UT parameters – the Unitary Business

A Unitary Business is the basic taxable unit.  It consists of all legal entities under common control which operate in the same or related business.   Note that I am using “business” to mean economic activity in general, and “Business” as a technical term for this basic taxable unit.

“Control” is defined using a 50% test, but this is to be extended to catch avoidance situations.

There is a presumption (rebuttable?) that businesses are related if there are a significant number of transfers between them, or share common resources/services.

Number of Businesses

Starting with a business that buys and sells widgets, where all entities are 100% subsidiaries, this is clearly a Business.

If we also buy and sell grommets, with broadly similar suppliers, customers, assets and staff, this would appear to be the same Business.

If we have a retail operation in the UK, and another in France (with a separate brand name, staff, assets and customer base), are these separate Businesses?  If we set up an EU procurement company to supply both of them, do we now have 1, 2, or 3 Businesses?  I assume that we consolidate into as few Businesses as we reasonably can, and so would just have the one.

Similarly: if we have a widget-selling business, and then acquire a separate grommet-selling business with its own staff, premises, suppliers and customers, is this immediately subsumed into the same Business (as the businesses are related), or do we need to wait until there is some economic integration?  For example, Alliance Boots – there is a retail business which is primarily in the UK and a wholesale business which is primarily not, from which one can fairly safely conclude that there will be a lot of labour and assets which are not at all shared; but would the shared elements be enough to bring them into a single Business?

If we make & sell widgets, and buy & sell grommets, do we have a single Business or two Businesses?  Or three, indeed – one of manufacturing and one/two of selling?  Again, I assume we would combine these into one Business if we can: there is a single Business of selling, and the manufacturing is just another way of sourcing the product of one of the businesses within it.

Similarly, if we buy and sell both widgets and grommets, and have a 40% stake in the factory we buy the widgets from but get grommets from a third party, how many Businesses do we have?  I assume that we have one, and we exclude the factory as not being controlled.  Would this change if all or nearly all the factory’s sales are to us – would that be enough de facto control and integration to bring it into the Business?  Can the factory dip into and out of the Business depending on how many thrird-party sales it makes?

Shareholdings: do we look through guarantee companies and partnerships?  I assume so – the test would not simply be a shareholding test like the normal UK CT grouping test, but would look at actual control.

On that note: who exercises control, if we are ignoring companies?  We need to find some way to identify management bodies which control each Business.  This needs to be below the board of the parent company – clearly this will control all the Businesses, but if we only look at that level we could only ever have one Business.

Accounting: assume a 100% group with 3 Businesses.  How do we establish the profit of each Business if they have a shared service centre?  Or does the existence of the shared service centre itself make them into a single Business?  It would seem odd if any inter-company transaction at all made businesses into a single Business, but if there is a threshold then we need to be able to deal with transactions beneath it.  The obvious route would be  to treat the actual amount received as a Sale, and the amount paid as a nothing (unless it can be brought into the Asset or Labour pools) – but how do we ensure that the Sale value is correct if we are trying to eliminate the arm’s-length principle in favour of a purely mechanical approach?  What if the transaction is intra-company: the salary of the MD of a company involved in two Business, for example?

We have a widget seller based in the UK.  It opens a branch in France – part of the same Business.  It opens a subsidiary in Germany – same Business.  When it starts a 50% JV with a local entrepreneur in Spain – is this the same Business, if something (operational factors?) gives us control?  What if we have 40% but operational control (so it’s in our Business), and the Spanish partner has 60% (so it’s also in their Business)?  Do we need a tie breaker for dual control situations?  The simple answer must be that when in looking at the extension of “Control” to shareholdings below 50%, you can only do so if no-one else has control, but this may take some careful wording.

Where do we start with determining whether businesses are related?  We can’t start with a company, as it could be involved in several Businesses, and to start with a business seems a bit chicken-and-egg.  Do we just start by breaking down the group’s activities into some rough splits and then see how the detail fits together?  Looking at the group that manufactures widgets, buys in grommets, and sells them both, should we start small and build up if they seem linked, or should we start assuming one Business and only split them if we can’t justify keeping them together?  The latter seems simpler, but might lead to a presumption of unity which could distort things.  Starting with the former might mean we end up too fragmentary.

Initial conclusions

I shall assume that all businesses in a group are a single Business to start with, but then actively examine the activities to see if one can justify splitting anything off.

Control will be defined as the power to have the business act in accordance with the wishes of a certain agency.  I need to define the agency which can exercise this control.

I also need to define the form of control.  Shareholding is a useful initial test, but obviously doesn’t work in all cases (such as a JV controlled by a 40% shareholder).  I want something more rigorous than an elephant test; it needs to be capable of breaking ties.

I need to establish a threshold below which intra-group transactions are insufficient to form a Business.

I am trying to abandon the arm’s length principle, so inter-business transactions below the threshold will (for the moment) be left at the amount in the books and not adjusted.


I have assumed for the moment that there will be a single UT formula to apply to all Businesses.  Should there be different formulas then Iwill need to make sure that each Business only contains businesses to which a single formula shuold apply.  This may then require that the interaction threshold be disregarded, and two Businesses kept separate no matter how great their interactions.  This seems like a complication to be layered on after a single-formula system has been established.


6 thoughts on “UT parameters – the Unitary Business

  1. There are some interesting thoughts on how to divide up the world for tax purposes in John Prebble’s paper “Why is tax law incomprehensible” ( http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1681810 ) – and it’s a good read anyway.

    The idea of starting with the legal group and only disaggregating if justified looks a sensible starting point, but how are you treating non-corporate entities? Given that this is all about tax, could you start with taxable personalities in each jurisdiction, so you don’t need to worry about precise comparisons between legal forms?

    Might it also be possible to use the taxable personality analysis also for control? That is, does that taxable personality have the capacity to influence or control any other taxable personalities in the group; if a ‘subunit’ of the group is able to act autonomously, it gets taxed autonomously. [Not sure how this would interact with entities which are transparent for tax purposes though?]

    The other possible analysis tool is management accounts, which ought to give a pretty clear picture of the economic reality of operations (which I think is what were trying to tax)? But a) they’re not by any means ‘standardised’ or comparable, and b) it’d take a significant shift in transparency practices and attitudes for them to be handed over to the tax authorities on a regular basis. Happy to be proved wrong, but I suspect that’s a non starter.

    Hopefully that’s all constructive stuff – but there’s a problem case which keeps niggling; I’ll post it separately to keep responses cleaner.

    • Thanks Jason, that paper was excellent. Lots of solid points, plus it made me laugh a couple of times.

      I’m starting to worry more about the multiple Businesses point: for one thing, it’s a subjective area that different tax authorities might disagree about. If the tests aren’t clear enough to get consensus across all jurisdictions, we have double- or non-taxation. But the only test which is even close to being clear is to have a single Business (and even that is a bit ragged at the edges), which intuitively seems to be the wrong answer if you have very different businesses.

      But at this stage I’m just building the model. Poking holes in it comes later – it may be that the impact isn’t going to be huge.

  2. Whenever I think about aggregation/disaggregation of business units, I keep thinking back to a client I had in practice – 14 companies in 4 main territories, plus several sales offices. 6 main divisions, incl. Manufacturing, Sales, Service, Head Office & R&D. Now, you could easily align all the ‘hardware’ stuff as one Business; it pretty much formed one ‘trade’ for UK tax purposes. (In practice they had divisional accounts for each company; some had 6 columns full of numbers, other companies had only 2 or three columns populated and others totally blank. Consolidation was a hoot, not; I ended up mapping it in 3d to do the tax return, which was split into <6 trades for UK purposes, across <5 companies. Management accounts mapping of TB of course != Financial Statements mapping of TB, so more joy reconciling tax return analysis to stats for the inspector.)

    But the problem for UT, and in particular the ‘control’ test is the R&D wing. In one way it was under head office control – they set budgets, and could demand certain projects be pursued to improve the group's own products. In another way, it was autonomous, and did work for external customers, often totally unrelated to the groups own product lines (transferable design principles). And that external work was run totally in the division; the group board couldn't (sensibly) and didn't attempt to interfere. It generated income, but in a somewhat lumpy fashion, and also a handy ongoing royalty stream from successfully exploited IP. Identifying what share of its profits were 'group' profits and what its non-group profits were would change from year to year, as would working out how much of the 'control' which was exerted during the year was 'group' and how much 'internal'. Plus calculating the business profits would be circular, since costs and income attributed to the external work would impact both on the absolute and proportionate levels of group profit available/allocated to the R&D wing. Given time of course, the external royalty stream would probably totally outweigh any internal value in a given year, so you'd have to call it a separate Business thereafter… but how would you treat purely internal projects called for by head office..? I'm inclined to think the only way round would be de minimis proportional levels – and even there, there's scope for inconsistency year on year if significant royalty streams come to an end.

    • That’s interesting – taking it slightly more broadly, if you split out a separate Business then could you effectively be increasing the Sales attributable to a country. Looking at the R&D unit in your example: if we assume the R&D sales are easily identifiable, then if we have a single Business then the external R&D sales are lumped in with it; if R&D is a separate Business then the sales to the Hardware Business also count as Sales for the R&D UT formula, but they have no impact on the Hardware R&D position. This means that the country overall gets slightly increased Sales even though the group’s overall profit is steady.

      Another, perhaps more common, case would be Boots Wholesale supplying Boots Retail: Retail’s cost of goods would effectively be added to the UK’s Sales.

      I shall have to look at this when I get to the Sales part (nearly there!).

  3. Sorry to be late back to this discussion.

    it’s interesting to think about this in the light of the business I work for. Taxation magazine is published by LesxisNexis (LN) (although under the Tolley brand). LexisNexis is ultimately based in America, but the parent company of LN and other companies in the group is Reed Elsevier (RE). We’re the UK division of an American subsidiary of an Anglo-Dutch parent company…

    Without breaking any commercial confidentiality, it’s obvious that the actual content of LN UK’s services will be different from that of the US parent (or indeed the Australian service, etc). There is, however, some common technology that underlies them all, and certainly a common high-level management.

    There is less direct synergy, except at a high level, with RE. We do, however, share office space, IT facilities etc, and I sit on a pensions management committee for a scheme that covers not only the existing publishing business, but former employees of all sorts of weird and wonderful businesses RE used to own in the days of conglomerates.

    And, paradoxically, I work in an office which also houses RE magazine teams. On paper (sic…) I would arguably have more in common with them than with some of the other services LN supplies – legal practice software, for example. In reality, although we occasionally get to bounce ideas off each other, there is actually fairly little synergy.

    So if you move away from the group and try and split it into different businesses, I think you have a real difficulty. It’s probably only practical to say that the multinational as it presents itself to the world (which will overwhelmingly be as a group with a consolidated set of financial statements) is the way that it has to be analysed for unitary taxation – I don’t think the “business” model in Sol Picciotto’s paper would stand up in the real world, even though it is part of the underpinning that justifies unitary taxation.

    it follows that you can only have one business allocation formula, having more always looked to me like it was a bit of a copout.

    • I’m starting to think you’re right, though there may well be ways to overcome this problem. It sounds as though perhaps your business is integrated enough to count as a unified Business, though, whereas other might not be.

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