Monday, 17 September 2018

A surprisingly simple way to deal with corporate tax avoidance

David Sanders

Last month, the BBC reported that Amazon’s UK tax bill had fallen despite a significant increase in its profits to public outcry. Many people are infuriated by the fact that multinational corporations avoid paying taxes in countries where their turnover is considerable and where they make huge profits.

The main legal device that multinationals use to minimise their tax exposure is to locate their official, tax-declarable headquarters in a country with a low corporate tax rate. Here, they pay the legally required corporate taxes. They can thus make a legal case, recognised in international law, that they are paying an appropriate amount of tax in their chosen country of tax residence. Yet at the same time they contribute little or nothing to tax revenues in the countries where they make most of their profits.

By implication, they make a disproportionately small contribution to the economic and legal infrastructures in the countries where they operate. Amazon, Apple, Google and Starbucks are frequently cited as examples of companies that deploy this sort of strategy. There are doubtless many others.

Suggestions that ‘something ought to be done’ to make multinationals pay ‘fair’ amounts of corporate tax are typically met by the response that concerted international action would be necessary to curb multinationals’ ability to avoid paying tax. And, as we all know, achieving coordinated tax policies across national borders is extraordinarily difficult, especially in an era when economic nationalism appears to be reasserting itself.

I am not convinced that we need to rely on international agreements to force multinationals to contribute properly to tax revenues in the countries in which they operate.

One proposed solution is that multinationals that pay no corporate taxes in, say, the UK could be taxed on their UK sales – thus compensating the UK Exchequer for the lack of corporate taxes paid. The problem with this approach is that it can be argued to be discriminatory against multinational companies that are paying all the taxes that are legally required in the UK. It is argued in consequence that if a Tax on Sales – paid by the Seller – were to be introduced in the UK, then all companies, whether or not their tax headquarters are in the UK (and whether or not they are making profits), should be expected to pay it.

In order to avoid such accusations of discrimination, I propose a modified version of the Tax on Sales (paid-by-the-Seller) idea. If a multinational has its tax-declarable headquarters in a country with the same or a higher rate of corporation tax on profits than the UK, then its Tax on Sales levy would be zero. However, if its tax-declarable headquarters were located in a country where corporate taxes were lower than in the UK, then its UK sales would be subject to a Tax on Sales at a level that would bring its UK tax liability to a figure that represented the difference between two measurable figures:

(a) the corporation tax that would have been paid in the UK had the company been obliged to declare the profit on its UK operations in the UK; and

(b) the amount of corporation tax paid by the company on its UK operations in its tax-declared country.

UK corporate tax law could easily be configured to require all overseas tax-domiciled companies that operate in the UK to reveal both (a) and (b) on an annual basis. If companies failed to provide the appropriate information in a timely way, HMRC could be empowered to calculate (a) and (b) based on reported tax paid in the tax-declarable country and the company’s average turnover figures for the UK and globally.

It would be a simple matter to calculate the difference between them. Thus, for example, if a company that was tax-declarable in Ireland paid only 12.5 per cent tax to the Irish government on its corporate UK profits, given a UK corporate tax rate of 19 per cent, it would be expected to pay a UK Tax on Sales amount equivalent to 19-12.5=6.5 per cent of the profits on its UK operations. On a sliding scale, where the difference between (a) and (b) was large, a relatively high Tax on Sales rate would be applied; where small, the Tax on Sales rate would be relatively low.

The object in all cases would be to bring the total corporate tax burden on multinational companies that operate in the UK into line with UK-based companies that tax-declare in the UK; to level the corporate tax paying field. A minimum UK turnover or sales threshold could be employed to ensure that HMRC’s activities were concentrated on the most egregious cases.

The UK does not need to negotiate internationally to adopt such a policy. It could just do it. Other countries could do exactly the same if they thought it was sensible. All countries might then start to realise that the race to the bottom of reducing corporate tax rates is good for no-one, since it reduces the global funds available to governments for the renewal of economic and social infrastructure. It might also begin the process of eliminating the tax havens that criminals, tax-avoiders and tax-evaders have relied upon for so long to protect and extend their narrow sectional interests.

David Sanders is Emeritus Professor at the Department of Government, University of Essex. 

Image by Christian Wiediger.

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