A rush of really quite stupid (I use the word advisedly) comments on tax reform are hitting the press in the wake of the Google tax story. Take the suggestion from Jonathan Ford, an FT writer, in that paper this morning. He says:
There is ... one simple measure that might allow the UK to do more than get mad at Google – and actually get even. It wouldn't require a wholesale revision of the existing system. It involves reviving (in a reformed guise) a levy abolished in 1999: Advance Corporation Tax (ACT).
As he notes, this charge was effectively a tax withholding an the payment of a dividend. It made a lot of sense. I regret its passing. And Jonathan Ford claims it can be revived, with a twist:
The new Advance Corporation Sales Tax (ACST) would be based on a similar principle. Set at a percentage of a company's UK sales, the levy would be offset against its corporation tax payments. ACST could be set at varying levels for different sectors, based on their profitability, and targeted at those – such as web services and retail – that are prone to abuse.
And as he explains:
To see how it would work, take a company like Google, with £4.3bn of UK sales in 2014. Apply ACST at the rate of, say, 4 per cent and it would have to pay £173m. Now if Google declared profits in Britain in line with its 26 per cent global margin, that would give it £1.1bn on which it would pay corporation tax of roughly £220m – more than enough to offset the ACST it had already paid. But if it continued to do what it currently does, squirrelling away profits overseas and stumping up just £30m of corporation tax, £143m of that ACST bill would be unrelieved.
So, fantastic, you might think.
But note he wants this tax to apply to retail. This is Tescos income statement:
Ignore 2015: we know they messed up that year. Use 2014, and what is the profit margin before tax? 3.55%.
So Google has to pay a 4% margin and Tesco, well, somewhat less.
And what would the right margin be in 2015 when Tesco made a loss? Are we really saying that it should still pay tax? Does anyone really feel completely comfortable with that? I have argued about limiting the use of losses, but asking for tax when a loss is paid is something else, and could tip some businesses in trouble over the edge, unnecessarily.
So let's be clear, what is being proposed is an arbitrary tax to be charged at rates set at will and clearly open to dispute whether or not tax might eventually be due at potential prejudice to the survival of some companies.
I think the description 'stupid' might well apply to that.
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Quite. Blundering into the morass or big retailers’ bad business practices – all those advance payments and retrospective alterations to supplier agreements – is unwise. Taxation is about incentives as well as income, but it’s probably the wrong tool for draining that particular swamp.
Nevertheless, if we look for the simple case of companies delaring one profit for distribution to shareholders, and another (or none) for the purposes of tax, the concept of a withholding tax looks attractive.
Perhaps companies that maintained true and fair accounts in some kind of ‘Tax Mark’ schemes would be exempt.
Definitely not to the last
I like withholding taxes: they are a weapon against tax wars
But a sales tax to substitute CT is not
It might help to read the rest of the article.
The beauty of ACT is that the Exchequer is in possession of the tax, the taxpayer has to justify the case for its recovery – unlike with Google et al today, where it is the reverse. Google would have to sue for recovery, that is unlikely as they wouldn’t want to do their tax laundry in public. Much as BAT never wanted to with ACT in the 1980’s
This would it seem not to be a “sales tax” but as Ford puts it an advance corporation tax set at a level based on sales.
Ford makes it clear that “ACST could be set at varying levels for different sectors, based on their profitability, and targeted at those – such as web services and retail – that are prone to abuse.” With retail it could be set at 1% say of sales, or less. 1% would be £360m of advance corporation tax in the case of Tesco on their UK sales, rather less than the £657m global taxes actually paid in 2015.
In the case of a loss making company, one not artificially creating that loss with specious cross-border inter-group management charges, he notes “A low-profit or lossmaking business would need to be able to recover the ACST against a legitimate UK profit and loss account.” So genuine UK tax abiding companies would be ok.
What he suggests is not an arbitrary tax at all. It could be set by sector based on the nature of the undertaking of the business. As I’m sure you know few overseas companies pay fair UK taxes with regard to the genuine levels of profitability they enjoy in UK.
Google’s own accounts show 2014 turnover in the UK of $6.3bn. This it their largest single market outside the US. There is no reason to assume it is materially less or more profitable than its global business, which made a PBT margin of 26% 2015 YTD. So if you’re the Exchequer why not assume it might have made £1bn in real profits, tax it slightly less based on sales, and in doing so put the onus on Google to show that it legitimately did not.
As with any company with legitimately lower UK taxes due than ACT, in a modern scheme the delta could be refunded, or if filing quarterly, simply not charged.
It seems to have elegance and merit on its side.
Let’s be quite clear why this would not work
Google has not got turnover in the UK of $6.4 billion whatever it says in its global accounts
It has a figure vastly less than that
There is then no legal tax base on which this ACST could be assessed on Google to remedy the fact that it hides its turnover out of this country
A neat solution that perpetuates the current failure to tax is not, I think, a neat solution
Nor do I really think paying tax in advance to then have to sue for its recovery is any basis for tax justice
And how are arbitrary tax rates avoided?
As for the recovery – the suggested mechanism is as clear as mud
But let’s come back to the main point: this is meant to tackle Google and since it has no sales in the UK on which the suggested rate of ACST could give rise to the suggested level of payment the whole argument utterly misses the point of Google’s planning which would carry on being exactly as effective as now
Which means that this is not the answer to the problem of Google’s tax, which is why I pointed that fact out
1. Google’s accounts – their numbers
Google 10k filing fiscal year ended 31 Dec 2014
United Kingdom revenues Year Ended December 31,
2012
$ 4,846m
2013
$5,600m
2014
$ 6,483m
2. The legislation required is rather simple and accords with the Rome Treaty as it has previously been used in the UK
If proposed in the Finance Act 2016, it would be expected to become enacted by November 2016 and so receive Royal assent
3. It doesn’t “perpetuate the current failure to tax” – it taxes, but in advance. It allows UK PLCs or LTDs with legitimate reasons for immediate recovery or for non-payment to be able to do so. The process for identifying allowable and non allowable deductions is clear in the UK, and has been for many years.
4. This would put the onus on subsidiaries of overseas companies to show that their claimed deductions are allowable and reasonable. The Exchequer is in receipt of the Corporation tax in advance and not arrears. It is also the effective intermediate adjudicator of allowable and reasonable deductions. If the taxpaying entity is not satisfied there is a well-trodden process of review and appeal. They can seek a first tier tribunal hearing, an upper tribunal hearing, a Court of Appeal hearing, a Supreme Court hearing and ultimately Judicial review (though this is rather rare). For an example of a detailed Supreme Court review see for example HMRC v Pendragon et al., 10 June 2015
5. Google’s UK turnover is clear and unequivocally stated by them, it is not UK and RoI turnover, just UK. It has been so stated on their 10k and 10q filings for several years, as the UK is their next largest market outside the USA.
6. This would be an effective answer, relatively simple to legislate, non-discriminatory in nature and considerably safer for the Exchequer than the current system.
Those are not sales in the UK
They are sales into the UK
They are UK purchases
They are not a tax base
ASCT has never existed in the UK
Taxing in advance is never considered fair. Why should it be?
Your facts are largely wrong
Your claims contrary to almost all concepts of tax justice
I can see no way ‘pay now, claim back at you will if you dare’ constitutes tax justice
And I am accessed of being a statist
“Richard Murphy says:
Those are not sales in the UK
They are sales into the UK”
Would this mean that under the current laws, the criticism of Google and the amount of UK tax is misplaced? If the rules were changed they might pay more but as the rules were and currently are they do not owe any more?
No less a person than Margaret Hodge has had letters published in national newspapers denouncing Google based on the tax she claims is due because of sales in the UK. As she is an ally of yours, I urge you to write to her warning her she has got things wrong and runs the risk of looking like she doesn’t know what she is talking about.
Profits are under declared in the UK. That we can tackle. But unless tgat issue is tackled in ways I suggest no ASCT could work so to suggest one and leave Goohgle’s avoidance in place would achieve nothing
I suspect that is what you want
VAT is levied on many UK sales. In advance of a VAT return, it is seen to be fair.
Interest on UK bank accounts is deducted at source. In advance of a Tax return.
ACT was levied against dividends paid and declared. In advance of a Corporation Tax return.
In the case of these and many other taxes, the tax is levied up front and a valid claim needs to be made for a refund at a later date. This is the case for a VAT exempt entity, a taxpayer having had too much tax deducted and was for a gross fund in the case of ACT, a valid claim needed to be made to have the tax so deducted, refunded.
This is also the case with VAT on exporting items for a non UK resident, exempt supply of VAT where it had been charged, excise duty drawback on alcohol where subsequently exported outside of the UK or EU – all these are taxes levied on a transaction
and claims for refund may be made at a later date.
Google’s activities in the UK constitute a self-acknowledged tax base – it is the extent and nature of that tax base that is in question. It is clear about its reported revenues in the UK but largely unclear on why it is the case that the sales are out of Ireland when the people entering into the sales and the services provided are in the UK.
This pattern is then borne out in its tax payments.
2014 – Paid £30m of tax in the UK on revenues of £4.3bn, an effective tax rate of 0.7%
2014 – Ireland – tax amounted to Euro 28.6m, on Euro 18.3bn revenues . An effective tax rate of 0.16%
Over 80% of its non-US activities were then channelled via Bermudian subsidiaries. 2015 YTD Sept sales 1were $71bn. Approx 50%
An advance corporation tax set against sales could rectify this – tax would be levied – Google would then in its return and related correspondence would need to demonstrate why it either had appropriate deductions in the UK or it believed the transactions took place largely outside the UK.
As I am sure you know, just because it says so does not mean it is the case.
VAT is levied on many UK sales. In advance of a VAT return, it is seen to be fair.
Interest on UK bank accounts is deducted at source. In advance of a Tax return.
ACT was levied against dividends paid and declared. In advance of a Corporation Tax return.
In the case of these and many other taxes, the tax is levied up front and a valid claim needs to be made for a refund at a later date. This is the case for a VAT exempt entity, a taxpayer having had too much tax deducted and was for a gross fund in the case of ACT, a valid claim needed to be made to have the tax so deducted, refunded.
This is also the case with VAT on exporting items for a non UK resident, exempt supply of VAT where it had been charged, excise duty drawback on alcohol where subsequently exported outside of the UK or EU — all these are taxes levied on a transaction
and claims for refund may be made at a later date.
Google’s activities in the UK constitute a self-acknowledged tax base — it is the extent and nature of that tax base that is in question. It is clear about its reported revenues in the UK but largely unclear on why it is the case that the sales are out of Ireland when the people entering into the sales and the services provided are in the UK.
This pattern is then borne out in its tax payments.
2014 — Paid £30m of tax in the UK on revenues of £4.3bn, an effective tax rate of 0.7%
2014 — Ireland — tax amounted to Euro 28.6m, on Euro 18.3bn revenues . An effective tax rate of 0.16%
Over 80% of its non-US activities were then channelled via Bermudian subsidiaries. 2015 YTD Sept global sales were $71bn. Approx 57% outside the USA. Perhaps this is might explain an annual receivable in Google Bermuda of some £7bn.
An advance corporation tax set against sales could go some ways to rectify this — tax would be levied — Google would then in its return and related correspondence would need to demonstrate why it either had appropriate deductions in the UK or it believed the transactions took place largely outside the UK.
As I am sure you know, just because it says so does not mean it is the case.
Hang on: Vat, dividends and interest paid are all transaction paid taxes
Taxes on profits are not transaction taxes
Please do not misrepresent things again
There are alternatives to taxes on profits in other countries which the UK could look at. For example, Japan has a local business tax for companies over a certain size (or part of a large group) which is based on labour costs (with approx 70% reduction) plus net interest costs plus net rent costs plus/minus profit for the year. The logic behind it is that even loss-making companies use local services therefore should pay towards them. There are also the usual taxes on profits. The formula means you have to pay some tax if the company is paying all of its profits overseas to a private equity fund as interest. Also, there is tax if you have a large employee base but are booking profits offshore. Maybe the UK ought to look at what is done overseas. Whilst Japanese tax rates on profits are reducing, this size-based tax is increasing.
We have business rates to do that – raising almost as much as CT
Sales into the UK, when last checked, were indeed “transactions”. So it is indeed fair so set a tax with reference to them as well.
We have covered this ground already
The TSC went nowhere near it
If the UK were to tax sales into the UK as opposed to sales booked in the UK, how does HMRC find out that number? Almost by definition it is not in any UK accounts or tax return. In the case of Google, we only know it because it is disclosed in their US filings as the UK is one of their biggest markets but that is probably not the case for many companies. As far as I know, country-by-country reporting would not show the “sales into” number either.
In theory the figure could be collected via VAT distance selling data from Ireland
But that is a long shot and extremely uncertain tax base – would Ireland even cooperate?