The Parliamentary Accounts Committee is meeting today to discuss the problems multinational companies are creating by shifting their profits out of the UK.
The mood for change in corporation tax is being created, and rightly so. Those who promote tax competition are worried. As the FT notes today, David Gauke said last week:
“If there is a perception that big business does not pay its fair share, that will make it all the harder for those of us advocating a competitive tax system.”
He's right, but since it is now glaringly obvious that big business is not paying its fair share I have as a result prepared a suggestion for an alternative tax to remedy the problem: I call this a fair international tax. This is not a fully developed idea as yet, but when discussion of sales taxes instead of corporation tax is taking place it is vital that all hats be thrown into the arena.
The FIT is what might be called an alternative minimum tax. What it does is look at the global profit of the company and then, using a formula based on where sales are and where people are employed allocate a fair share of that profit to the UK. If the resulting profit is bigger than the profit the company declares on its accounts for the UK then the FUT profit is used for tax purposes and if the accounts profit is higher then that is used instead. I suspect a margin for error might be allowed e.g. 10%, but that's a nuance to be considered later.
What this suggestion does is reconcile the demand for a unitary tax - explained here - which is undoubtedly the fairest way to tax corporations - with the local need to make sure things operate well now when the current system is failing badly. As a result FIT may only be appropriate whilst we move towards a full unitary tax, but since that will take some time it meets and urgent and pressing need now by providing an essential way of tackling the abuse companies are undertaking by shifting their profits out of the UK to elsewhere to avoid taxes in this country. And because it is simple, cheap to create, incredibly easy to operate. legal and cannot conflict with EU law it's ready to go right now.
I was challenged last week to think of a solution to our current tax problem. FIT is it, I suggest. Give it a read.
PS country-by-country reporting makes it work
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Perhaps you could reconcile the above with the myriad of Double Tax Agreements that are in existence.
I have already
I have said it is little more than an adjustment to ALP
And that’s acceptable – but if we need to change – so what? It’s a price worth paying
Richard – how can we make changes that make the tax system more simple?
This solution seems to make it more complicated. We need fairness and simplification.
M
Trying to simplify the tax system is by and large a bogus objective because in a complex world – made complicated by accountants – that’s just a call for more opportunities to avoid tax.
If we have a simple world we can have a simple tax system – but neither s going to happen
Hi Richard,
This accountant believes that the tax system should be simplified even if it means reduced work for our profession.
“A simple lifestyle freely chosen is a source of strength.”
I believe that a simplified tax system (and I mean seriously simplified, like replacing all existing taxes with a straightforward banded income tax) would have few if any opportunities for tax avoidance. It would be so simple that there would be no loopholes.
I know that’s very unlikely to happen in real life, but hey, a woman can dream 🙂
M
I was delighted to hear a number of participants on the Today programme this morning advocating taxing sales rather than profit, though they didn’t seem to have your, correct, understanding that this is just VAT. Indeed, if you work through the algebra it is quite clear that your proposal is mathematically identical to a tax on turnover, which you, quite rightly, recognise as being equivalent to VAT. In any mature business sector there is only limited variation in return on sales (Adam Smith pointed that out over 200 years ago) so that profit and turnover are linearly related. Similarly, as anyone with experience of different business sectors recognises, value added as a percent of sales is pretty much constant for a given sector. What that means is that taxing profit is mathematically identical to taxing value added despite the widespread perception that the one is a tax on the “business” and the other is a tax on its “customers”. If I am wrong in this analysis, I would appreciate you pointing out the flaw in the argument.
I am taxing profit
That is not a tax on sales
Your suggestion is wrong
As for a linear relationship between sales and profit, you’ve clearly never been in business!!!
Hi Richard
How do you respond to the argument that, in competing for investment, HMRC will not question how international companies organise their accounting?
I fear it is happening
That is tax haven activity
[…] And the basis for reform is relatively simple. I set out a way of doing it, here. […]
[…] to Murphy, what he dubs a FIT (a “Fair International Tax”) would be much better than a sales tax to raise extra tax revenue from multinationals. A FIT would […]
It strikes me that if your proposed rules were adopted globally a UK business trading in the UK and making sales into the UK but employing staff in a call centre in India would have to pay tax in India on some of those profits.
The UK could seemingly claim that since the sales are made in the UK by a UK company it should rightly be taxing the whole profit, but India could reasonably argue that they have an input in the sale and should have some share of the taxes collected as well.
I suspect the rule itself may actively encourage companies to locate their employees in jurisdictions with a lower corporate tax rate because it would shift more profit in those low tax jurisdictions reducing the amount of tax due under FIT. Certainly companies would think twice about locating employees in countries with high corporate tax rates and they would seek to minimise the headcount in those countries.
Of course some taxes should be paid in India in that case
They provide the infrastructure, training and support for those people
Too true tax should be paid there
I can’t see the problem with that
Transfer pricing would do that now anyway – but maybe not sufficiently