Microsoft Doesn't Have A Secret HMRC Deal And Isn't Avoiding UK Taxes

The British newspapers are managing to get themselves all excited today over a story that Microsoft signed a "secret deal" with the taxman at HMRC and thereby has been avoiding £100 million in rightfully due taxation. This is not, to put it mildly, anything like what has actually been happening. Microsoft has been following the tax law exactly and the only deal it has with HMRC is an agreement that it is in fact following said law just as it should be. The newspapers are wilfully misunderstanding the basic economics of how taxation works in order to produce yet another scare story. It's even possible that perhaps taxation should not work in this manner but the combination of the standard tax treaties plus the European Union rules means that it does.

For example, here is the Mail:

Microsoft agreed a secret deal with HMRC to avoid paying over £100million in tax to Britain despite making billions from UK customers.

Microsoft Ireland's accounts show that the computer giant made £2.3bn in revenues from sale of hardware and software in the year to June 2015, but its British arm paid a poultry £16,9million in corporate tax.

I have to admit I rather like their use of the word poultry there - presumably they've just been paying chicken feed then?

The first and most obvious mistake there is that the revenues, sales, profits and expenses of Microsoft Ireland have absolutely nothing whatsoever to do with the tax that is or ought to be paid in the UK. There is simply no possible connection at all - tax paid in the UK will be related to either the sales of a UK company or, possibly, the sales of a company with another tax residence but which has a permanent establishment in the UK. Assuming that Microsoft Ireland is neither (it isn't) then that company's affairs have no relevance to the British taxman at all. It's all as relevant as the activities of Amazon Japan are to the British taxman. That is, not at all.

Microsoft has reportedly avoided up to £100m a year in UK corporation tax by routing its sales through Ireland.

The corporation has sent more than £8bn of revenues from computers and software bought by British customers to Ireland since 2011, as part of a deal with HM Revenue & Customs (HMRC), the Sunday Times reports.

The arrangements, known as advance pricing agreements, agree on the allocation of profit between various countries.

That is all entirely wrong as well. No, it has not been "routing" sales through Ireland an Irish company, it has, as it has every right to do under EU rules, been making sales in the UK from an Irish company. And that's the end of it. As long as that company has no permanent establishment in the UK that is (that part coming from the standard tax treaties). It has not been "sending" revenues anywhere. That's where the sales were from so that's where the revenues went.

An advance pricing agreement has nothing to do with this at all either. Those sales were from Ireland, revenues went to Ireland, tax is applied in Ireland, that's the end of it.

What the advance pricing agreement is about is something entirely different. Microsoft does have a UK company. That company, as with Facebook and Google etc in the UK, does a lot of engineering and support work for which it is paid by Microsoft Ireland (Facebook UK, Google UK, being paid by their respective Irish companies). Under the transfer pricing rules the price at which is it compensated should be the same as it would pay a truly independent company. That's a little difficult to divine of course, something that's perhaps more art than science. So, when a company does this, pays its own subsidiary in the UK, it will often go along to HMRC and ask a question. "So, err, Mr. Taxman? Have we got this price right according to the rules?"

If Mr. Taxman agrees that the price is indeed right by the rules then it will issue a comfort letter, an advance pricing agreement, saying, well, yes, you're paying what we think is a fair and reasonable price, by the rules, to your own subsidiary. This is not a deal and it's no more secret than any other letter from the taxman to a taxpayer. It really is someone just asking, well, have I got this right Guv?

The recent tax deal between HMRC and Google for example, was HMRC saying to Google, well, you know, we don't think you have been paying the right price. So, the price paid for the past few years was raised a bit, Google UK made a bit more profit and so a bit more tax was paid. And that's that story. All Microsoft was doing here was asking, in advance, whether it had got the price right.

This does of course mean that Alex Cobham is talking through his hat here:

Alex Cobham, of the Tax Justice Network, said: “It is simply untenable for HMRC to claim taxpayer confidentiality as an excuse to keep these deals private. They have the potential to exempt major multinationals from the full application of tax law.

“In other words, HMRC may be allocating substantial government revenues back to multinationals, entirely in secret, against stated government positions on tax and with no public accountability.”

But then Cobham's at the Tax Justice Network where they tend to be more than a little confused on these matters.

Corporation tax in the Emerald Isle is 7.5 per cent lower than in England, making the tech giant the mammoth saving.

The taxman approved the deal, which runs until 2017, among 140 unknown others to other huge companies.

It also agreed the amount the firm could pay its UK arm for marketing services in 2012.

It was not also: the entire point of the matter was to get HMRC to agree upon the price which it would pay for that marketing support.

Seriously, how are we ever going to have a reasonable and rational discussion about the taxation of multinational companies when the reporting of what does happen is so hopelessly skewed? There is no deal here, there is no tax avoidance. There is simply a company asking HMRC, well, have we got the rules right here? And HMRC tells them they have - and that's that.

Think about it. How can HMRC telling a company they're following the rules and the law, to the jot and tittle, be evidence of tax avoidance? It's proof perfect of the opposite instead, isn't it? Actually, we have proof of this too. As Richard Murphy, one of the founders of the Tax Justice Network, has pointed out with respect to Oxfam and Gift Aid, if HMRC investigates an arrangement and gives it the all clear then that cannot, by definition, be tax avoidance. Because HMRC has cleared it. QED.

If we're going to end up with a decent and reasonable public policy on such matters then we've got to be having a reasoned discussion about it all. There is no tax avoidance here, simply a following of the rules.