I'm always willing to give credit where it is due. The Oxford tax conference has moved to international tax issues today, and the first session looked at issues relating to the recently announced consultation on the taxation of foreign source business income in the UK. Mike Williams, head of international tax at HMRC introduced the consultation paper. I admit, this remains an issue I'm going to largely ignore for now. This HMRC paper has issues inherent within it which trouble me a lot. What I want to mention is the more theoretical discussion, because it was more interesting.

What Mike Devereux did when introducing the session was to suggest that what tax competition has done is to force headline rates of corruption tax down in Europe over the last decade or so. The fall in rates is true. The fact that tax paid has fallen little is also true, although as a percentage of GDP it has, in the UK at least. What Mike suggested was that this trend will continue unless action is taken. And, this is the first thing where I agree with him, the new UK proposal will encourage this trend. The reason is obvious. The suggestion is that we move from a basis of taxing foreign dividends on receipt here with credit given for underlying tax to a position where all dividends received from foreign companies substantially owned by UK larger entities will be free of tax here, subject to a more robust controlled company rule to prevent abuse. This effectively shifts the UK from a residence based tax system for these companies (i.e. their income is taxed here at our rates) to a source basis (i.e. their income is taxed in the country where it arises at whatever rate they choose and is not taxed again here). Pure financial income is basically excluded from this system. What this means is that those territories offering low tax rates for "real" businesses undertaking real trades can be sure that the benefit of those rates will flow into the UK. Of course this will fuel tax competition. That is inevitable. As worrying to me, this will encourage conduit companies and abuse of tax holidays in developing countries, the benefit of which will now be easier to remit to the UK, only exacerbating the loss these countries will suffer from being forced to offer these arrangements.

As Mike suggested, and again I agree with him, this suggests there is no limit to the fall in tax rate that might occur. Indeed, this dedication to a system of nationally based taxation of corporations means that there is a real possibility that tax rates could reach 0% over time. This is inevitable in the structure of tax that we have in the wold right now, and to which the UK is wedded, where each country fends for itself.

These is an alternative. It is called unitary taxation. This was introduced at this conference by Reuven Avi-Yonah, one of the giants of world wide tax thinking. A paper by him on this subject is here, and I can tell you without breaking any confidences that the US Democrats are looking at this and it is, of course, at the core of the EU Common Consolidated Corporate Tax Base. In this the net income before tax of a group of companies is allocated to each of the countries in which it operates using a formula based on third party sales, employment (or some say employment costs) and the value of physical assets in each country. The bias in the formula tends to be towards sales, i.e. towards where the market is (which results in tax being paid in populous places). Each country applies tax at its own local rate once the profit has been allocated.

Of course there are problems. We have to agree common accounting rules (but IFRS is doing that). Then we need common tax adjustment rules (but there is increasing convergence on this). Then the formula has to be agreed, and so on. But think of the benefits. Reduced admin: one set of accounts to agree: elimination if transfer pricing issues and so on.

The UK is adamant right now that this is a threat to sovereignty. But I'm going to agree with Mike once more. If they are serious about collecting taxes from corporations then they might have to change their view on this sooner or later, with sooner being much ore likely than they expect. The chance to link EU reform on this with the US under a new Democrat administration is really important. It will be theme I will return to.

There's one other link to my thinking. The IFRS I have designed on country-by-country reporting provides the perfect base for doing an initial allocation formula for unitary taxation. You might call that a coincidence. I couldn't possibly comment!