I have been asked why we should bother with corporation tax and why not instead ‘look through’ the corporation and tax the shareholders instead — as many neoliberal economists and libertarians would prefer, since they view the corporation as a mere agent for its members.
The following is a range of the arguments against this proposition — which is both a denial of the legal reality of the existence of companies and a simple charter for tax abuse.
1. The corporation is a legal entity in its own right - why should it be exempt from tax when other people are not?
¬? Corporations impose cost on society - they need to pay for the benefit of limited liability
2. Who are the owners?
¬? Some owners in quoted multinational corporations hold shares for seconds. How is profit to be attributed to them?
¬? How are derivatives, loans and other arrangements to be taxed?
¬? What is the owner is a nominee?
¬? What if the owner is another company? How many iterations are needed before a warm blooded human being is reached?
¬? How are trusts to be treated - especially if discretionary?
3. If all the owners are offshore then no tax would be paid on income arising in the UK
¬? Source taxation ceases to be possible
¬? A disaster for developing countries where inward investment is high
¬? A gift to tax planner everywhere
4. What if the owner had never seen the benefit of the profit - because no distribution had been made to them. Can they be taxed on an income they have never had?
¬? Surely this breaches human rights?
5. What about collective investment vehicles such as unit trusts and pension funds? What happens then?
6. How does the admin of advising tens of thousands (if not more) of shareholders of the income they must put on their tax return work?
¬? How does this represent efficiency?
7. The exception
There is an exception
¬? Small companies
¬? Fewer than ten owners
¬? Less than £50,000 capital
¬? The look through can work - but the company must act as agent to pay the tax for the member - so higher rate tax by withholding will be due by default
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That’s great. Thanks for that.
Now comes the accountant question: should the tax rate be higher and the investment allowances larger – with the option for a company to be taxed like a partnership if the shares have been held in a compatible manner.
I’m thinking about how to hit the avoidance without affecting the wider benefits of the company system.
Ideally how should it be set up?
“If all the owners are offshore then no tax would be paid on income arising in the UK
¬? Source taxation ceases to be possible
¬? A disaster for developing countries where inward investment is high
¬? A gift to tax planner everywhere”
It has never been a problem to tax the offshore partners in a UK Limited partnership, mostly because if the assets of the business are in the UK it is easy to enforce the company/partnership to withhold tax from the distributions.
@Tim
Wrong – it is a problem
And it’s only not an issue because it has not become one of scale – yet
[…] Update: here are some more reasons to tax corporations, courtesy of Richard Murphy. […]
i am very interested in whether this could work. i accept that there would be problems, but i think that the current system is simply unfit for purpose in a global economy. a new system would bring new complexities and risks of avoidance, of course, but we’re not talking about changing a system that works well. the biggest issue with the current system, for me, is not all the offshore shenanigans and allowances – it’s the basic fact that we tax an accounting calculation of profit, which is a much manipulated figure and is not actually a measure of ability to pay in any case (as any good accountant knows.. cashflow, cashflow, cashflow!!).
my view is that it would be preferable (if it could be achieved) to tax corporations through a witholding tax when they issue dividends. these payments are, after all, the realised profits of the shareholders.
my thoughts on your individual points..
1. whilst i agree, i’d consider that taxing the shareholders would still achieve this.
2. there are complexities here which, i freely concede, i don’t fully understand and cannot say how they should be treated. i would say that anything currently taxable via means other than a corporation tax on profits should continue to be taxed in the same way. if something is currently only taxed when it becomes a profit, then the burden would fall directly – instead of indirectly – on the shareholder.
dividends paid to substantial uk holding companies would be free of tax. other corporate shareholders would be able to reclaim the tax if/when the government set policies allowing it.
3. offshore issues are a problem with the current system also. if the tax is levied on dividends then surely it can be a witholding tax and taxed at source – and thus taxable in the uk before it goes overseas?
4. i would only tax dividends – so the shareholder is only taxed when the company distributes the profit. if the company retains the earnings for future investment then there would be no tax – the rationale being that there would be a higher tax take in the future (that will not always be the case, of course)
5. the tax is witheld at source at the point of distribution. qualifying recipients (e.g. an approved pension fund) may be allowed to reclaim some tax paid if the government deems that appropriate – though something which currently receives post-corporation-tax income shouldn’t expect to do so. a partial credit could be given for something which would currently not pay tax on dividends, if appropriate. the key here is that by witholding the tax the onus falls on the recipient to show that they should get it back. in most cases, i’m ok with that.. but recognising your next pint.
6. this is a definite issue. there would need to be a straightforward system for smaller shareholders to get back witholding tax if, as i would suggest, it is levied at the higher rate of income tax. i would hope that, however, in this modern age this could be achieved.
i am curious, richard, whether you’re issue is that you think that this si simply the wrong basis on which to tax companies, or whether you simply feel that it would not work. either perspective is valid.
@theboynoodle
I’m sure you’re keen on tax only on a withholding tax on dividends
That way the rich get ever richer since by definition they don’t need their income to live on
And the rest get poorer – and pay all the tax
How wonderfully regressive of you
Given that fact I really can’t be bothered to deal with the rest of your commentary
@Richard Murphy
Quite so, Richard. Taxing distributions only enables those who don’t need their profits immediately to convert them into capital gains with all the opportunities for avoidance and simply lower tax rates that that presents. It’s a recipe for disaster.
you could have responded there by saying ‘what do we do about companies who then choose not to make distributions? if the shareholders don’t need to make distributions then they can avoid paying tax’.
because that, richard, is an entirely reasonable thing to say. it’s a flaw in the idea that would need to be dealt with in some way.
instead, with absolutely no basis for doing so, you rudely and dismissively (and, i should add, wrongly) assume that this is, in fact, not a ‘flaw’ in the idea.. but the very reason i think it might be a better option than the current system.
i read your blog post with interest, i posted some thoughts that occurred to me because i was interested in whether you, or others, had a view.. because i recognise that just because something seems to make sense in my head that doesn’t mean it’s indisputably the route to a better world. that’s how these places are supposed to work, isn’t it? now.. whilst i don’t mind you excercising your right not to respond to anything that i did write.. i do mind you being rude and making wild assumptions about my motives.
believe it or not, richard, not everyone who has different ideas to you is hell-bent on making society even less fair than it is today.
@theboynoodle
Oh come on – I’m allowed to assume someone commenting here is a) competent and b) sufficiently informed to put forward an idea
Instead the defence is always that I’m rude
No I wasn’t – time and again those who promote regressive ideas put up that straw man when all I’m actually doing is saying that the ideas someone is promoting are either a) ill informed or b) disguise for abuse and often c) both
You’ve taken to commenting here – regularly – I do presume you think you have informed reason for doing so – you claimed professional links for contacting HMRC earlier today. In that case I think my comment was fair
James, how would capital gains be produced from a withholding tax on dividends?
@Stephen
Cash is accumulated
Then the company is liquidated
And the distribution is then a gain
Simple
And well over 20% tax saved
Unless we have corporation tax
The issue of companies failing to distribute profits is a valid one.
So how do we either ‘persuade’ them not to do that, or ensure that they are appropriately taxed if they do?
An obvious partial solution is to also tax capital gains as income, at income tax rates. There are reasons, some good and some bad, why capital gains are taxed at a lower rate – and if the rate was higher we would need to provide appropriate reliefs in those circumstances. That would introduce an element of complexity, but we shouldn’t pretend that things aren’t complex already. We would simply have to shift the overriding assumption so that all gains were deemed as income unless they qualified for some relief.
A further disincentive to ‘hoard’ could come with changes to inheritance tax. That’s a whole other issue – suffice to say that I think that IHT is the single best opportunity to enforce a genuinely progressive and redistributive tax and I would favour both reducing the threshold materially, and taxing inheritances at, as a minimum, the marginal income tax rate of the recipient (though, perhaps, allowing an element of ‘carry-back’ to benefit basic rate taxpayers.)
I think that both of these measures reflect the ‘look through’ spirit of this idea.
As an aside, along with any abolition of corporation tax I’d wish to see a dramatic increase to the minumum wage such that anyone in full time employment drew a wage sufficient to live without any state benefits. It’s wrong that those companies with low-paid workers (irrespective of whether they pay any CT or not) benefit from state subsidisation of low wages. This would not increase the tax take from these companies, but it would benefit society by removing some of the benefit complexities many people ‘enjoy’ and eliminating a degree of tax churn.