Multinational IT suppliers doing well on tax deals

Multinational government contractors have been paying tiny sums on tax, and undercutting smaller companies on tender deals, according to Private Eye.

Private Eye named and shamed Accenture, Capgemini, Fujitsu, HP, IBM and CSC for paying tiny amounts of tax while making millions.

CSC paid just half a percent in tax on £1.5 billion income it earned from the 10-year outsourcing deal it did with with Royal Mail in 2003. Last week, the Public Accounts Committee waded into other multinationals such as Starbucks and Amazon which were doing the same sort of thing.

But it looks like in the case of IT outsourcing it is the way of the contract when governments do deals with the big multinationals.

The suppliers have been winning big contracts by slashing prices to an extreme, running at a loss for a few years and then making up the difference by cutting costs and sacking staff at the last moment. In the short term, they save themselves from trouble by tax write offs which keeps them making money from the contract.

Accountants have said that the losses are built into the long term nature of the outsourcing contact. There is nothing illegal about it, and it is possible that Royal Mail knew how it would work when it hired CSC.

Because companies only pay tax on their profits, it is still possible for a loss-making outsource to generate income for its parent by using some clever internal accounting.

According to Computer Weekly, the CSC case shows how such a scheme can make cash. CSC made a loss of £12.4 million on its £1.5 billon Royal Mail contract. It started turning a profit in 2009 after it had finished cutting 63 percent of the staff it acquired under the deal.

While it was making a loss it was given £61.6 million of tax credits and it finished up with the project in the black.

What is particularly annoying for UK companies is that many of these cunning plans are not available to them because they can’t funnel money off-shore to avoid tax. It means that when they bid for lucrative government contracts, they can’t offer the lower prices of the multinationals because they are usually attempting to make a profit.