Corrie and Surrogacy Law

Tina McIntyre (Michelle Keegan) has just given birth, prematurely, to a baby boy. She is a gestational (or total) surrogate mother – she is not the biological mother of the baby, nor is she married to the father.

However, all is not well in Coronation Street. The baby’s genetic parents, Gary Windass (Mikey North) and Izzy Armstrong (Cherylee Houston), are having serious relationship problems, which have surfaced when it was revealed Gary had made a pass at Tina.

*SPOILER ALERT* There is a possibility that Tina will refuse to hand over the baby to Gary and Izzy.

As a Corrie Widower, I only know all this because I’ve been dragged into the discussion of surrogacy law and parental rights. So, here is my legal analysis.

The Surrogacy Arrangements Act 1985 (section 1(2)(a)) states that “a woman who carries a child is to be treated for this purpose as beginning to carry the child at the time of the insemination, or of the placing in her of an embryo, of an egg in the process of fertilisation or of sperm and eggs, as the case may be, which results in her carrying the child.” The legal result is that it is the gestational mother, NOT the genetic mother, who is treated as the mother of the child.

So the baby is Tina’s.

Secondly, under the Surrogacy Arrangements Act 1985, no-one can enforce a surrogacy arrangement (section 1A). Tina can therefore quite legally walk away from the arrangements she has with the Windass family.

I don’t know enough of the back-story to be able to say whether Gary is already the baby’s legal as well as genetic father. It is possible for a sperm donor to be the legal father of a baby, but consent and notice are required (see Human Embryology and Fertilisation Act 2008 – Meaning of “father” at sections 35-41).

Izzy’s and Gary’s only method of obtaining legal parental status would be to seek a parental court order (section 54 of the 2008 Act). It is important to note that the parental court order would make the baby the legal child of the TWO applicants – spot the potential plot line development there. Other than that qualification, Izzy and Gary meet the other conditions of section 54.

A court would also have to be sure that Tina had “freely, and with full understanding of what is involved, agreed unconditionally to the making of the order” (section 54(6)). Plenty of room for plot twists there, too. Also, any financial arrangement between Owen Windass and Tina should not fall within the ban on money or other benefits changing hands for the parental order, or must be approved by the court (section 54(8)).

Lastly, in considering any application, the baby’s welfare is the court’s paramount consideration when considering whether or not to make a parental order: see Re X and Y (children-foreign surrogacy) [2011] EWHC 3147 (Fam).

Google, Amazon, Starbucks and Tax Avoidance

Lough Erne Resort – location of G8 summit in June 2013 to discuss tax avoidance

A number of international e-commerce and other business-to-consumer businesses have been in the media spotlight recently. Google, Amazon and Starbucks executives have received the most attention in the UK, following appearances by them to give oral evidence to the House of Commons Public Accounts Committee (PAC) investigation into tax avoidance. Google was asked to return to the PAC to clarify issues concerning its taxable status in the UK.

These three companies appear not to have paid similar amounts of corporation tax to those of other UK-based companies with a similar turnover, even though they appear highly profitable. This has led to criticism of their ethics as well as to the tax system itself that enables them to appear to get away with paying little or no tax.

Starbucks is reported not to have paid much tax as its UK subsidiary is not, on paper, a profitable company. It appears to pay significant sums for its supplies and branding rights to other companies in the Starbucks’ group of companies. This raises the issue of the real value of these transactions and what is known as transfer pricing. Starbucks has weathered the PR storm by ‘volunteering’ to pay £20 million in corporation tax for 2013/2014.

Here, I look at the situation where business is said to be conducted by foreign companies without a taxable presence (or, in tax jargon, a permanent establishment) in the UK. Google, in particular, is quite up front about its tax affairs, stating that all of its UK business is concluded by its Irish company, which pays 12.5% corporation tax in Ireland instead of the UK’s 20%+ tax rate.

The reason that these tax arrangements are legal is that for many jurisdictions’ tax laws, the mere carrying out of certain activities by representatives of a foreign company in a jurisdiction does not created a ‘permanent establishment’ for the foreign company in that jurisdiction. It is only companies with a permanent establishment that are taxable.

‘Permanent establishment’ is defined in the UK by Chapter 2 of Part 24 of the Corporation Taxes Act 2010. In summary, if the activities of a foreign company carried out in the UK by its employees or agents are only for preparatory or auxiliary purposes, then no place of permanent establishment is created. This closely follows the OECD Model Tax Convention on Income and on Capital 2010, Article 5. If the place of management, ie where the companies’ transactions are concluded, is outside of the UK, then no UK corporation tax is payable. As has been demonstrated by the Google case, this appears to be a surprise to many, despite this being long established international tax law and practice.

The obvious answer is not to vilify the executives of companies, who naturally seek legitimate ways to reduce their tax burden, but to change the relevant tax laws.

If I were to do this, I’d go for the definition of ‘permanent establishment’. I suggest that if a significant proportion (say 75%) of the total costs of sale or delivery of a service are physically incurred in a the same jurisdiction where the goods or services are delivered, then despite the fact that the relevant company’s HQ (place of management) may be elsewhere, the company should be deemed to have a permanent establishment in that jurisdiction.

Secondly, I support the idea already considered by the OECD Technical Advisory Group of amending the OECD Model Tax Convention (and the definition of ‘permanent establishment’ in the Corporation Taxes Act) to include virtual permanent establishment.

The TAG suggested in its report Are the Current Treaty Rules for Taxing Business Profits Appropriate for E-Commerce?:

323. The “Virtual Fixed Place of Business PE” would create a permanent establishment when the enterprise maintains a web site on a server of another enterprise located in a jurisdiction and carries on business through that web site. The place of business is the web site, which is virtual. This alternative would effectively remove the need for the enterprise to have at its disposal tangible property or premises within the jurisdiction. It would nevertheless retain some or all of the other characteristics of a traditional PE, i.e. the need for a “place” (whether physical or electronic) within a jurisdiction having the necessary degree of permanence through which the enterprise carries on business. Thus, for example, a commercial web site, through which the enterprise conducts its business and which exists at a fixed location within a jurisdiction (i.e. on a server located within that jurisdiction) is regarded as a fixed place of business.

I would go further than the TAG and not get fixated on the idea that virtual permanent establishment be tied to the physical location of the e-commerce website server. In addition to the server location, I’d also consider that where a website was clearly targeted at consumers in a particular jurisdiction, as shown by evidence such as use of language, billing currency, local contact details or the applicable law that would apply to the consumer transaction effected by the web site, then this, too, would create a virtual permanent establishment.

Note that the TAG report referred to above was published in November 2002, following work started in 1999. Any recent outrage and questions about the ethics and morality of tax avoidance from politicians of any party must therefore be taken with a pinch of salt. It is a shame that it has only taken the worst recession the UK has suffered for a generation for these same politicians to begin to wake up to tax avoidance.

Companies and their employees

All company law students know about the case of Salomon v Salomon & Co Ltd, even though it dates from 1897. The case continues to be a leading authority for the key company law concept that companies are separate legal entities, and is an early example of shareholders avoiding any liability when a company went into insolvent liquidation. Saloman & Co Ltd had been incorporated under the Companies Act 1862, the first of many Companies Act and a consolidation of, among others, the Joint Stock Companies Act 1844.

Before the Joint Stock Companies Act 1844 companies could only be formed by an act of Parliament or Royal Charter. These pre-1844 companies were generally unlimited liability corporations. Only where there was a significant public interest were companies granted the privilege of the protection of limited liability. This was often the case for transportation (particularly railway) or utilities’ companies, where large capital investment was required and where there was likely to be substantial public benefit. However, the Limitation of Liability Act 1855 made this privilege a right for any company incorporating under the 1844 Act, where the shareholders paid up £50 share capital (approximately £5,000 in 2013 terms).

There had been wide debate about limited liability corporations, with a Royal Commission taking evidence on the issue and deciding against limited liability being introduced into any company law reform (Royal Commission on the Mercantile Law, Report 1854). However, the new coalition government of 1855, led by Lord Palmerston  appears to have rushed through the 1855 Act under the political and financial pressure of dealing with a failing and unpopular war, the Crimean (see Colin Mackie’s analysis at From Privilege to Right: Themes in the Emergence of Limited Liability). It should not be a surprise that the immediate beneficiaries of limited liability were the upper and middle classes. It was even recognised that lawyers and accountants would gain new business from advising on the use of the new limited liability structures.

Some arguments against joint stock companies with limited liability came from respected sources. In Book V of Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations, he makes observations that are as relevant today, with directors of FTSE100 companies arguably awarding themselves excessive remuneration whilst taking, in the case of financial institutions in particular, outrageous risks, without active shareholder control:

The trade of a joint-stock company is always managed by a court of directors. This court, indeed, is frequently subject, in many respects, to the control of a general court of proprietors. But the greater part of these proprietors seldom pretend to understand any thing of the business of the company; and when the spirit of faction happens not to prevail among them, give themselves no trouble about it, but receive contentedly such half yearly or yearly dividend as the directors think proper to make to them. This total exemption front trouble and front risk, beyond a limited sum, encourages many people to become adventurers in joint-stock companies, who would, upon no account, hazard their fortunes in any private copartnery. Such companies, therefore, commonly draw to themselves much greater stocks, than any private copartnery can boast of. The trading stock of the South Sea company at one time amounted to upwards of thirty-three millions eight hundred thousand pounds. The divided capital of the Bank of England amounts, at present, to ten millions seven hundred and eighty thousand pounds. The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company. It is upon this account, that joint-stock companies for foreign trade have seldom been able to maintain the competition against private adventurers. They have, accordingly, very seldom succeeded without an exclusive privilege; and frequently have not succeeded with one. Without an exclusive privilege, they have commonly mismanaged the trade. With an exclusive privilege, they have both mismanaged and confined it.

This is all background. The essential point is that we have become so used to the idea of a limited company being considered to be a separate legal entity with limited liability that we have forgotten how unusual this is, and what an artificial mechanism has been created in order to encourage investment in business, and to protect investors should their investment not prove successful. It is as if we have collectively decided that the interests of the capital classes are completely paramount, with no regard for the wider social and societal interests in companies being good employers.

In my view, we have not ensured that this shareholders’ “right” to limited liability, as Colin Mackie identifies it, is balanced by adequate shareholder “responsibilities” to protect the public interest.

I remember being disappointed during one of my first readings of the Companies Act 1985 (which was the relevant law at the time) that the only statutory duty directors owed to employees, as set out at section 309, was so limited. Directors had only to “have regard to  interests of employees”, but crucially these employees had no mechanism to enforce the provision.

This continues to be the case under the current Companies Act 2006. This relatively new law is a major reform and consolidation of UK company law. It extends to 1,300 sections and 16 schedules, making it one of the longest acts of Parliament in UK history. Part of the Act put directors’ duties on a statutory footing for the first time – see Companies Act 2006, Part 10, Chapter 2. However, nowhere in these duties are employees given adequate protection. Section 172 of the Companies Act 2006 merely reiterates the “having regard to” wording used in the Companies Act 1985, but this is still subservient to the interests of the members (shareholders).

How radical would it be, in practice, if shareholders were required to recognise the benefit of being granted limited liability protection by accepting that their interests were not paramount? What if Section 172 read as follows (changes in red):

172  Duty to promote the success of the company

(1)  A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of—

(a)   its members as a whole, and

(b)   the company’s employees.

(2)  A director of a company, must, for the purposes of subsection (1), in doing so have regard (amongst other matters) to—

(a)   the likely consequences of any decision in the long term,

(b)   the interests of the company’s employees,

(bc) the need to foster the company’s business relationships with suppliers, customers and others,

(cd) the impact of the company’s operations on the community and the environment,

(de) the desirability of the company maintaining a reputation for high standards of business conduct, and

(ef)  the need to act fairly as between members of the company and the company’s employees.

(2)  Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members and the company’s employees, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members and the company’s employees were to achieving those purposes.

(3)  The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.

Creative Commons and Photos

As a Creative Commons licence user, I thought this infographic was particularly useful.

How To Attribute Creative Commons Photos by Foter