I was asked one question on two separate occasions last week. It was "is tax a cost of business?"
The answer is a resounding "no, it isn't!"
The idea that tax is a cost of business is a convenient myth - one propagated by the tax avoidance industry to provide an all too ready excuse for its clients who justify their tax abuse by saying "it's all in the shareholders interests."
We do not however have to go far back in history to realise that in a more enlightened era those responsible for accounting saw through this untruth. It's not by chance that in the profit and loss account of any company tax is shown as a payment after its profit has been struck. In that sense the tax charge of a company stands alongside the payment of dividends to shareholders as a distribution by the company out of its profit. This makes abundantly clear that tax is not a cost, any more than payments of dividends to shareholders are costs. The payment of tax is a distribution.
Dividends are a distribution to the owners of a company paid in return for the capital that they provide to allow it to trade.
Tax is a payment made by a company to the society that grants that company its right to operate.
And there is no company that can say it has not been granted a licence to operate. Most companies trade in the states in which they are incorporated. In that case their certificate of incorporation - the certificate that proves they have a legal existence - that is their quite literal licence to operate. If they trade in a state other than the one in which they are incorporated then most states require that they be registered before being allowed to do so - in which case that registration becomes their licence to operate.
And have no doubt that this licence is very real: the licence may be cheap, but it carries with it too significant and unavoidable obligations.
The first such obligation is to comply with the tax charges created using the very same legal process that granted the company a licence to operate.
The second obligation is, I think, to be transparent and accountable for their actions by putting financial statements on public record.
These are reciprocal obligations for the right of limited liability that has been granted by a state. And yet we have allowed them to be corrupted. So much so that we don't enforce them any more resulting in a loss, in my estimate of up to £16 billion a year in tax revenue.
Which is something we really can't afford.
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“It’s not by chance that in the profit and loss account of any company tax is shown as a payment after its profit has been struck”
That doesn’t prove anything though. You have a gross profit, a profit before tax and a net profit line.
If you say tax is a distribution then payments to suppliers are also “distributions” for the goods and services provided.
Also, “distribution” implies that it is a voluntary payment (as dividends are). A cost is something that can be legally enforced, that comes into being when a contract is made (e.g. puchase of goods) or because statute requires it (e.g. taxation).
a) You clearly don’t know much about business or accounting to argue contractual payments are distributions
b) Ditto re knowledge of business and economics re shareholder payments being an option – makes the theory of the firm look pretty strange
c) Contract is for a supply, tax is not
d) Shareholders can also enforce – they vote board out
your argument is in tatters
Do you bother to read your comments or do you just plough straight in?
(a) I wasn’t arguing that at all – I was saying that if your logic was extended then any payment to anyone could be classed as a “distribution” rather than a cost.
(b) Dividends are voluntary. I thought theory of the firm was one of those mumbo jumbo things that existed in economics textbooks but not the real world – and I don’t even think that that theory has anything to say about dividends being compulsory.
(c) I made that very distinction in the last sentence.
(d) When was the last time a board was voted out for failing to pay a dividend? And it is completely irrelevant anyway.
Sure I read
And I responded as I saw fit
So have you
Trouble is only one of us is making sense
And that’s after re-reading
Of course tax is a cost of a business. A company can choose to operate in country X or country Y or both . Its decision will usually take into account all likely revenue and cost consequences of its decision, and the tax will be one component.
Wrong.
All the evidence is that at best headline rates are the only thing looked at when it comes to tax.
And that’s for good reason. Business people need to work in environments where money can be made. Tax is a consequence of money being made. It does not impact the money made.
So, tax comes way down the priority listing when deciding on a business location.
Things paid for by tax such as infrastructure, education and health systems, grants, the rule of law and the like come much, much higher. And the result is higher tax locations are usually much more attractive to business than low tax ones – unless we’re talking artificial relocations to offshore.
Only professional advisers who think themselves entrepreneurial but who have never actually taken a commercial risk in their lives think as you suggest.
“Things paid for by tax such as infrastructure, education and health systems, grants, the rule of law and the like come much, much higher. And the result is higher tax locations are usually much more attractive to business than low tax ones”
Actually that is the perfect argument for taxing land/location. All good public investment feeds directly into land values. And you can’t hide land in a tax haven.
This discussion is regarding income tax. It is another story when considering sales tax/VAT. If a customer is only willing to pay X and Y% is sales tax or VAT, then the company is left with an every small piece of the remainder when the tax rate is high. In the US, sales taxes are low or none. In Europe, VAT can be as high as 25%. That is a substantial ‘take’ by the Government when trying to make a profit selling a product or service.
Yes, but like all in the US you don’t realise that most businesses don’t pay VAT as they can reclaim it
Wrong argument in that case
yes but not ALL Vat type taxes in all jurisdictions can be reclaimed right richard? my employees fly lots, they pay lots of vat type taxes on their hotel stays and flights all around the world. Are those contractual expenses considered disbursements? wow, I’m looking forward to you helping me stand tall in court and help me argue this point!
Hang on
You can reclaim EU Vat in the UK is you could if it had been charged from here
It’s a pain
But it can be done
So it looks like your claim is wrong, again
My view is that tax is a method of ensuring that externalities are paid for. Businesses are not going to willingly pay for this sort of thing – same as regulatory costs (well good regulatory costs anyway) – they’ve got to be charged as businesses aren’t willing to volunteer these.
Its the sort of thing that stops us from all living in a sewer – of course it goes without saying that it needs to be spent well and collected fairly etc etc, its a pain, but not a bad thing – a bit like sprouts…