of whether the arrangements are abusive, no discussion of whether they are pro or anti purposive. It is said to follow from the mere fact that the arrangements “work” that they do not constitute avoidance. That shrinks the category of transaction described as tax avoidance, quite literally, to a nothing.

  3. Marvellous stuff. Time to revisit your ‘Badges of Avoidance’ and the blogs by David Quentin, Rebecca Benneyworth and me that you kindly hosted here previously. it perhaps changes the volumes likely to flow through the different branches of our respective flow-charts!

  4. You’d only need a single Badge of Avoidance. Does it deliver a tax saving? Yes? Then it’s not avoidance.

  5. Is it really that contentious? Looking at the example they quote, it’s perfectly normal to have a separate UK company to provide UK services to the offshore vendor, and not even for tax reasons – it simplifies the accounting, for a start, and makes it easier to structure contracts (such as with suppliers) which pertain only to the UK operations and would be more difficult if you had to have UK suppliers contracting with (for example) US corporations.

    The key issue on the corporation tax side however is that using a UK company to provide distribution or warehousing does not change the corporation tax position – the calculation of UK taxable profit would be the same if the structure was a single offshore company operating here via a permanent establishment. Using a UK company can sometimes be *worse* from a UK tax perspective because using losses is more difficult.

    I therefore really don’t see your point here – operating a distribution centre in the UK and contracting directly with UK customers from overseas is not, of itself, an avoidance structure. Yes it might be combined with other planning like a double Irish to turn it into a US tax avoidance structure, but UK tax is not being avoided simply because you contract directly with customers and operate a distribution centre here.

  6. HMRC’s Guidance on the Diverted Profits Tax is full of examples of structures like this – so-called “avoided PE” cases – which they were happy to describe as avoidance. I’m sure there are instances where it isn’t tax avoidance too. But it certainly doesn’t follow from the mere fact that the structure generates a CT advantage that it’s not tax avoidance.

  7. I’m aware of the avoided PE rules for DPT, but those require it to be reasonable to assume that the purpose of the structure is to avoid corporation tax. I had a quick look at the DPT guidance, and the examples there talk about contrived separation of negotiation of contracts from signing – ie tax avoidance. I can’t find a DPT example (but there are 110 pages to go through, so I may have missed one) where simply having a UK distributor subsidiary was treated as avoidance. The avoidance is something that can be bolted onto that structure, it seems to me at least.

  8. You misunderstand. I am not saying that such arrangements will always involve tax avoidance. I am saying that it is entirely wrong for HMRC to say that they will never involve tax avoidance.

  9. And also, to double-reply, you say: “it certainly doesn’t follow from the mere fact that the structure generates a CT advantage that it’s not tax avoidance”.

    But that’s not what they are saying, is it? They are saying that THIS structure is not avoidance.

  10. Yes. They are saying it is not tax avoidance because it works. They are not considering any of the factors that might make it take avoidance despite the fact that it works.

  11. It may be that the point here is too subtle for me. I can’t see where HMRC say the structure will never involve avoidance.

  12. Where they say categorically of an avoided PE case “This is not tax avoidance.” That’s where.

  13. J – you are much more attuned to the UK corridors of power than I, so I will defer to your political analysis ! If the sentence had read “This is not prima facie tax avoidance; it is simply the way corporation tax works” – would that have bridged the gap between us?

    However I can’t believe HMRC didn’t want to try and counter some of the commentary out there which clearly doesn’t understand the principles of cross border taxation.

  14. If you were going to write that paragraph – and HMRC absolutely shouldn’t be involved in this sort of politicking because it undermines their independence – the words “not tax avoidance: it is” should be deleted. Or there should be an explicit recognition that it may or may not be “tax avoidance” depending on a range of relevant factors including in particular the motivation of the Group in establishing the structure.

  15. I think that would be fine too Jolyon and would equally serve as a good educational statement by HMRC. But to reiterate my point, in the general digital model – especially in B2C, the business model requires a lot fewer “boots on the ground” than a more traditional model – ergo a single taxable sales point in the “HQ” country. Some commentators seem to suggest that the fact a taxable presence is not being created in the UK is direct evidence of tax avoidance !! If you talk to these types of businesses and suggest they might like to create a sales presence in the country into which sales are being made, you don’t even get to the tax analysis as the answer tends to be “why would we?”.

  16. Tax avoidance is a pretty amorphous concept. It extends all the way from ‘good’ avoidance – like paying into your pension scheme – to the worst sort – often bolt-ons which do nothing to alter your underlying business but achieve a reduction in tax compared with the status quo ante. I certainly agree that the mere fact of an absence of a UK PE does not, of itself, establish that there is ‘bad’ tax avoidance going on. If I buy a digital download of an album from a US artist who has no UK presence and because of that no UK distributor that artist is not avoiding tax.

    My objection is (1) to the blanket assertions that “because it works” it’s not tax avoidance. I’m sure we’d both agree that’s nonsense. (2) To the implicit assertion that these structures can never involve bad avoidance. Sometimes they will and sometimes they won’t. It all depends. I suspect we’d agree about that as well. And (3) to the political dimension of this statement: in particular its timing and its authorship. And you’re sensibly leaving that question to me.

  17. I can’t weigh in on the possible motivation for the HMRC statement, but anyone interested in the taxation of multi-national corps (MNC) should use the current row over the taxation of Amazon, Google and Starbucks (among many others) as a wake-up call to help their country develop a fairer, more transparent system for taxing large MNCs.

    I’ve mentioned before that California uses “unitary taxation,” where the “presence” of one or more MNC *subsidiaries* in CA subjects the *entire corporate group* (in most cases) to taxation, including its foreign subs, absent a “Water’s Edge” election. Applying a state’s apportionment factors (its share of some combination of sales, property and payroll within the state) to the worldwide profit of the MNC group allows the states to tax a proportionate share of the MNC’s world-wide profit.

    Under a unitary system transfer pricing among the subs becomes irrelevant. Inter-company charges (esp interest and “management fess”) become irrelevant. Shifting costs and revenues among 200 subsidiaries become irrelevant.

    The more recent issues concerning the ease in which large technology-based MNC’s can reduce their tax in a given country arise from the fact that corporate business operations are much more complicated than when the rules for taxing corps were first devised. Recent improvements in fast and reliable international travel for the movement of goods/services; the emergence of countries that cater to MNCs looking for low cost tax bases to operate their international operations (many courtesy of the British empire – Singapore, Bermuda, Hong Kong, Isle of Man, etc); the uncertainty of political risk in many countries where tax and business rules can rapidly change; and especially the emergence of the internet where businesses use real time integration of business operations across the globe, all combine to encourage MNCs to establish the most tax-efficient structure possible.

    Don’t hate the players, hate the system. Advocate for counties to adopt either a unitary tax system that does away with the taxation of individual subsidiaries and brings the entire corporate group into the tax calculation when one of more of the MNC’s subs “does (substantial?) business” within the country, or adopt a system that taxes corporate gross receipts in a particular country (using progressive tax rates), which is my favorite since it’s simplest and a fair approximation of a MNC’s worldwide business operations. (eg, a company with 1 billion of worldwide sales might pay a 4% GR tax on its sales within a country, whereas a company with 10 million of WW sales might pay only 1% on its GR.)

    Of course, the UK and its largest companies have been very active over the decades opposing unitary taxation in US states, which makes sense given that the UK and the City of London are often perceived as being the biggest supporters of reduced taxation of “capital” (ie, corporation-type taxes), relying instead on regressive payroll taxes and the taxation of smaller, local businesses to fill its tax coffers. Even the UK’s property tax system seems to favor the largest and wealthiest landlords. Many countries have followed the UK’s lead, which has given us the world today where corporate capital is treated much better than labor tax-wise, and large landlords are treated much better than tenants and homeowners.

    Here’s a bit of history about unitary taxation in the US.

  18. This is a bland document posted on the HMRC website which explains in broad terms how the UK’s corporation tax system works. I can’t see that’s it’s wrong in any respect. A UK website has for a long time not been regarded as sufficient by itself to create a UK PE. Without a PE in the UK a non-resident company cannot be charged to corporation tax. Holding a store of goods in the UK and meeting orders from that is not a PE either. I can’t imagine you dispute that as a matter of law. One might not agree with that as a matter of principle but that’s not relevant!

    There is no TAAR or GAAR that can look through it, although the company may be within the DPT regime if it meets the requirements.

    The definition of a PE will change somewhat as the UK adopts the BEPS principles, and that is as a result of changed perceptions of tax fairness, but you can’t (in my understanding of the English language) term as tax avoidance something that falls within the very parameters prescribed by the tax. It’s the policy behind the tax for there not to be a PE in that position.

    Your position, if I’ve understood you correctly, is getting rather close to that which classes as tax avoidance the ordinary use of ISAs, pension reliefs, gift aid, etc etc and has effectively clouded in the public debate the broader tax avoidance / tax fairness arguments. The world has decided that certain non-PE structures are unfair, and consequently as a policy matter international tax norms are being rewritten. Companies that comply with those revised rules will still not have a PE even if there would have been one if they had organised their affairs differently.

    Of course, if a company sets out to operate without a PE (whether for tax avoidance or other reasons) but fails to do so correctly, then it will have a corporation tax liability and have to accept the consequences of not having met its UK tax obligations correctly.

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  20. Is it tax avoidance to structure your business in such a way that it is clear that no PE arises? In a situation where that structure makes perfect sense from a business and commercial perspective?

  21. Is this just a matter of how the “avoidance” definition is applied?

    HMRC use a narrow definition some would call “abusive avoidance”. They state it is “operating within the letter -but not the spirit- of the law”. This reflects how the term is increasingly used by the media and general public.

    Other ways to legally reduce tax, such as structuring a family business or MNC, is regarded as legitimate, and therefore not ordinarily “avoidance”.

    Only if the business structure is highly artificial would it be “avoidance”. Even if it “works” legally. 

    HMRC’s only action in PR terms is trying to defend themselves by implying that MNCs such as Google use structures which are not highly artificial.  Whether that is the case is the only problem with their statement.

  22. Few would argue that a US corporation, selling goods or services to UK customers via a website, with no staff or premises here in the UK, has a PE in the UK, or should be taxed on part of its profits here (although that might be the effect of formulary apportionment, or of the DPT).

    Few would argue that an overseas business sending stock on consignment to a warehouse in the UK, ready to deliver to customers once they make an order, has a PE here either.

    And if an overseas company has any activity in the UK, it makes good sense for a variety of commercial and legal reasons (entirely unrelated to tax) for UK activities to be ring-fenced within a separate UK subsidiary.

    All of these business activities are entirely normal.

    So why does it become “tax avoidance” let alone “abusive” if a UK warehouse is run by a separate company in the same corporate group, holding stock to deliver to UK customers when they make an order via the website?

    The UK has a domestic definition of PE, derived from the OECD definition, and similar definitions appear in almost all the UK’s double tax treaties. It is clear that preparatory or auxiliary activities (such as holding stock in a warehouse, or delivering goods from the warehouse) do not create a PE (and will not create a PE under amended definitions following BEPS). Are we really saying that this sort of business structure is contrived or artificial, or that Parliament did not intend this result when it passed the legislation to implement those definitions?

    I would argue that the spirit of the law requires profits from UK activity to be taxed here, and that is achieved by applying proper transfer pricing to the UK subsidiary – what does it do, and what is that worth?

    (To pick an example, I think you could make a good case that Amazon derives considerable and valuable commercial benefit from being able to hold stock across a variety of lines and then deliver quickly to satisfy orders, over an above what it might have to paid to a third party for warehousing and delivery.)

  23. HMRC’s comment is rather strange. Is it simply defensiveness in the wake of public reaction to the Google settlement?

    In all these situations, the relevant multinational group has carefully fragmented its activities and thereby used the relevant rules to minimise its UK tax footprint despite extensive UK business activities and infrastructure. That seems the very essence of tax avoidance even if such planning is “normal” or “sensible” and even if other factors are in play. It is hard to argue that such structures have ever been closely considered, let alone endorsed by Parliament. If anything, the UK domestic law definition of a “permanent establishment” suggests that such activity may give rise to a UK tax presence although that definition is usually overridden by the narrower definition of a “permanent establishment” in most tax treaties.

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  25. Lord Hoffmann has stated extra‐judicially: “tax avoidance in the sense of transactions successfully structured to avoid a tax which Parliament intended to impose should be a contradiction in terms. The only way in which Parliament can express an intention to impose a tax is by a statute which means that such a tax is to be imposed. If that is what Parliament means, the courts should be trusted to give effect to its intention. Any other approach will lead us into dangerous and unpredictable territory.”

    What HMRC and laypeople really mean by “(unacceptable) tax avoidance” is to view “Parliamentary intention” in its wider sense of what Parliament would have intended had it been able to foresee a particular outcome, yet the court felt bound by the narrower concept of parliamentary intention ‐ that which could be found within the words of the statute itself. E.g. Mayes.

    HMRC’s comments here re tax avoidance make sense if understood in those proper terms.

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