What now seems a long time ago I did the investigation that led to the first ever story on Google's tax. The story was shared very quickly, as here from the Guardian. The rest you could say is history. Except, of course, for the fact that very little has actually happened as a result. Google still pays very little tax, and that despite the introduction of the so-called 'Google Tax'' by George Osborne.
But now, according to the BBC, the government is to act:
Some of the world's largest technology firms are facing hefty new bills as the UK government moves to fundamentally change the way they are taxed.
Google and Facebook are braced for significant changes in the tax system after the Treasury told the BBC that a new tax on revenues was the "potentially preferred option".
It would open up the firms' huge UK sales numbers to the tax authorities.
At the moment, tax is levied on profits, a much smaller figure.
Google, for example, said it made sales - revenues - of £1bn in the UK in 2016 and a pre-tax profit of £149m.
If the government taxed a proportion of those sales its tax bill would be likely to increase significantly.
The details are not clear as yet. But I will say that there are problems.
The first is that if the new tax is simply a sales tax then it is bad news. As I have long argued, sales taxes are simply passed on to consumers, or in this case to advertisers. Making advertisers foot Google's tax bill would be deeply unintelligent: this would simply increase the unlevel nature of the playing field on which business is operating and so compound the injustice of the current situation where only some (largely smaller, and largely domestic) companies really pay the tax we might expect of them. Expect a serious backlash as a result.
In that case we have to hope for something better. I have argued for an alternative minimum corporation tax (AMCT) that I think has real merit in this situation. In my original proposal I suggested this:
My proposal for an AMCT is simple. In essence the AMCT would apply an agreed tax rate to the globally reported pre-tax profits of the reporting entity. This sum would be collected by the head office location of the company, unless that jurisdiction refused to cooperate in the process, in which case another country could nominate itself to undertake the task.
The sum settled would then be apportioned among all the jurisdictions in which the entity traded as indicated by its country-by-country reporting data. To minimize potential valuation disputes, I would suggest any apportionment be based only on sales and labor, with sales also being apportioned on both a source and destination basis (each being weighted equally) and labor on both a headcount and payroll cost basis (again weighted equally). I accept this would mean extending the OECD template but this information should be available to any company, so the demand is not onerous.
The tax rate to be used would be blended: I would suggest the rate be based on the headline tax rate of those most populous states representing at least 90% of the world's population, with the calculation being weighted by population. If this was thought to create bias, this sum could itself be averaged with a similar calculation based on GDP per country itself weighted by GDP.
The actual figure to be charged should, I suggest, be 80 percent of this blended sum. This would then ensure that most states would still have an additional tax charge to make, giving them a vested interest in reviewing the local affairs of the corporation. This would also mean that if some local incentives, such as accelerated capital allowances, were to be offered to encourage investment in a jurisdiction then they are likely to be effective.
There is more: follow the link. My point now is that using CBCR data (and Google's UK sales and headcount are known, as are total figures) it would take minutes to work out how much tax it might owe in the UK using this method as an alternative to the token gesture that it offers now. Simplicity is built in.
And I stress, the UK could do this unilaterally. If it did so it would simply have to describe this as an anti- avoidance measure . If it did so the objection that such a charge would not comply with our double tax treaties would fall away.
Is the solution ideal? Clearly not: it would be better if we had a unitary taxation system for global profits. But we are not going to get that as yet. In the meantime an AMCT is easy to calculate; is (essentially) on profits, should be internationally tax compliant if considered an anti-avoidance rule (which adds the merit that the vast majority of UK companies would be automatically unaffected by it) and at the same time hints at the right direction for travel for the eventual required reform.
I sincerely hope this is what we get because basing any new tax in sales would be a very big mistake indeed.
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An extremely good point that I agree with.
But alas I expect it will be a tax on consumption which is the usual Tory MO in the guise of ‘fairness’.
Must say that I favour a tax based upon sales.
A box could be added to the VAT return that would require the seller to remit a percentage of the declared sales figures. In this way the tax would not be incorporated into the selling price and therefore not passed on to the consumer via the sale. The collection mechanism is already in place.
All increases in taxes would impact on retained profit and would lead the seller to find other ways of passing on the tax and so this is not a specific argument against a sales tax.
There would need to be a relationship to corporation tax in order to ensure that the total tax paid was not excessive, here I would favour some kind of offset. The tax would reflect the need to address such issues as jurisdictional arbitrage, transfer pricing, IPR issues and interest charging and therefore would be primarily aimed at large multi national entities.
We can have another deeply regressive sales based tax that penalises those on lowest income and lets the best off almost tax free if you want
But that’s not my appraoch to the issue
Surely wherever in the value chain additional taxes are levied if the market will absorb the attempts of corporations to recover those costs by raising prices then that is what those corporations will do.
Maybe
But then we need to address monopoly power
“it would take minutes to work out how much tax it might owe in the UK”
An individual can’t work out how much tax they own in minutes, how could a global corporate do the same?
And if it is possible, I guess we end up with a smaller HMRC staff, not something your union friends would want.
Did you read what I proposed?
If you had you would have seen your comment makes no sense
I heard this tax described as “Turnover Tax” on the News at 10 last night. The News at 10 used to be my main News source but I now watch it to see what’s left in and left out and what of spin the BBC. We had turnover tax in Ireland when I was a child but it was replaced by VAT.
A unitary taxation system was definitely the way to go
I seem to think the US has a simple way of assessing what tax is owed by corporations to which State. They take the total profit, look at sales in each specific State then calculate the tax according to individual State tax regime. (I am not referring to state sales tax here. That is dealt with separately, I think). I can’t see the difficulties to adopting such a simple system in the EU. Can you?
See here
https://www.taxjustice.net/cms/upload/pdf/Towards_Unitary_Taxation_1-1.pdf
I have discussed the issue often on this blog, at the OECD and elsewhere
I see few issues
The USA does, as do the UK and most tax havens
The proposal does sound rather silly.
To tax on the basis of total turnover assumes that all companies make a standard rate of profit on their activities. This is clearly not the case.
What next ? Tax credits for companies that don’t make enough profit?
If sales taxes get passed on to customers, as you say, why wouldn’t higher corporation tax rates – which you claim elsewhere wouldn’t be?
The evidence is that they are not
See the work of Kim Clausing on this issue
There is plenty of evidence also – and more of it – that corporation taxes are passed on to customers.
I suppose the point is more general though. on the one hand you are saying that a sales tax would be passed on to customers. If that tax is, surely other taxes will be as well?
I know the literature
The only evidence that stacks says they don’t
Unless they are monopolies
You like monopolies?
OK then, in that case, who does corporation tax fall upon?
If you raise it, someone must be losing out. So who?
How about the glaringly obvious – which is shareholders
Why do you think companies try so hard to avoid tax if not?
Well, the shareholders do bear the cost of a corporation tax.
But ALL the serious research out there says that it is also born by the workers of a company in terms of lower pay and by the consumers of that company in higher prices.
I suppose it suits your purpose to say that only evil rich shareholders get hit by corporation taxes, and not the people actually working for a company and those buying from it.
With respect, serious research has rubbished that conclusion.
I refer you to Kim Clausing, again
And US government research as well
Serious research has not rubbished that conclusion. But in your world Kim Clausing’s work trumps all other economists, because it suits your argument.
The US government research I can find (from the US Federal Reserve banks, no less) says that corporate tax incidence falls on a combination of shareholders, workers and consumers. Not just shareholders as you are claiming.
I have never said all on shareholders
Black and white does not exist in my world
But certainly not all on customers
Or workers
And mainly on shareholders
What else can behaviourally explain corporate behaviour?
I reiterate, unless you now engage intelligently I will be hitting the delete button
There was a recent situation with Google UK (I think) where it made very little profit because it had paid staff a large bonus. Thus CT was very low and came in for criticism but the actual tax collected would have been greater as IT on the stay pay was higher than CT.
How would your system deal with this type of approach?
The loss on the bonus was not tax deductible in that case as I recall
Surely bonuses form part of pay, and there would be no “tax deductibility” on that whatsoever? instead of making more profits google simply chose to pay its staff more. The result being that they paid less corporation tax (because of lower net profit) but their employees would hae paid more tax – probably at a higher rate.
So what are you talking about bonuses being tax deductible for? Please explain.
Go and read some general tax literature
You are wasting my time
No really – that’s just stupid.
Bonuses are variable pay. They are paid out of revenues along with normal fixed pay, and only after costs operating profits worked out. And then only the corporation tax due.
Bonuses and variable pay DO NOT come out of the post tax income of a company. Any accountant should know this.
Regardless. Google paid their staff more. Which reduced their profits so reduced their tax bill. You are trying to imply that this tax avoidance, but that money Google paid to it’s staff also gets taxed – at higher rates. So all in all MORE tax was paid by Google and it’s staff.
I am sorry that you think this stupid – bit depending on the way paid bonuses do not always attract immediate tax relief, and most especially if related to US stock schemes not subject to UK rules where the accounting is undertaken in one period but the real cost in another.
As long as bonuses are paid out in a timely fashion after when the provisions are made then they fall in that same tax year.
https://accotax.co.uk/accounting-provisions-and-year-end-bonuses/
You are trying to wriggle out of answering simple questions because you don’t like the answer.
Is Google avoiding tax by paying it’s staff bonuses? Or is more tax going to be collected in total, because those bonuses are taxed as income tax? Or are you saying somehow that bonuses should be paid out of post tax profits?
These are not standard bonuses
They are stock options
And respectfully, I have better things to do with my life than offer explanation you are clearly intent on not believing
What an utterly unworkable system. An “agreed” world wide tax rate “blended” and based on populations.
Let’s put the laughable idea that any tax rate could, should or would be agreed to one side for a second and realise that China and India on their own account for 36% of the world’s population giving them rather a lot of influence here. Hilarious. The world’s tax system at the behest of a communist dictatorship and a growing country with some of the world’s highest levels of inequality. Or would there be a “Richard Murphy knows best” override feature?
So what would this blended rate be today? You said it would be nice and simple. Let’s see your workings on this by the end of the day.
I do forget sometimes that it has been nearly 20 years since you have been involved in anything practical. All this theory has left your powers of reasoning flabby. Since you never actually do anything, you never get to see if your ideas could actually work.
Sorry but this is one more idea to put in the pile marked “unrealistic fantasies”.
The tax rate is simply an average of world wide tax rates with the weighting given to each country determined by its population. As an estimate of the world wide rate goes it’s hardly hard to calculate. Or agree upon. sceptical by those with dogmatic objection, as you obviously do.
I will look at doing a worked example
Can I just ask why a weighted corporation tax rate would be based on population rather than GDP? Surely most profits typically arise in areas with a high GDP rather than those that simply have large populations?
If the objective is to ensure this weighted corporation tax rate replaces the rate that you might expect if the profits were distributed fairly around the globe I don’t think you would really assume that places like India and China should have such a large input into the equation?
Although having said that if you decide to base it on global populations or even GDP you will have some multi-nationals that might do no trade whatsoever in some of the countries that you are factoring into your calculation.
I could accept a compromise on both
What I do know is GDP is pretty unreliable data
And in some cases – such as tax havens – utterly misaleading
Population is more reliable
If we take the 2016 figures at face value, how much tax should Google be paying in the UK on sales of £1 billion and pre-tax profits of £149 million?
Under your worldwide alternative minimum corporation tax, it sounds like the UK would be trusting the tax authorities in the 190 odd other countries around the world to collect about 80% of our corporation tax revenues, and they would be trusting everyone else to do the same for them. Bold.
I will do the figures sometime
I seem to have a lurgy today
[…] noted yesterday that the suggestion that Google, Facebook and other tech companies should pay tax on their […]
Tax is the price we pay to live in a civilised society.
People who decline to pay tax are saying in effect that they think they can go it alone, that they make, or made, their pile without any input from anybody else or the infrastructure in which they thrive.
It’s the attitude exemplified by ‘ The Little Boy Who Ran Away from Home’. He was back before bedtime.
We seem to be living in an increasingly infantilised society. The financial sector was back before bedtime ten years ago, (and not for the first time) yet seems to have learnt nothing.
It doesn’t matter how the bonus is paid – cash, shares or options on shares – it still gets accounted for. It’s all covered by IFRS2, it all gets taxed and treated in a timely manner. Companies can’t avoid tax by paying bonuses, which is what you are trying to suggest. But you should know that, being an accounting expert, shouldn’t you?
Again you have ignored the difficult question though. Maybe you could give us a quick yes or no for each one – surely that would take very long.
1. Is Google avoiding tax by paying it’s staff bonuses?
2. Is more tax going to be collected in total, because those bonuses are taxed as income tax?
3. Are you saying somehow that bonuses should be paid out of post tax profits?
With respect, getting a deferred tax asset is not getting tax relief
And I did not suggest they avoided tax: I said they did not get tax relief, which is the exact opposite
You are so keen to be abusive you are not engaging in debate
Hi Richard, you say “I would suggest any apportionment be based only on sales and labor, with sales also being apportioned on both a source and destination basis (each being weighted equally)” I’m not sure I understand why destination is included. Couldn’t we base a tax on say the proportion of Google’s total gross revenue earned in a given jurisdiction. If for example 500 million pounds in their gross was earned in Britain, they can’t hide or change where that revenue was earned can they? You mentioned to me in a previous post (Setting a new course for corporation tax) that Google could sell all product to a distributor in Cayman. So correct me if I’m wrong but you appeared to suggest that Google could hide the source of their sales revenue.
If you do one and not the other games can always be played
Google does all sales from Ireland now and the UK is abused
We need both then
That gives best chance of collecting tax
Ok Richard, so I take it under present international rules we can’t disregard the destination of sales?
No, we do at present
That’s the problem