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Foreign firms responsible for a third of underpaid tax, analysis finds

Using transfer pricing, a multinational business could pay less corporation tax in the UK by charging an inflated price for services to its division in the UK. HMRC suspects that this practice results in some large businesses artificially reducing their tax liabilities in the UK

HMRC believes that foreign-owned companies are responsible for 32% of all the underpaid tax by large businesses in the UK, making up £11.5bn from a total of £35.8bn unpaid, according to analysis from Pinsent Masons.

Figures from HMRC show that large US-owned businesses are believed to be responsible for the highest percentage of the under paid tax from foreign-owned companies (47%), with the revenue missing out on £5.4bn as a result.

According to Pinsent Masons, large US-owned multinationals are a “key target” for investigation by HMRC, with their use of so-called ‘transfer pricing’ a major focus.

Using transfer pricing, a multinational business could pay less corporation tax in the UK by charging an inflated price for services to its division in the UK. HMRC suspects that this practice results in some large businesses artificially reducing their tax liabilities in the UK.

HMRC also suspects some major US businesses of ‘base erosion’ – shifting profits from UK sales to lower-tax countries by claiming not to have a taxable presence in the UK.

After large US-owned companies, businesses operating in Switzerland (£825m) and the Republic of Ireland (£674m) make up the top three countries in the list of foreign-owned companies HMRC believes are underpaying UK taxes. Both countries still have corporate tax rates below the 15% that will be required from 2023.

Steven Porter, partner at Pinsent Masons, said: “Major US multinationals are now a constant target for HMRC. The tax authority believes some of them are paying substantially less tax than they owe in the UK.”

“Reducing losses to the Treasury from transfer pricing and base erosion is a key target, both for HMRC and for the Government. With Corporation Tax set to rise in just over a year’s time, they will be keen to make sure the extra revenue generated does not leak away to lower-tax jurisdictions.”

Porter adds: “HMRC’s stance on overseas corporates underpaying tax has toughened significantly over the last decade. Given the need to repair public finances after the pandemic, it is only likely to get even more active in terms of investigations in the coming years.”

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