Has Corporation Tax had its day?
Members of the UK200Group of independent accountancy and law firms have commented on news that former Conservative chancellor Lord Lawson has suggested Google’s £130m tax deal with the UK shows that Corporation Tax has “had its day”. The peer argued that the levy needs to be reduced and bolstered by a tax on corporate sales. He said:
“While multinationals can artificially shift profits to whatever tax jurisdictions they choose, sales are where they are and can’t be shifted.”
The Institute for Fiscal Studies (IFS) has also said there is a need for a radical overhaul of the international tax system. The think-tank suggested governments should consider developing a tax system from scratch that accommodates multinationals.
Duncan Montgomery, tax partner at Whittingham Riddell, said:
“The best way of handling the issue of underpayment through international means is not a Diverted Profits Tax, or a transfer pricing regime, but a direct approach on known figures as Lord Lawson suggested. Other means require argument, debate and information gathering that is long-winded and never quite gets everything it should. A system of minimum taxation (like the American Alternative Minimum Tax, but improved) is far better. Companies pay based on a different calculation if their tax would otherwise be too low. Not quite sales as that really is disproportionate to certain business models, but a profit calculation that is fair and reasonable and uses standard limits. Alternative Minimum Tax credits can be offset against future profits when businesses come back strongly into the UK market and declare proper profits, but if they never do, we at least tax the real economic benefit.
“So in short, no need for long and complex negotiations. Set the minimum tariff for doing business in the UK and then companies will factor that cost into their models. We are too big a market for them to ignore, so without being penal, we can raise revenue sensibly and fairly.
Andrew Jackson, head of tax at Fiander Tovell LLP, said:
“The problem with the Google situation is not whether Corporation Tax is fit for purpose; it is about the whole structure of international taxation of corporate profits.
“Google has operations in many countries and it is important to the UK that we get to tax the profits that are made here. However, the taxation of profits that are not made here is not our business. If Google gets to avoid US tax on profits that is for the US authorities to sort out. The issues around US corporate tax, with its high rate but exemption for profits kept offshore, are well known.
“The question then is how to measure the profits that are made here in the UK. Google is a US company which is selling to the UK, via a chain of intermediary companies, and so has quite a lot of flexibility about how it structures its operations. The tax needs to follow that structure if it is not to become arbitrary and unfair. I am conscious that we also have a lot of UK companies selling to the US and I would not want to distort their tax position simply to attack Google – and the current legislation is set up to do this, so long as it is applied correctly.
“It therefore comes down to a close investigation of how Google is actually operating. HM Revenue & Customs (HMRC) claim that they have carried out such an investigation and that this settlement reflects the commercial position; there is no particular reason to suspect that this is incorrect. However, public trust in HMRC would be enhanced if there were some independent oversight of HMRC’s activities, and if HMRC were to have more resources to carry out the checks. The relatively small number of advance pricing agreements that are being made demonstrates the lack of manpower at HMRC.
“It will be interesting to see what effect the Diverted Profits Tax has, especially how much can be collected through it and how other countries react to it. I like the idea that the Diverted Profits Tax would seek to tax income which ought to have arisen in the UK, but I do worry that by introducing that subjectivity it breaks the link between actual operations and the tax on them, and this could lead to arbitrary tax treatments that would damage international trade.
“Any new system would have to be very carefully designed. There has been some suggestion that it should be based on the destination of sales, for example, but having looked at this area in some depth I am not at all convinced that this a workable basis. It is just too hard to determine the destination in any but the simplest cases.”