The Guardian reported yesterday that:
Abolition of corporation tax is to be considered by a new cross-party group of MPs and peers who will subject ministers and business leaders to public interrogations in a bid to secure fairer and more responsible tax policies.
The all-party parliamentary group on responsible taxation will bring together senior Labour and Tory parliamentarians determined to keep up pressure on ministers to ensure multinationals and others pay their fair share.
The group will begin work in the new year and be chaired by Labour MP Margaret Hodge, with ex-Tory minister David Davis as a vice-chairman.
That Margaret Hodge has managed to secure cross party interest in an APPG on Responsible Tax is good news. I should also declare I am a registered participant in the work of the APPG.
What was worrying was the way that the article was written: I doubt any serious politician wants to abolish tax on company profits in the UK. Thankfully that is not the plan. A little further into the article it is noted that:
The first item on the [APPG's] agenda will be how to respond to G20 recommendations to crack down on corporate tax avoidance.
With evidence growing that the current tax on profits is unfair and too easily avoided, the group wants to debate whether it should be replaced by a new tax on location of activity and sales.
And:
Corporation tax is levied on a firm's profits, but there have been increasing concerns in recent years that multinationals with complex global operations can shift them to low-tax jurisdictions by making large royalty payments between different arms of their business.
What then becomes clear is that what is actually being reviewed is whether or not there should be fundamental reform of corporation tax so that it is charged on what is called a unitary formula basis, and not its abolition. As Labour's Lord Wood was noted to say about the planned work:
“There is now strong public support for making sure that business pays its fair share of tax, and pays it in the countries where they make their money. At the moment it is clear that this is not happening in a consistent way.
“This cross-party group of parliamentarians is determined to press the government to demand greater transparency, ensure fairness and take steps to minimise avoidance. We want to engage and hear from the public.”
Stewart Wood (who I should declare that I know) is right to say just that and I am delighted that the committee takes this view.
As I said in a recent lengthy submission to this APPG on country-by-country reporting:
The Tax Justice Network has fairly, and accurately, described the BEPS process as the application of a sticking plaster to a system that is already suffering long-term failure from which it cannot recover. The reality is that we need to tax corporations. I discussed the reasons for doing so in a lecture given in Montréal recently, accessible here.
If we are, however, to have an effective national and international corporation tax system then it must be based upon economic reality. The fundamental problem with the existing system is that it pretends that the companies that make up a multinational group are entirely independent entities that trade with each other at arms length when the actual economic fact is that no group of companies is created unless there is an advantage to them trading with each other on terms that a market would not set. Almost all the problems that exist in the current corporation tax system result from the adoption of this, quite literally, fantastic basis for tax assessment.
The most that can be hoped for from the BEPS process is that it will keep the world's corporation tax systems functioning until such time as a proper alternative can be put in place. The obvious problem to which an answer is needed, and which can only be speculated upon, is to ask how long it will take for that alternative it be put in place, and whether the existing system can be kept going for that long. If there is a crisis in world taxation, it is in resolving the stresses implicit in the answer to that question.
In practice, by adopting country-by-country reporting as the basis the tax reporting in the future and, by implication, accepting a greater emphasis upon the profit split basis of transfer pricing, the BEPS process has done two things. The first of these is to recognise that multinational corporations do trade as single entities: this is the assumption underpinning country-by-country reporting (and as the original creator of country-by-country reporting I can state that fact with confidence). Second, there is an implicit move towards unitary taxation, which the supply of country-by-country reporting data is also meant to facilitate (again, something that I can state as a fact because I designed it with that intention). In themselves these two facts may be the single two most important consequences of the BEPS process: they suggest that progress is possible. Unless, however, that progress away from the existing basis of arm's-length pricing towards a unitary basis of profit apportionment (also implicit in the European Union's Common Consolidated Corporate Tax Base) does take place then we are at serious risk of seeing the complete breakdown of the worldwide corporate tax base.
This failure of corporation tax is something that some might welcome: there are those who argue that it is quite simply incorrect to tax profit, but this is an untenable suggestion to those who believe the taxing capital is an essential part of any comprehensive tax system. Abandoning corporation tax would, in effect, shift the vast majority of the burden of taxation onto individual people, making the overall tax system substantially more regressive as a consequence. If, therefore, tax justice is to be maintained worldwide we have no choice but pursue the ultimate goal of transforming the international corporate taxation base to a unitary basis. The foundation for that change has now been laid: the political will to ensure that the necessary change can take place must now be created and this is the ultimate challenge to those seeking responsible taxation, worldwide.
I look forward to submitting evidence to the APPG.
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What about turnover tax? Or at least setting some kind of minimum tax level expressed as a % of turnover
This cannot work
What is the turnover of a bank?
And the profit margins of banks tend to be 25% +
A supermarket is low single digits
Why is a tax on the turnover of both fair when it will hardly impact the bank?
And anyway we already have VAT
Although we need to extend it in a different form to banks
It’s worthy of note that the Vice Chairman of this group is the honourable (genuinely so) Tory MP, David Davis.
I think I can say with confidence that if he – a man willing to sacrifice his political career by calling a by-election to stymie Charles Clarke’s thoroughly illiberal attempt to bring in 42 days detention without charge – if he had won the Leadership of the Tory Party in 2005, instead of David “Bullingdon Club” Cameron, we would not now be facing an all-out assault on our liberties, nor would we be experiencing the hasty deconstructon and dismantling of the Welfare State.
David Davis is certainly a Right-winger – but an honourable man, a man of integrity; had such a Tory won the 2010_Election, would have been unhappy at Labour’s defeat, but would have trusted that the UK was still in decent, honourable hands – quite different from those that did actually take power in 2010.
David Davis and Margaret Hodge should make a truly effective, and principled, team. Good news, indeed.
I might be wrong here but haven’t there been press reports about Margret Hodge? By that I mean doing things she accuses multinationals of doing?
All of which are nonsense
Richard
On what basis can you confirm that Margaret Hodge did not use or did not benefit from tax avoidance activity in relation to the use of family trusts?
Also your views on corporation tax is not a classical economist’s view of how to tax corporations. As you know a classical economist would tax the individual owners of shares in a company on their share of the profit of the company regardless of whether the profits were distributed. CT is therefore a proxy for the tax that the individual shareholder bears on their share of the profits of the corporation.
On the basis the above is correct how can you say that abolition of tax of CT would be regressive beyond what you’ve said as it is not clear to me why it is regressive. If the above is not correct then I would appreciate your professorial view on what is the correct view.
I have made clear very many times why the classical economists view of corporation tax is wrong
See http://www.taxresearch.org.uk/Blog/2015/11/04/the-case-for-corporation-tax-yesterdays-debate-in-montreal/
And I asked Margaret about trusts
Yes there were trusts. She did not create them as I understand it
She did not use them
She and her immediate family unwound those they inherited
I take her word for it
You say:
“…the actual economic fact is that no group of companies is created unless there is an advantage to them trading with each other on terms that a market would not set.”
Can you provide evidence for this – particularly with regard to the multitude of conglomerates found around the world.
How about using Unilever, LVMH or CK Hutchison as a case study?
The evidence is that when this condition ceases to hold true groups are broken up
And let;s just consider the alternative for a moment: are you seriously saying that tax minimising companies are also profit minimisers?
Well in that case you should have no trouble in proving your hypothesis regarding the three groups I referred to.
And to keep it close to home, perhaps you could explain how the Port of Felixstowe trades with Superdrug on terms the market would not set.
And to be clear, I have not suggested anything regarding tax minimisation. I am merely challenging you on your assertion that groups of companies are set up solely to minimise or avoid tax.
And I challenge you, on this basis, to prove that all groups of companies trade as single entities. The three I have referred to make a mockery of that claim.
Prove all your claims
Actually it is you have claimed that groups of companies are set up to take advantage of non-arms length mismatches and that MNCs are in reality a single trading entity.
Perhaps the other members of APPG will extract a more comprehensive answer from you on these points.
So you are suggesting that the group’s in question are not anything like profit maximisers
Maybe so
But in that case the theory of group entities needs to be rewritten