Unitary taxation has been used by the US for nearly a century
The Google tax controversy has highlighted the huge imbalance between the power of transnational corporations and normal people. Normal people’s tax disputes don’t drag on for decades and they can’t get access to policymakers to secure favourable deals. Neither can they easily create complex structures to shift income and profits from the UK to elsewhere.
If corporate propaganda is to be believed, battalions of lobbyists, accountants and lawyers are heaving their luggage about in ministerial offices and tax havens because of a burning desire to comply with the law.
They go to enormous lengths to manufacture losses, shift profits and engage in dubious transactions to merely comply with the law. The truth is that companies make profits by using social infrastructure (education, healthcare, transport, security and legal system), but too many don’t want to make a fair contribution towards its cost.
For years, the corporate lobby claimed that when corporation tax rates are reduced, companies will stop dodging taxes. The compliant governments have reduced corporation tax from 52 per cent in 1982 to 20 per cent in 2016, but there is no end to tax games in sight.
The same lobby wants to abolish corporation tax altogether. If successful, that would deprive the UK public purse of around £42 billion (page 5 of the HM Treasury forecast). The higher profits will simply line the pockets of executives and shareholders.
As a consequence normal people will have to forego hard-won social rights, or face higher taxes. Income tax yield will need to rise by 26 per cent (see page 8). Of course, companies will still want subsidies and taxpayer bail-outs to rescue them from their own follies, as in the case of banks.
Corporation tax is levied on profits, but former Conservative chancellor Lord Nigel Lawson argues that this should be replaced by a tax on sales. His reasoning is that multinational companies can move profits around, but somehow the sales figure can’t be shifted.
Actually, his proposals complicate the issues even more. The debate about Google is precisely that the company is able to undertake economic activity in the UK, but books its sales in Ireland.
The nearest experience of tax on sales that we have relates to Value Added Tax (VAT). Around £12.1bn is not collected in the UK each year and the European Union fails to collect €168bn (£129bn).
Sales tax is a favourite target for the tax avoidance industry. One such scheme was marketed by Ernst & Young for Debenhams and 70 major high street retailers, and described by a Treasury spokesperson as ‘one of the most blatantly abusive avoidance scams of recent years’.
Another scheme developed by KPMG used offshore structures to enable amusements arcades to avoid VAT. There is little to suggest that tax on sales is immune from attacks.
Lord Lawson’s proposal for tax on sales has no relationship with profit margins. Many fledgling and small businesses either make losses in earlier years or have small profit margins. They would be penalised by a tax on sales. Steelmaking companies currently have sales but are making losses.
They would be forced to pay the tax on sales, which would worsen their cash flow, hasten their demise, and kill-off any chance of recovery. In a long supply chain, the final link in the chain may have a small profit, but will face a large tax on sales. Of course, companies don’t earn their revenues from just selling their products and services.
They also make gains by selling assets and profits from gambling in stock markets. The Lawson scheme does not touch such revenues.
The third option on the table is Unitary Taxation, and a version known as the Common Consolidated Corporate Tax Base (CCCTB) is advocated by the EU. It levies tax based on profits but in a radically different way. Under the current system, a company with 500 different subsidiaries is assumed to have 500 independent taxpaying entities.
This invites companies to indulge in creative games to shift profits through spurious royalty payments, management fees and intragroup interest payments.
The reality is that companies like Google are integrated entities with common products, boards of directors, shareholders, strategy, finance, marketing and everything else.
Their subsidiaries are not independent entities. In essence, unitary taxation calculates the worldwide profit of an integrated entity. It ignores intragroup transactions. The profit is allocated to each country by an apportionment formula that takes account of how value-added is generated. This could be on the basis of sales, assets, number of employees and other key variables.
Each country can then tax its share of profit at any rate that it wishes to.
A system of unitary taxation has been operated within the US for nearly a century to prevent companies from avoiding tax by playing-off one state against another. The apportionment formula is based on sales revenues in each US state. Canada’s system of unitary taxation apportions profits to each state based on two-factor formula of sales and payroll costs.
A similar system can be developed for the EU or the entire world. It can also be applied unilaterally by any state. For example, the UK can choose to ignore/restrict tax relief on intragroup transactions, or redefine the meaning of economic transactions. Unitary taxation is not a panacea, but offers a way of checking some of the corporate abuses.
Prem Sikka is Professor of accounting at the University of Essex
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5 Responses to “A solution to corporate tax dodging?”
madasafish
“For example, the UK can choose to ignore/restrict tax relief on intragroup transactions, or redefine the meaning of economic transactions”
Not on its own it cannot.
This article is simplistic. The US can do what it wants internally. It is all on Governement state. The world is different..
Simplistic junk.
NHSGP
Agreed.
It’s simple. Corporation tax taxes profits. VAT taxes turnover.
If you complain about Google having a large turnover and paying little in tax, increase VAT. Oh dear, the customer will notice.
Increase corporation tax, and the business will move.
Notice that he’s not going after business rates. Taxes before you have even made a transaction.
It still ignores the quesiton, why are you taxing? In the case of Sikka for a professor of accounting he is remarkably ignorant. The issue is false accounting and the state’s books. He would be better off concentrating on that and why 9.2 trillion has been hidden.
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http://www.ons.gov.uk/ons/dcp171766_263808.pdf
Levy (2012) explains that the last official figure for the state pension schemes’ obligations was
produced by the Government Actuary’s Department (GAD), as at 31 March 2005, at £1.347 trillion
In summary, the estimates in the new supplementary table indicate a total Government pension
obligation, at the end of December 2010, of £5.01 trillion
636 bn a year.
Note too, that the Tories have doubled the debts and that includes pensions
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Hence the need to tax more and cut services. It’s going to get worse.
Now for the biggy.
Take Ebay. What can it do? It can just revert to running all its websites in the USA. Then what? Illegal for the UK or EU to cut the pipe or put filters on. Ebay is completely virtual and can be set up anywhere.
For IP and tradeable goods, the left need to wake up, its game over.
They need to to acknowledge that the damage of running Ponzi pensions is vast, and that they are causing massive damage in the efforts to tax their way out. Ask the steel workers who’ve been sacked.
Bradley B.
How about a communications tax on all data flow?
CGR
The taxation of multinational corporations is controlled by international tax treaties. The UK cannot effectively do anything in the short term to change them. The multinational will register itself for taxation in the low tax country, thats what we would all do if we had the chance.
David Davies
As an absolute minimum, every single company should be obliged to lodge a minimum amount of tax to the value of the accountants and lawyers that they employ to dodge it. They obviously do this willingly, so their fees can be adjusted to justify their fees, and ensure a more equitable contribution.
The vast majority of companies who do pay their dues need not bother, as this will not affect them.