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Multinational corporations and corporation tax

The current media interest in multinational corporation tax is an emotive subject. However, it is important to understand the contract law and tax policies that underpin the issue to gain a more balanced insight.

In contract law, where the contract is concluded is critical. For high street retailers the contract is concluded at the till. For an online business, the contract is concluded at the location of the company’s webserver.

The place of contract determines whether the online retailer trades “with” or “in” the UK. Those trading in the UK have a taxable presence, are subject to the UK tax system and their profits will be liable to UK tax. By contrast those who trade with the UK and do not have a taxable presence are not subject to UK tax.

The technical term for a taxable presence is a permanent establishment (PE). If a PE exists a proportion of the company’s profits must be allocated to the PE and taxed accordingly.

What constitutes a PE? According to the Organisation for Economic Co-operation and Development (OECD), it is a place of management,  a branch,  an office, a factory,  a workshop,  a mine, quarry or other place of extraction of natural resource, or a building site or construction or assembly project which exists for more than six months.

What is specifically excluded is the use of facilities and the maintenance of stock or merchandise solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise.

In effect warehousing and delivery of a product ordered online through an offshore server does not constitute a PE and is therefore not subject to UK tax.

In addition to the location of PEs, a company is also taxed where it is based. However, companies are protected from paying tax several times on the same profits to different countries by Double Tax Treaties and the UK has over 100 treaties in force.

It could be argued that indignation at the multinational e-retailers is misplaced. They operate within the bounds of UK contract law, and UK and International tax law. If there is an appetite for change it should come from reasoned parliamentary debate leading to amended legislation. 

As an interesting aside, the government has just published a consultation paper “Taxing remote gambling on a place of consumption basis”. This is the first mention of a change from a “place of supply” to a “place of consumption” basis and may have interesting ramifications for the rapidly developing e-commerce arena.

If you would like to speak with Graham about any aspect of corporate or personal tax, please contact him at or call on 01332 365855.

This advice is general in nature and as each individual’s circumstances are unique, you should take no action without first consulting your professional advisors.