The UK rules for taxing multinational businesses are based on a commonly-agreed set of international standards, based on principles developed by the League of Nations in the 1920s.

These standards have not kept pace with the global ways in which multinationals work. This means multinationals can plan their tax affairs in a way that separates their profits from the economic activities that generate them. This allows them to place profits in countries with low tax rates regardless of where they are earned. This type of aggressive tax planning gives multinationals an unfair advantage over their competitors and can mean that under current rules they can pay little or no tax on their profits.

This briefing explains how we are working with other countries to stop some multinationals exploiting these standards to avoid paying tax.

1. Working globally to tackle aggressive tax planning

To fully understand how multinationals operate in an international environment, countries need to work together. We are at the forefront of encouraging tax authorities across the world to liaise more closely in exchanging information about multinationals’ tax affairs, sharing best practice and developing ways to combat aggressive tax planning. We are actively involved in a number of international groups set up to examine the tax issues of global businesses. They include:

1.1 Base erosion and profit shifting (BEPS) project

This is a major international initiative that is modernising global tax rules. It is jointly overseen by the G20 group of countries and the Organisation for Economic Co-operation and Development (OECD). We are working closely with other countries to make changes to international tax rules so that they are robust, and operate in a fairer and more consistent way. These changes will ensure the profits of multinationals are taxed where the economic activities generating them are performed. In September 2014, the OECD outlined the first set of changes from the BEPS action plan.

1.2 Global Forum on Transparency and Exchange of Information for Tax Purposes

This is helping to expand a global exchange of information network that has enabled countries with less-developed tax systems to enlarge the number of international tax treaties with other countries. As a result, there has been rapid growth in these treaties since 2009. The UK, a founder member of this forum, has played an instrumental role in encouraging countries to sign up to Tax Information Exchange Agreements and the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.

1.3 Forum on Tax Administration (FTA)

This brings together the heads of tax administrations from the OECD, members of the G20 and emerging economies. This group, chaired by our Tax Assurance Commissioner Edward Troup, aims to ensure that tax administrations work together to improve tax collection, compliance and taxpayer services.

1.4 Joint International Tax Shelter Information Centre ( JITSIC)

This was jointly founded by the UK in 2004. The purpose of JITSIC is to help member countries identify and combat abusive tax schemes, using international agreements that allow for the exchange of information between tax authorities. The group currently has 9 members, including the USA, France, Germany and Japan, and through working together to exchange information it has achieved some notable successes, such as securing additional tax yield in the US of more than $1 billion. The importance of exchanging information is vital in meeting this global challenge and there are already plans to significantly expand this approach, following a FTA plenary meeting held in October. It committed its members to enhanced co-operation between tax administrations, based on existing legal frameworks. This will allow tax administrations more quickly to understand and deal with global tax risks whenever and wherever they arise.

A new voluntary international group has been created to support this approach by focusing specifically on cross border tax avoidance. This is essentially an extension of the existing 9-member JITSIC model to a wider audience. We are already building closer working relationships with strategic treaty partners outside the current JITSIC group to take this work forward.

2. Exchanging information with other tax administrations

To understand how much a multinational operating in the UK owes in tax to the UK, we need to understand its global business model and how the UK business fits within this.

To understand the full picture, we can request information from other tax administrations using tax agreements, and vice versa. Exchanging information in this way means there is greater transparency about multinational ownership of assets and the location of their profits, and is a way for governments to counter potential loss of tax revenue to tax havens.

The UK has the second-largest tax treaty network in the world and is able to exchange tax information about multinational companies with almost 150 other countries. We plan to implement the new country-by-country reporting template unveiled by the OECD in September 2014. Multinationals based in the UK will have to tell us where they make profits and pay taxes around the world. This information will help us to assess better where there are risks to collecting the tax that is due and where to focus on countering tax avoidance.

3. Advance Pricing Agreements (APAs)

We use APAs so that businesses can agree in advance, with HMRC and other tax authorities, how transactions between different parts of the business will be priced for the purpose of calculating taxable profits.

In common with most developed countries, these pricing agreements are based on internationally-recognised principles and provide certainty in advance about how the law applies to particular transactions. An agreement will only be made once HMRC has thoroughly assessed all of the facts and decided an APA is appropriate. The APA is regularly reviewed to ensure the business meets the terms of the agreement.

4. More information

Find out what HMRC is doing to tackle tax avoidance.

Source: HMRC. www.hmrc.gov.uk. Copyright Acknowledged.