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How Companies Avoid Corporation Tax

I watched a great video on the BBC with the beguiling title of “A Beginners Guide to Tax Avoidance”. It is a fascinating simplification and here is our summary.

“Big Biz Co” is a company based in the USA, it has a presence in dozens of counties including the UK where it makes widgets, this British subsidiary “Widgets UK” made widgets worth some £900,000,000 last year, but somehow it only made a profit of £10,000,000 and thus paid very little corporation tax.

How did it pay very little tax? Well (and here’s the interesting detail) Big Biz UK spends a lot of money importing parts from Big Biz HongKong and every widget it makes, it sells on at a very low price to Big Biz Ireland (with me so far?).

Well Big Biz Ireland has the rights to sell the company’s widgets across Europe and buying them cheaply makes a very substantial profit on the sales of many, many millions – So (I sense you thinking… Big Biz pays loads of tax in Ireland? Well (again) you’d be partially right because Irish corporation tax is only 12.5% at the moment and they also pay tax in HongKong at 17.5%.

But, and there’s a BIG BUT…  Big Biz is run from New York so the Irish tax authorities state it’s American. Those lovely pals of ours over the pond, treat the company as IRISH because it’s business is over-seas!!  And as it said in the BBC video… Magic! And to make it even better, all those low or non existent tax bills are perfectly legal because the laws were generally written over 100 years ago, just a little before Tim-Berners Lee was thinking about the population of the World sharing stuff over the World Wide Web

avatar Name: Alexandra Eager
About: Alex has worked as a Financial Controller and Finance Director for many years for a variety of companies across a range of industries but more recently she has moved away from accounting working for an internet marketing agency as Finance and Operations director, primarily overseeing the finance functions and search engine optimisation (SEO) for clients. Follow Alex on G+ and on Twitter @Alex_BusDirUK
Alex runs her own company with two fellow owners developing a suite of e-commerce web sites and promoting them directly. “I found that SEO and finance were quite compatible both needing an eye for detail, research and analysis as well keeping up with new developments and changes.”

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