The UK and Germany are taking preparatory steps to tackle the issue of multinationals profiting from the legal loopholes that allow tax avoidance. The US based coffee company Starbucks is one of the many multinational corporations that are accused by the UK business secretary of “taking from the British economy and putting very little back.” International tax laws have trouble keeping up with the practices of developing electronic commercial activity. To this regard, the steps taken by these two states will be useful for more states to tackle this evolving issue.
By Patrick Wintour and Dan Milmo
George Osborne, the chancellor, has joined forces with the German finance minister, Wolfgang Schäuble, to announce an international crackdown on tax avoidance by multinational companies.
The intervention comes came as the business secretary, Vince Cable, weighed into the Starbucks tax affair by berating corporate behemoths for "taking from the British economy and putting very little back". According to a Reuters report last month, Starbucks has not paid tax in the UK for three years.
Cable told the Guardian: "At times of hardship, when tens of thousands of British companies are paying their basic tax, to discover that leading multinationals are getting away with it is not acceptable."
Osborne said he and Schäuble, meeting at the G20 finance ministers' summit in Mexico, had called for "concerted international co-operation to strengthen international tax standards that at the minute may mean international companies can pay less tax than they would otherwise owe".
Neither was he eager to identity individual corporate culprits
government sources said the spread of e-commerce, and the ponderous nature of international corporate tax rules had left governments trailing as multinationals shift profits around the globe.
Osborne and Schäuble said they would back work by the Organisation for Economic Co-operation and Development to identify possible gaps in tax laws.
Trying to balance his defence of low tax rates with the need to act against firms that repeatedly pay virtually no tax, Osborne said: "We want competitive taxes that say Britain is open for business and that attract global companies to invest in and bring jobs to our country, but we also want global companies to pay those taxes. The best way to achieve that is through international action that ensures strong standards, without pricing ourselves out of the global market."
The joint statement by the two countries, a rare example of Anglo-German co-operation, admits, that "international tax standards have had difficulty keeping up with changes in global business practices, such as the development of e-commerce in commercial activities."
The two countries add: "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."
In the statement, Britain and Germany say they expect the first report from the OECD at the next G20 meeting in Russia in February 2013. The two men agreed their joint approach when the chancellor visited Berlin on Thursday last week.
The co-operation comes ahead of a meeting between David Cameron and Angela Merkel, the German chancellor, on Wednesday.
Starbucks has paid only £8.6m income tax since 1998 on £3.1bn sales, thanks to reporting consistent losses. Cable said: "It is worrying and frankly a bit of a disgrace that Starbucks is a tip of the iceberg."
Pointing to similar arrangements among other multinationals with UK operations, he added: "They are taking a lot of value out of the British economy and British consumers, and putting little in."
He added: "There appears to be a loophole in American legislation which encourages them to put their money through tax havens. And that is unacceptable from a UK point of view because they are taking from the British economy and putting very little back."
Starbucks reiterated its claim that it has paid more than £160m in taxes over the past three years, including national insurance and business rates.
Google said it complied with all UK tax rules. "We make a substantial contribution to the UK economy through local, payroll and corporate taxes," said a Google spokesperson. Amazon did not return calls seeking comment.
Britain has the lowest rate of corporation tax in the G7, and has cut its rate by more than any other G20 country over the past two years (from 28% in 2010 to 22% by 2014).
Last year, around half of the £136bn taxes paid in the UK by the biggest businesses came from foreign-owned companies; while inward investment created or safeguarded more than 100,000 jobs.
The HMRC has raised more than £1.5bn since March 2010 through increased efforts to tackle transfer pricing. This aims to ensure multinationals pay the right amount of tax by determining the taxable profits of each company as if it were an independent entity trading at arm's length from other members of the same group.
