Samsung in the UK and Ireland: where’s the outrage?

The ongoing debate over corporation tax has seen a lot of attention focused on US companies such as Apple, Google, Facebook etc.  It hasn’t been exclusively about US companies but has been predominantly so.  It can be hard to find non-US comparators for the likes of Google of Facebook but for Apple we can look at one its rivals in the consumer electronics market: Samsung Electronics from South Korea.

Samsung Electronics operates in the UK and Ireland through its subsidiary Samsung Electronics (UK) Ltd.  This company’s 2014 accounts state that:

During the year the company’s (the ‘company, being Samsung Electronics (UK) Limited) principal activities were as follows:

• Importer, distributor and lessor of electronic and electrical goods
• European head office
• Purchase and sale of components and capital equipment
• Provision of research and development services to the ultimate parent company
• Importers and distributors of telecommunications systems

All of the above operations are UK based with the exception of two small research and development facilities in Israel and Finland and a branch office in Ireland.

How much revenue is generated by these activities? Quite a lot actually. 

Samsung Electronics (UK) had revenue of £3.423 billion in 2013 and £2.605 billion in 2014 with almost all of this associated with activities in the UK and Ireland.  The reports states that:

The principal drive for the decline in turnover has been the performance of the company’s Mobile Phone division.

Samsung Electronics is a massive company that generates substantial profits.  Here is its consolidated income statement for 2013 and 2014 (in US dollars).

Profit before income tax was 16.8 per cent of revenue in 2013 before falling to 13.5 per cent of revenue in 2014.  The performance of Samsung Electronics (UK) is consolidated into the above income statement but if we look at the accounts for Samsung Electronics (UK) we can get its income statement.

Here we can see how the £3 billion or so of revenue transfers into profit. Profit on ordinary activities before taxation was £59 million in 2013 and £72 million in 2014.  This profit was 1.7 per cent of revenue in 2013 and 2.8 per cent of revenue in 2014. 

If you want to do silly things with the level of income tax reported you can say that tax was 0.4 per cent of revenue in 2013 and 0.6 per cent of revenue of in 2014.  That, of course, would be meaningless as tax is paid on profits not revenues.  But still the frothing at the mouth that Apple and Google have recently generated seems somewhat absent in the case of Samsung.  This can be seen with internet searches of [Apple tax UK] and [Samsung tax UK].

Is Samsung getting a “special deal” to allow it to pay £15 million of corporate income tax on £3 billion of revenues in the UK and Ireland?  No, this is the way corporate tax works.  By far the biggest cost for Samsung Electronics (UK) is buying the products it wholesales and retails in the UK and Ireland. Samsung UK doesn’t make the phones and other consumer electronics devices it sell; it has to buy them centrally from Samsung. And Samsung must charge Samsung UK the same price it would charge if it was selling them to a third party. 

Hence the largest cost for Samsung Electronics (UK) is cost of sales which is equal to about 80 per cent of turnover.  Is this transfer price right? I don’t know.  But it is what it is, a transfer price.  Where does it end up?  It goes where the value is added which in the case of Samsung is in offering a phone that people want to buy. 

Importing, distributing and wholesaling are not high-value-adding activities.  Designing and branding a phone that people want to buy adds value. If Samsung, presumably, does most of this in South Korea then most of the tax due on its profit is owed to South Korea.  Just like most of the tax that Apple and Google owe is due to the US. The fact that the US has a system that allows these companies to defer the payment of this tax, sometimes indefinitely, is a related but different matter.  The taxing right is the US’s to choose what they want to do with it.

Under the present system countries can tax the value-adding activities that take place in their jurisdiction.  And should go to all reasonable lengths to ensure that the right tax is paid on these activities – but this can only be under the rules as they stand.  There is no merit in complaints on the basis of sales or global profit margins.  But there have been plenty of complaints against Google and Apple on these bases.  But why the relative silence on Samsung? 

One reason is that to argue that companies are getting “special deals” you have to be selective in who you shout about.  If you start shouting about everybody then it must be that your beef if with the system and not the individual companies.  And that would be fair enough.  But that is not what is happening.  The complaints are usually along the lines of:

Google has £4.5 billion of sales to UK customers; Google has a profit margin or 20 per cent so it makes £1 billion of profit from these sales and therefore it should be paying £200 million of corporation tax to the UK (one source).

or

Apple has £10 billion of sales to UK customers; Apple has a profit margin of 20 per cent so it makes £2 billion of profit from these sales and therefore it should be paying £400 million of corporation tax to the UK (one source).

These then are used to declare that the amount of tax paid by these companies is “wrong” and that they are getting some form of special treatment.  If they were presented as an alternative way of determining corporate income tax liabilities that would be fine but they are presented as something that the companies should be doing and that HMRC should be enforcing.  But it cannot be enforced because it is not in existing law.  Location of customers and global profit margins are simply not features of corporation tax law.

So by all means present these approaches as an alternative but using them to suggest that tax payments under the existing system are wrong is misleading –at best!  And, of course, while these alternatives might bring in more tax from companies who sell to customers in the UK there would be offsetting losses of tax from UK companies who sell to customers outside the UK.  What is the balance of the two?  And small countries with successful companies would be absolutely battered by this system.  And you cannot have a system that picks and chooses which approach to use based on the nature of the company.

Anyway the main point is why don’t we hear the following:

Samsung has over £3 billion of sales to UK customers; Samsung has a profit margin of 15 per cent so it makes around £500 million of profit from these sales and therefore it should be paying £100 million of corporation tax to the UK.

Where is the outrage that Samsung are only paying one-sixth of that?

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Calculating Google’s profit in Ireland – it’s not too difficult

Here are the top line figures from Google Ireland Ltd.’s profit and loss accounts for the three years to 2014.

There are two items to be considered in the transition from turnover to operating profit: cost of sales and administrative expenses.

The cost of sales item is relatively straightforward and quoting from Google Ireland’s accounts it is described as:

Cost of sales consists of traffic acquisition costs.  These costs consist of amount ultimately paid to Google Network Members, as well as to partners who directs search queries to Google’s websites.  These amounts are primarily based on revenue share arrangements under which the Company pays its Google Network Members and other partners a portion of the fees it receives from advertisers.

There is little to dispute here.  Google places ad on the websites of third-party hosts and pays them a share of the advertising revenue.  For the three years shown above Google Ireland paid out around 30 per cent of the revenue it received to sites that hosted its advertising.

OK, so now we are as far as gross profit.  The next item is administrative expenses.  There is a little complication here as the actual process is somewhat the reverse of what is shown in the profit and loss account.  The P&L shows operating profit as been the result of the subtraction of administrative expenses from gross profit.  In reality, though, the operating profit figure is determined first and the administrative expenses figure is reverse engineered to give the operating profit figure.

By far the largest component of administrative expenses is the license royalty that Google Ireland Ltd. pays for the rights to sell advertising using Google’s platform and technology.  There are no details on this fee in Google Ireland Ltd.’s accounts but the accounts of the payee, Google  Netherlands Holdings Ltd. do tell us how much is paid by Google Ireland Ltd. each year.   These figures were:

• 2014: €9,221.6m
• 2013: €8,482.5m
• 2012: €8,554.7m

Using these we can get the levels of administrative expenses excluding the royalty payment.

From this we can see that for the past three years Google Ireland’s operating profit has been around 6 per cent of its expenses (excluding the license payment).  And, albeit in rough terms, this is how the profit of Google Ireland is calculated – it is determined on a cost-plus basis.  We don’t know the precise formula used and there are likely to be some non-qualifying items in the “other administrative expenses” figures shown above.  A cost-plus agreement of eight per cent of qualifying expenses may be what is applied but we can’t tell that from the published accounts.

Is there anything untoward about this? Not at all. Cost-plus agreements are a standard feature of transfer-pricing agreements.  Is the cost-plus agreement the appropriate one to use?  Well, there is no right or wrong answer to this.  If you want to argue the toss the OECD have this useful guide to the methods available.

We can get some insight into the expenses incurred by Google Ireland from its accounts.  We that depreciation is around €50 million a year with compensation of employees coming in at around €300 million a year.  But even with the items listed most of the expenses are in the balancing item of “residual expenses” in the table below.

Google Ireland’s accounts don’t tell us what these “residual expenses” (my description) are but we can see them in the revenues of other Google companies such as Google UK, Google France, Google Italy etc.  These are the amounts that Google Ireland pays to subsidiaries in the countries in which it sells advertising for “sales and marketing services”.  A scout around the accounts for the various Google Ireland subsidiaries throws up the following figures for payments received from Google Ireland Ltd. over the past few years.

It can be discerned that these payments make up the bulk of Google Ireland’s expenses (excluding the license fee).  By adding in all the markets which Google Ireland sells into would get us pretty close to the total required. 

Ireland is free to challenge the cost-plus method used to determine the operating profit in Ireland and the other countries can challenge the basis used to determine the basis used to determine the operating profit of the Google subsidiaries in their country or look to see if Google Ireland has a permanent establishment, or taxable presence, in their jurisdiction.  HMRC have just completed a six-year audit on this basis in the UK and both the Italian and French tax authorities are looking at Google’s structure.  See previous discussion of these here.

Google Ireland’s operating profit is a function of its expenses.  These expenses include the staff and other costs that are incurred in Ireland and also possibly the payments made for “sales and marketing services” to subsidiaries in the markets into which Google Ireland sells.  If these expenses go up (i.e. the company gets bigger) then Google Ireland’s operating profit will go up.  Google’s profits in Ireland are not a function of revenue though are continually presented in that fashion.  And Google then pays 12.5 per cent Corporation Tax on those profits. It’s not that difficult.

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On the distribution of income

There are lots of silly things that can be done with income distribution statistics.  Here is another to add to the list.

The above tables shows the share of equivalised disposable income going to each income decile in the 28 Member States of the EU.  Two countries are highlighted: Ireland and Sweden.

Some commonly used summary statistics of the income distributions in both countries:

1: Gini Co-efficient (zero being complete equality)

• Ireland: .307
• Sweden: .254

2: 80/20 Quintile Share (zero being complete equality)

• Ireland: 4.7
• Sweden: 3.9

On both measures Sweden has a more equal distribution of equivalised disposable income than Ireland.  However, the table above shows that these summary statistics can miss some of the detail.  In this instance it is the share of equivalised disposable income that goes to the middle of the income distribution.

In Sweden, 37.6 per cent of equivalised disposable income accrues to those from the fourth to seventh deciles; for Ireland it is 34.1 per cent.  If the share of income in this middle range of the Irish income distribution matched that of Sweden then these households would have around €3 billion extra of disposable income or nearly €5,000 per household.  This would come from a reduced share at the top of the income distribution.

Sweden doesn’t follow the “ideal” position in the table above of starting in the top left corner with a relatively high income share to the lower deciles and moving to the bottom right corner for a relatively low income share for the top deciles. Sweden starts off the in middle of the ranking for the bottom deciles and then rises to having the highest income shares in the middle before moving to having the lowest income share for the top decile.  Ireland pretty much starts at the same position for the bottom decile but moves in the opposite direction through the deciles.

Of course, there can be a multitude of reasons why the income share in the middle of the distribution is much greater in Sweden than in Ireland – earnings, taxes and transfers among others all play a role.  We don’t address those here but are merely pointing out that the difference exists.

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It’s all about Google – but is it about Ireland?

The taxation of Google’s activities are capturing the attention this week.  Although a party to what is going the attention isn’t really on Ireland – the attention is rightly on the taxation by countries of activities that take place within their jurisdiction.

Closest to home we had the conclusion in late January of the six-year audit of Google’s activities in the UK by HMRC.  By and large HMRC seem to have accepted the premise of Google’s structure as it is generally understood and the rough position is outlined in the Supplementary Written Evidence that HMRC provided for the House of Commons Public Accounts Committee when they convened a hearing on this matter a few weeks ago.

Under the structure Google’s sales are booked by Google Ireland Ltd in Dublin.  Google Ireland contracts with a subsidiary, Google UK Ltd, which provides “marketing services” to Google Ireland and liaises with Google’s largest customers in the UK. 

A critical part of the audit was whether the activities of Google’s staff in the UK are close enough to the sales to mean that Google Ireland had a permanent establishment or branch in the UK.  This would accept that the sales are booked by Google Ireland but that this activity actually happens in the UK rather than Ireland.

HMRC have concluded that Google Ireland does not have a permanent establishment in the UK and therefore Google Ireland does not owe UK Corporation Tax on sales made to the UK.  The parent company’s most recent 10-K filing for 2015 in the US shows that based on the billing address of customers Google generated $7.1 billion of sales from the UK.

Another part of the audit involved analysing the remuneration of Google UK for the activities it undertakes.  The 2006 accounts of Google UK include the following note:

Turnover represents the total intercompany cost plus at 8% charged to Google Ireland Limited for sales and marketing and cost plus 10% for research and development charged to Google Inc. during the year, excluding value added tax.

The most recent accounts show that in the 18 months to June 2015 Google UK had revenue of £1,178 million with £890 million coming from Google Ireland and £288 million from Google Inc.  The reported operating profit of £123.7 million suggests there has been a small uplift in the margins used in the transfer pricing arrangement but not significantly so.  Although not broken out it seems that part of the outcome of the HMRC audit relates to the treatment and deductibility for Corporation Tax purposes of share-based staff remuneration rather than the remuneration of the activities of Google UK per se.

Anyway the political reaction has been as expected.  The PAC state that:

The lack of transparency about tax settlements makes it impossible to judge whether HMRC has settled this case for the right amount of tax.

before going on to declare that:

The sum paid by Google seems disproportionately small when compared with the size of Google’s business in the UK, reinforcing our concerns that the rules governing where corporation tax is paid by multinational companies do not produce a fair outcome.

A crucial aspect was whether Google Ireland had a de facto branch in the UK and HMRC have determined that it does not.  But the PAC are sure to be interested in how this is being viewed by other tax authorities – namely in France and Italy.

In essence, the French and Italian tax authorities are following the same approach as that undertaken by HMRC in the UK.  In a similar fashion Google Ireland has subsidiaries in France and Italy, Google France and Google Italy, and these also provide “marketing services” to Google Ireland and get their revenues from Google Ireland.

In 2014, Google Italy had revenue of €54 million and reported a profit of €4 million.  Over 60 per cent of expenses were personnel costs. For 2013, Google France had revenue of €225 million with a profit of €20 million.  Again personnel costs made up over 60 per cent of expenses.  Given the profit levels the (relatively small) amount of tax paid can be roughly discerned.

France and Italy might quibble with the remuneration by Google Ireland for the “marketing services” provided by Google France and Google Italy respectively but that is not where the pot of gold is.

France and Italy are also looking at whether Google Ireland has a permanent establishment in their countries.  Again what is at issue is whether the activities of the staff are sufficiently close to the sales of Google Ireland that they constitute a branch of Google Ireland in those countries.  We don’t have figures for Google’s revenue from customers with billing addresses in France or Italy but the suggested figures are that it is around €1 billion per annum in France with a somewhat smaller figure originating from Italy.

Although final assessments have yet to be made the tax amounts involved are significant – apparently €1.6 billion in the case of France and €227 million in the case of Italy.  It appears around one-third of the €1.6 billion figure for France arises from interest and penalties for not declaring a tax presence but the potential tax sum is large.

However, there does appear to be a bit of leap here to arrive at these tax figures.  As it stands the sales are booked in Ireland but this doesn’t result in massive taxes falling due in Ireland.  How are Italy and France (allegedly) determining much higher tax bills by claiming the sales of Google Ireland are booked in branches the company has in their jurisdictions?

Google Ireland’s accounts for 2013 show revenue of €17 billion.  The companies main expenses were “cost of sales” of €5.1 billion and an “administrative expense” of €11.7 billion.  The cost of sales is the money to third-party websites which host ads from Google and this is around 30 per cent of the ad revenue. “Administrative expense” includes around €0.4 billion of costs in Ireland and also the fees paid to the subsidiaries of Google Ireland in the various countries for “marketing services” but the main component of this expense is the royalty paid for the license to sell advertising on the Google platform.  This fee was €8.5 billion of Google Ireland’s “administrative expense” in 2013.  The deduction of the cost of sales and the administrative expense from revenues leaves a profit in Ireland of around €200 million and Corporation Tax due in Ireland of around €25 million for sales in all of Google’s European markets.

So how can the tax due in France, in particular, and Italy be a multiple of this?  One avenue could be that they are challenging the royalty fee paid by Google Ireland.  Even if they determine that Google Ireland has a branch in their country the taxable income remaining could be negligible after the royalty fee is deducted.  For the company as whole Google Ireland’s costs are almost 99 per cent of revenue. What reason is there to believe that this would not be similar for a branch of the company undertaking the same activity?

The size of the royalty fee can be challenged but it is possible that they are not going down the route but looking at the tax treatment of it and, in particular, whether it is subject to a withholding tax.  The report on the Italian audit says:

In addition, some 600 million euros of royalties should have been revealed to the tax authorities and would have faced a tax demand for some 200 million euros.

Google Ireland does report that it pays some “foreign withholding tax” but the amounts are small with €8.5 million paid in 2013 and €17.5 million in 2012.

As we know the royalty fee incurred by Google Ireland is paid to The Netherlands.  The most recent accounts for Google Netherlands Holding show that it received €9.2 billion of royalty income from Google Ireland in 2014. This payment, or a variation thereof, would still be due if sales are not booked in Dublin but are booked by branches of Google Ireland in the various countries.

At present, the Revenue Commissioners do not subject this outbound payment from Ireland to a withholding tax.  One justification for this is that the payment is made to a company in another EU Member State and such payments are exempted from withholding tax under the EU directive on the taxation of interest and royalties.  Besides those arising from the EU directive there can also be exemptions from a withholding tax in  other provisions of domestic law.

However, even if the provisions of the EU directive have been transcribed into domestic law there are a few bases on which it can be argued that the royalty payment could be subject to a withholding tax.  It could be said that Google Netherlands Holding does not qualify as a “beneficial owner” per article 1(4) given that it transfers 99.9 per cent of the royalty it receives to Google Ireland Holdings in Bermuda (or apparently it does).  Alternatively it could be argued that the withholding tax should apply so as to prevent “fraud or abuse” under article 5 of the directive. 

These are possibilities but it is not clear that any them would actually apply.  And for these countries to impose a withholding tax it first of all requires the determination that Google Ireland does actually have a permanent establishment in their jurisdiction.  In the only known audit concluded to date on this matter HMRC have determined that Google Ireland does not have a permanent establishment in the UK.  But that doesn’t mean that France or Italy can’t determine that Google Ireland has permanent establishments in their jurisdictions – this can be through a difference of facts or, maybe more likely, a difference of interpretation.  And just because HMRC have concluded their audit doesn’t mean they are right.  Truth be told there is no “right” but let’s not go there.

Even if other countries can show permanent establishment they would further need to establish that a withholding tax can be applied to the outbound royalty payments of that permanent establishment (with the possibility of challenging the size of the royalty also an option – again a matter of interpretation). If the royalty payment was paid direct to Google Inc. in the US (as it possibly should) then it is likely that no withholding tax would apply.  But the payment isn’t made to the US so there doesn’t seem any leeway for someone from the US Treasury to try and intervene by arguing that EU Member States have no right to tax these monies.  This is about countries exercising their right to tax activities that take place within their jurisdiction and because of the countries involved US tax treaties do not apply.

Anyway, one first-round statistical implication of attributing the sales of Google Ireland to branches in the various countries is that the flows would no longer be recorded as imports and exports in Ireland’s Balance of Payments. And for these countries there would be a reclassification of the current computer services import as a patent royalty import.  The GDP effects in both  cases would be negligible (provided the royalty paid by the branch is of a similar magnitude to that currently paid by Google Ireland).

How will the Revenue Commissioners react? Will they be passive and say “after you” to countries who deem Irish-resident companies to have permanent establishments within their jurisdiction?  If such branches are deemed to exist would they argue that the royalty fee should be paid from the branch to the parent here without being subject to a withholding tax?  Would they be prepared to challenge the transfer pricing parameters of such arrangements?  Do they have the resources to do any of this?  Should they be charging a withholding tax?

And what of the implications for Google? Well the implications in the UK seem slight in comparison to the (alleged) potential outcomes in France and Italy.  What about the implications for the infamous “double-irish” structure that Google uses?  In essence, this is not a relevant feature of the various audits being undertaken.  What the tax authorities are concerned with is establishing the activities that take place within their jurisdictions and the remuneration and taxation of same.  The place of incorporation of the companies is a bit of a side-show – except, that is, for US tax reasons.

The main reason for putting in place a “double-irish” structure is to engineer a deferral until repatriation of the US corporate income tax that would be due on these profits.  The US has a general deferral for sales company profits but if there are profits from royalties, rents, interest or dividends the anti-avoidance measures in Subpart F of the US tax code for passive income kick in and the US tax becomes due for payments regardless of whether such profits have been repatriated or not.

Well, that was the original intention of Subpart F when it was introduced in the early 1960s but it has been significantly watered down since then with various provisions and exemptions.  The structures are all multi-layered and include many methods through which a deferral of the US tax due on passive income can be achieved.  Even if one fails there will be another to step in.

The principle exemption that a “double-irish” structure is designed to avail of is the “same-country exemption”.  That is, the transfer of passive income between two companies in the same country does not trigger a payment of the US corporate income tax due under Subpart F.

Of course, the US judges “same country” on the basis of place of incorporation so we have two Irish-registered companies, Google Ireland Limited and Google Ireland Holdings, being classed as being in the same country even though one is in Dublin 2 and the other in Hamilton, Bermuda.  [Google uses “check the box” to have Google Netherlands Holdings assessed a disregarded entity in this instance.  The royalty payment does not go direct from Ireland to Bermuda as Ireland would have levied a withholding tax on such transfers to a non-treaty country.]

What would happen to the “same country exemption” if the royalty payments originate in branches of Google Ireland in other countries?  From this remove it is impossible to tell.  And with provisions like the “look-through rule”, “check the box”, and others there are multiple ways of achieving the same deferral outcome. 

And we don’t know if all of this is just idle speculation.  HMRC have completed their audit and concluded that Google Ireland does not have a permanent establishment in the UK under the Irish-UK tax treaty.  There isn’t anything sufficiently different in our tax treaties with France and Italy to suggest that the definition of permanent establishment used will lead to a different outcome.  Of course, the facts may be different or, even if the same, France and Italy may apply a different interpretation to the PE provisions.  And it is also the case that this tax risk has been obvious to Google for some time – one would imagine from the time the structure was put in place - but knowing the risks and avoiding them are not the same.

Is there any take-out point from all of this. Maybe not!  But it does show that countries are not trying to unravel the “double-irish”.  It is a part of the story but they are not hugely interested in what goes on in Ireland – or more precisely they are interested in what does not go on in Ireland.  They are interested in the activities that are carried out in their countries.  What they are doing is looking at the structure and wondering if the nature of the activities that happens is such that they can dip into the flows that begin with customers in their jurisdictions and capture some tax revenue from them.  All sides are generally acting as they should; let’s see how it plays out.

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Google before the PAC in the UK

Last week Google appeared before the UK’s Public Accounts Committee for the third time in four years.  Once again it was a wasted opportunity.  The Committee Members were more interested in point scoring then in getting to the heart of the matter in hand. 

The first topic addressed to the Google executives was that of Matt Brittin’s and the first issue for the staff of HMRC was the cost of the audit into Google’e tax affairs.  Google’s pay rates is not a public accounts issue and HMRC undertook the detailed investigation that the PAC Members had been loudly clamouring for. 

There are some nuggets of information in the transcript but all in all it makes for frustrating reading with lots of weak questions and the Google executives cut off whenever they seemed set to give a useful answer to the few good questions asked.  The supplementary written evidence from HMRC on the Google audit is helpful.

When the results of the audit were published there were numerous claims that Google was engineering a 3% corporation tax rate in the UK.  The crude calculations usually go something like this:

• Google has worldwide revenues of $70 billion or £40 billion
• Ten per cent, £4 billion, of Google’s revenue comes from UK customers
• Google makes an annual profit of around £10 billion
• Thus, Google profit margin is around 25% of revenue
• Therefore, Google’s profit from sales to UK customers is £1 billion
• Google pays £30 million of UK Corporation Tax a year
• Ergo, Google pays 3% tax on its UK profits.

This is all well and good and the arithmetic is correct but it is not how the current system of Corporation Tax works.  Maybe it is how it should work but arguing that the amount of Corporation Tax that Google pays in the UK is “wrong” based on such a calculation can only be the result of ignorance of how Corporation Tax works or dishonesty.  Neither reflects well on those making the claims.  Here is a good reply.

Corporation Tax is not paid based on the location of sales or customers; it is paid based on the value-added of the activities a company has in a country.  If a company has no presence in a country and makes sales to customers in that country it will face no liability for corporate income tax in that country. 

Of course, the problems arise when a company has a presence in lots of countries.  The first problem is determining whether that presence is significant enough to be deemed a taxable presence.  This is the concept of permanent establishment.  A storage facility will not be a permanent establishment whereas a manufacturing facility will be.  The next problem is determining how to allocate a company’s taxable income across these permanent establishments.  The current approach is to try and resolve this using transfer pricing based on the arm’s-length principle.   This allocates profits to permanent establishments based on the risks, functions and assets that they have.

The staff of HMRC tried to explain this to the Committee Members but they weren’t fully for listening. They heard what was being said but didn’t follow through on it.  Below the fold are some extracts from the hearings. 

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