If you talk to tax practitioners they will tell you that tax is divided into two broad types.
Firstly there is direct tax, which, they say, is charged on things like income and profits. Examples would, of course, be income tax and corporation tax but capital gains tax also very clearly falls into this category, as does National Insurance.
The second type of tax is, perhaps unsurprisingly, called indirect tax. These are taxes on specific transactions. The obvious example is VAT, but there are plenty of others. Excise duties, fuel duty, all carbon taxes, insurance taxes, landfill tax and many other taxes fall into this category.
The more I think about it though the more artificial I think this divide is, and the less helpful thinking about tax in this way has been for the creation of good taxation policy. This realisation has, in part, been fuelled by a survey work I have undertaken on 147 different corporation tax systems. The outcome of that work is not yet published but the finding was unambiguous: there isn't a single corporation tax system that I can find in the world (and the survey covered the corporation tax systems of more than 98% of the world's GDP) that charges that tax on anything like accounting profit.
Now, of course, we know that in the UK, but then we are reputed to have one of the more complex tax systems. To replicate that finding literally everywhere was, if not surprising, then at least an eye-opener because what this means is that a so-called direct tax is actually no such thing. Corporation tax is, in fact, a tax on specified transactions, just like VAT. If confirmation were needed, when the European Union with drafting the articles for its proposed Common Consolidated Corporate Tax Base it had to be explicit on this issue. In article 10 of the draft CCCTB it says:
The tax base shall be calculated as revenues less exempt revenues, deductible expenses and other deductible items.
You only have to think about that for a moment to realise that what it is saying is that specific transactions are taxed, or are tax allowable: it is not profit that is the basis for this proposed European corporation tax. This is not peculiar to the CCCTB; in effect what I now realise is that this is the commonplace basis the tax assessment for what are supposedly called profits (and in effect, income) around the world. We may start all tax computations with a figure for income, or profit, but that is in itself misleading. That figure is only an approximation to the revenues that are taxable, and even more so, to the expenses that are deductible, and the process of adjustment is not one that comes up with an alternative profit figure; it is an exercise to identify the chargeable and allowable transactions that are within the scope of tax. That is something quite different.
Now, maybe I am slow in realising this, but if I am, then I suggest that I'm far from alone. This suggestion is one I have not seen made. The appreciation does, however, have significance. Once we begin to think that we're charging transactions to tax it becomes very much easier to think about alternative ways of taxing. It was many years ago that I recall reading the new economic thinker James Robertson suggesting that the object of a tax system was to tax the ‘bads' in an economy whilst leaving the ‘goods' alone. This idea is very difficult to reconcile with any concept of taxing either profit or income, but it is very easy to reconcile with a transaction-based approach to taxation: any transaction-based tax necessarily allows for this opportunity, and the truth is that we may only have transaction-based taxes.
The same realisation is also important for another reason, and that is in tackling tax avoidance. The CCCTB definition is very interesting here, and contrasts with the logic of UK jurisprudence on this issue, at least until the introduction of the General Anti-Abuse Rule. That is because the EU rule works on the basis that everything is taxable unless exempted whereas UK taxation law has worked on the basis that nothing is taxable unless specifically charged. Again, a transaction-based approach allows for a change of emphasis.
It does more than that though: it also changes the way in which we need to look at accounts. As I have often noted in the past, the IFRS Foundation have specifically stated that the International Financial Reporting Standards that they publish are not a suitable basis for the preparation of tax calculations, even though they are the only accounts that many companies might produce. Those accounts focus upon a profit figure, which we know to be inherently unreliable. If accounts are, however, to be useful for taxation purposes then there may well be a need for a different focus that seeks to identify particular forms of transaction that may, or may not, be taxable, but that then opens the question as to who will produce those accounts, and who will set the standards for their production.
I don't have answers to these questions is yet: I would be interested in informed comments.
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I think that the CCCTB definition is simply defining profit for tax purposes, rather than moving away from profit as a concept.
I have long considered that much of tax law can be regarded as simply defining a new accounting standard: in fact, when teaching deferred tax to accountants I refer to UK GAAP, IFRS, and “HMRC GAAP”, where deferred tax adjustments are essentially similar to the adjustments you need to shift between, UK GAAP, IFRS, US GAAP, or whatever. This does seem to help accountants who are happy with GAAP adjustments but get confused by DT.
You could equally well say “IFRS profit shall be calculated as UK GAAP revenues less revenues recognised under UK GAAP which are not yet recognisable under IFRS, expenses deductible under IFRS, and other items for which IFRS gives a deduction”.
Replace “IFRS” with “Tax law”, and “Profit” and “Tax base” become largely interchangeable.
If you were to move to purely taxing transactions then to get something similar to the current tax on profits you would need to give a tax credit for purchases transactions. VAT does this (very broadly); but taxing every bit of revenue, giving a credit for every purchase, and then netting the credit off the tax due is functionally identical to simply taxing the profit.
I am saying we are taxing transactions as a matter of fact
But you are right that we do need a Tax GAAP
Yes, we are, but it’s much simpler to start from profit and work down than it is to start from transactions and work up.
We already have a tax GAAP: capital allowances are the standard depreciation policy, the policy for pension contributions is recognise them on a paid basis not an accruals basis, and so on.
Recognising this makes tax accounting much easier to understand.
I am not disputing that we may start from profit
But the point is it is not a profits tax
And we will understand it better if we think differently
As for Tax GAAP – no we do not have one: we have tax rules
What we need are accounting rules to provide the necessary data
Well… yes, corporation tax is a profits tax. It says so right there in s2 of CTA 2009: “Corporation tax is charged on profits of companies for any financial year for which an Act so provides”.
The rest of that Act (and several others) then sets out the way you calculate the profit – what I call HMRC GAAP, to distinguish it from the way you accountants calculate accounting profit in the UK (UK GAAP), the US (US GAAP), or elsewhere (IFRS, and so on).
Starting from the raw transactions, GAAP tells you how to find the profit. HMRC GAAP gets you the UK taxable profit; UK GAAP gets you the UK accounting profit, and so on.
Oh well,that proves it – the aka says it so you must be right
As fatuous arguments for defending the status quo go that takes dome beating
Really? It certainly seems to imply that it’s intended to be a profits tax.
So it’s called a profits tax, it’s intended to be a profits tax, it looks like a profits tax… but it’s not a profits tax.
You’ll forgive me if I disagree with you on this one, I hope.
You may disagree
But the fact is, as the EU explains, it is not a profits tax at all
It charges some transactions to tax, and that’s very different indeed
I’ve copied the words straight out of the document you linked to, in Article 4. P is simply an abbreviation for Profits as used in that article, and the other terms are also abbreviations of the words used. It’s absolutely clear: I’ve even shown all my workings. QED.
How can you seriously say that the EU CCCTB is not based on profits, given the explicit wording of Articles 4 and 10? There is no other way to read them.
There is no one who says the CCCTB is a tax on profits
It says it is not
No, it says it is. It explicitly says it is a tax on profits, other than non-taxable revenue.
If you disagree, please point out the flaw in my very simple algebraic combination of the Article 4 definition of profits with the Article 10 definition of tax base.
I already have
And nothing in my reading of Art 4 contradicts what I have said
In fact it confirms what I have said: it very clearly says the shorthand use of the word profit refers to what I have described and not to anything called profit or profit would not have needed to be defined
So candidly, unless you have something useful to add, please stop wasting my time
It does not say it is a tax on profits
Quite the 4 and Art 10 would not be needed if it was
You are, very simply, wrong
Debate over
So how do you explain Article 9(1)?
“In computing the tax base, profits and losses shall be recognised only when realised.”
The tax base is clearly calculated based on profits and losses, or that section makes no sense. Why would you recognise a profit at all if you’re going to ignore it in the subsequent calculations?
These terms very clearly do not have their normal meaning
They are defined in terms of Art 10 – which says they are transactionally based
I am really bored explaining the glaringly obvious to you
OK, I’ve re-read the CCCTB directive again, and it is *absolutely* clear that it is a tax on profits.
It is mostly couched in terms of “the tax base”, presumably to keep the term distinct from accounting profit, buit as noted above the tax base is defined in terms of profit.
However, it also explicitly refers to taxable profit. See for example Article 53: “Losses incurred by the taxpayer which have not yet been set off against taxable profits under the rules of the system provided for in this Directive shall be carried forward in accordance with national corporate tax law.”
“Taxable profits under the rules of the system provided for in this Directive”. How can you argue that the Directive does not tax profits, when it explicitly says it determines taxable profits?
Or look at the legislative financial statement for the proposals: it says that the impact will be “To provide companies with the option to apply a common system for taxation in the union (a common and consolidated tax base for the determination of the corporate profits)”.
Or again, look at the preamble: “Since such a system is primarily designed to serve the needs of companies that operate across borders, it should be an optional scheme, accompanying the existing national corporate tax systems.” – these national corporate tax systems all being taxes on profits.
The only way you can argue that CCCTB is not a tax on profits is by saying that “profits” can only ever mean “accounting profits”. That is absurd: if that were the case there would be no need ever to use the “accountign” prefix.
CCCTB is designed and expressed to be a tax on corporate profits, calculated according to rules which largely parallel but do not entirely accord with accounting rules on calculating profit.
OK, let’s take the Commission summary of the CCCTB tax base:
Commission summary
The ‘tax base’ (i.e. the individual tax results of each
group member)
– all revenues are taxable except if expressly listed as
exempt; in addition, taxable revenues are reduced by
deductible (business) expenses and certain other items
treated as deductible.
– Exempt items include: received distributions of
dividends; proceeds from the disposal of shares; and
income from a branch in a third country. Deductible
business expenses commonly involve all costs relating to
sales and expenses linked to the production, maintenance
and securing of income. The CCCTb extends deductibility
to costs for research and development (R&D) and for
raising equity or debt for the purposes of the business.
– Fixed assets are depreciable for tax purposes
subject to certain exceptions. Depreciable assets are
distinguished between those subject to depreciation
individually and those placed in a pool. Long-life
tangible and intangible fixed assets are individually
depreciated while the remaining assets go into a pool.
– Losses may be carried forward indefinitely. No loss
carry-back is allowed
Where’s the word ‘profit’?
And if in doubt:
the Directive does not make a formal link
between IAS/IFRS and CCCTb
Please stop wasting your time and mine Andrew
The word “profit” is in Article 4, which defines profit in exactly the same terms as the first bullet point you quote. “Taxable profit” and “tax base” are pretty much interchangeable.
The Directive does not make a formal link between CCCTB and IFRS because, as it explicitly states, other GAAPs are available and may be more appropriate.
You are simply getting yourself confused by jargon again. Calling a profit “the tax base” does not mean it is no longer a profit, it is simply using a clearly-defined term – which cannot be confused with, say, “accounting profit” – to refer to it.
If you think that changing the name of something changes its nature, please feel free to refer to my car as a Jaguar.
Posted subject to point 5 of the comments policy
Further repetitive postings will be deleted
You need to read the whole, rather than smy cherry-picking as single article.
Article 4(9) says “‘profit’ means an excess of revenues over deductible expenses and other deductible items in a tax year”. P = R – DE – ODI
The tax base shall be calculated as revenues less exempt revenues, deductible expenses and other deductible items. TB = R – ER – DE – ODI
Substitute P for (R – DE – ODI) and you get:
TB = P – ER
The tax base is defined as profit less exempt revenues.
Looks rather like a profits tax to me.
But as a I have demonstrated, that is clearly not true
You are wholly inappropriately substituting P for something it is not
“The second type of tax is, perhaps unsurprisingly, called indirect tax. These are taxes on specific transactions. The obvious example is VAT, but there are plenty of others. Excise duties, fuel duty, all carbon taxes, insurance taxes, landfill tax and many other taxes fall into this category. ”
You need to be careful of your terminology here. Generally we do not call these transactions taxes, we call them consumption taxes. VAT is a tax on the consumption of Vatable goods, landfill tax a tax on the consumption of landfill etc.
The reason for the care is that we can also have what we usually call transactions taxes: the FTT is an example of one of those. And there’s a significant difference between a consumption tax and a transactions tax. To the point that consumption taxes are generally seen as regressive but efficient while transactions taxes are possibly regressive but also wildly inefficient.
You’re mixing up the language that is usually used in these discussions.
But if we start to talk about consumption taxes then yes, this is indeed preferable to taxing, in Robinson’s words, “goods” like income and profit. Which is why we neoliberals (among other reasons, see efficiency above) have been arguing for more taxation of consumption and less of those goods of course.
I am saying the language used is wrong
Your language is wrong
Fine, but that is the way that it is used at present. And we also need to be able to have some language which distinguishes between consumption taxes and transactions taxes.
Take an example: we have (in my terminology) a consumption tax called VAT of 20%. This tax is collected in stages along the value add chain of production. But the final tax rate on the entire chain is 20%. The consumer pays that 20% on the final transaction if you prefer to think of it that way. But an important point is that the total tax collected is 20% of final value however long that production chain. It doesn’t matter whether the product was made entirely within on firm with no outside transactions or it came through 100 different forms all charging a fraction of the VAT each. Final rate is 20%.
Compare that with a transactions tax (my definition) of, say, 1%. Now it matters hugely how long that production chain is. If just the one single company in there then the final tax to the consumer is 1%. If there’s 100 companies in that chain then the consumer is being charged 1% on each of those transactions. And no, that cumulative chain of 1% s will not be the same as 1% of the final transaction value.
This is why we distinguish between a transactions tax and a consumption tax. VAT is a consumption tax and the FTT is a transactions tax. We already use these words in these quite specific meanings.
But both are transaction taxes
Just some allow the offset of tax paid against tax due
That’s all
No big deal
I suspect that what Worstall means is that although both are taxes on transactions, only the FTT is a “transaction tax”.
It doesn’t seem like a big difference to me as a non-economist – except that I know enough about language to know that getting your jargon right is important, and being sloppy about it leads to misunderstandings at best, and outright error at worst.
But since Worstall is wrong with rated to almost all economic interpretation why listen to him on this one?
I am neither an accountant nor an economist…
…but the division between direct and indirect tax at a personal level is clear – direct tax taxes me for merely existing, indirect tax taxes me for what I do.
Logically, the fact that you can’t draw that distinction clearly at a corporate level means that the people who claim that corporations are a personality are peddling a myth…no?
The split is just as real re income tax
“But both are transaction taxes
Just some allow the offset of tax paid against tax due
That’s all
No big deal”
Yes, but: in the jargon this is how we distinguish between them. In said economic jargon a transactions tax is one that does not have that offset. So it is, truly and purely, a tax upon that one transaction.
A tax which does have that offset is not purely a tax on that one single transaction. It’s a tax on all of the transactions in the chain (in the instance of VAT for example). We thus have a different name for this type of tax. A consumption tax.
Please do note that I’m not arguing with your basic point at all. I’m just correcting the terminology you’re using so as to make it consistent with the terminology everyone else uses when talking about the same things.
What I call, and the literature calls, a consumption tax you can call a transactions tax with offset if you like. It’ll just mystify everyone. The other point about providing you with the correct terminology is that you can now see what other people have said about these various types of taxes. For some thought has gone into this subject already.
And I am saying – as I often do – that the jargon does not reflect reality and is wrong and therefore needs to be replaced because that would result in better tax
Just because you know the jargon of defunct economists does not mean you are right
“Just because you know the jargon of defunct economists does not mean you are right ”
Think about what you’ve just said there. You are the supporter of the FTT precisley, exactly, because it is a transactions tax. It taxes that, specific, transaction. And you hope that that taxation will mean that that transaction will not take place.
And then we have VAT, which does not prevent consumption from taking place. But it does raise googly revenue.
Can you not see that these are different things?
That, as I am sure you know us yin clutching at straws
Rates can clearly vary
As can, as I have already made clear, deductibility of costs
But you, of course, ignore that
But in the process you ignore the whole pint I was making in tax design
Jargon isn’t meant to reflect reality. It’s nice when it does, but the whole point is that the name for a concept is simply a token rather than a descriptor. This is basic linguistics. You might as well say that selling your house gives rise to a chargeable event gain.
It doesn’t matter what the label is, it’s what the underlying concept is that matters. The problem comes when using a label in an unexpected an non-consensus way, as you confuse people who expect it to be used in the generally accepted manner. A perfect example is the “Fair” in “Fair Tax Mark”, which everyone last night (yourself included!) appeared to agree meant something like “Transparent” or “Clear” rather than being in the expected “Just”, “Equitable”, “Reasonable” part of the thesaurus.
No, only pedants think the Fair in Fair Tax Mark means that
No one else is confused, at all
Everyone last night who expressed an opinion said that the Fair Tax Mark is not a measure of the fairness of tax and so it ought not be called the Fair Tax Mark – it should be the Tax Transparency Mark, or the Clear Tax Mark, or some variation of that – because to call it Fair Tax when it’s not about fairness is confusing.
I’d say you lost that part of the debate, but it wasn’t a debate: I didn’t see you even try to defend that use of “Fair”.
I think the argument is trite
I don’t engage with pedantry
I have better things to do
For what it’s worth, I am someone who believes that measures which enable people to get a useful impression of how a company conducts itself are good things. See ‘Fair Trade’ also. It’s easier for someone to get a grasp on what a ‘mark’ is trying to achieve and adjust their habits accordingly (if they agree with those aims) than it is to independently assess all the organisations they deal with.
So despite the complexity of what you’re trying to do, and whatever qualms I might have over whatever methodology is chosen, I applaud what you are trying to achieve. So I wouldn’t call myself a ‘fan’ of the Fair Tax Mark, but I would say I’m someone who’s sees a place for it, and gives the credit due to those of you trying to make it happen. If it evolves into a properly transparent and collaborative process (acknowledging the rights of, but not but not capitulating to the the interests of, as many affected/interest stakeholders as possible) then it can be an asset to society.
However, I also think that the name is misleading. It might not be intentional, but I think it’s a shame that you dismiss such concerns as ‘pedantry’ when they’re based on a very basic understanding of what words literally mean, and what they are commonly taken to mean.
The public debate on tax, which you’ve been a part of, has revolved around the word ‘fair’, and whilst transparency has always been a theme of yours, it has not grasped the imagination/ire of the public/media… who have focussed on the fairness of what companies actually pay. It would be the height of naivety to think that when the public hear about a ‘Fair Tax’ mark that they won’t assume it’s concerned with the issues at companies like Starbucks, Amazon and co, that they’ve been reading all about. You are free to disagree that this is a problem, but I think that the concerns deserve a little more respect than you seem to give them. Not everyone with a different opinion on these matters is opposed to what you’re doing, some just want to express different view on how it’s being done. I do, however, understand that it can be a difficult job working out which is which.
Yes, you can argue that almost all of our taxes are transaction taxes – perhaps the only obvious exceptions would be taxes based on occupation/ownership of land (including business rates and council tax, and especially LVT.. but we don’t have that) but isn’t that just because those ‘direct’ tax bases are just the balancing figure on a series of transaction. It’s a different way of looking at such taxes, for sure, but with corporation tax structured as it is then it strikes me as entirely the wrong way to look at it. It’s almost tautologous, because the results of a company, are by definition, the results of a series of transactions.
The approach throws up an interesting (or, at least, rarely acknolwedged) distinction between income tax and National Insurance. The latter is very much transaction based (liability and value are directly linked to payment of wages) but the former much less so. I say that because you cannot derive my income tax by reference to any transaction, it can only be the result of multiple transactions (due to thresholds and allowances) so taxing individual transactions is not possible. Where the tax impact of a transaciton cannot be derived without reference to any number of entirely unrelated transactions, I’d say it’s a tough sell to pursuade anyone that it’s a transaction tax, except in the sense that ’there are transactions’.
The danger (of sorts) with this approach is that focussing too much on transactions is detrimental to any attempt to shift the tax base towards things like wealth and (if you’re a bit of an LVT fan, which I am), land. I think there should be less focus on direct flows of money (transactions) and more on the indirect impact of those flows – e.g. the unearned land gains of those who sit doing nothing whilst the rest of us pay to build a new tube station 200 yards away.
If we want to tax bad things, not good things, then transactions are not the best place to look. If two people transact then we should start from the default position that this is a good thing – they have mutually agreed an exchange of value. Absent externalities (pollution, damage to health etc) that we want to minimise and/or mitigate via taxation, these transactions are good. Vast unearned wealth from land values, on the other hand, is bad – but the very absence of a transaction is one of the many factors that have prevented us from taxing it.
Actually – I think you make a good pint in wealth
I will muse on it
Ah, that is the first time I have heard LVT (a tax on rent) referred to as a 3 direct tax, which it clearly is. As you say, we don’t have it – more’s the pity – instead we have one of the most futile of transaction taxes: Stamp Duty Land Tax, which, apart from raising some revenue, succeeds in further hobbling a most dysfunctional market.
Richard, I’m probably the least qualified person to comment on this (but I’ve never let that stop me before) so here goes.
Two thoughts occur…
Firstly, if I understand what you’re saying correctly, that under this model direct taxation would be replaced with transaction taxes, what of the millions of unrecorded transactions that take place every day (eBay sales, newspaper personals pages etc.)? Car sales are a prime example. A car may be sold a dozen or more times in its lifetime, but the likelihood is that only the first two or three of those sales may be through officially recognised channels. Furthermore, as it ages and becomes less efficient its cost to the environment and public health becomes greater. There are often breaks in the chain of registered ownership, which would make tax liability difficult.
I’m not saying I understand the ramifications of transaction tax alternatives as a lreplacement to the current status quo enough to disagree with it, but as a comprehensive system it looks, to me, as though enforcement would be even more convoluted than it currently is.
Secondly on the idea of ‘taxing the bads’, I had an idea recently about LVT based on ‘calorific land value’. The idea was that all land be assessed according to its potential calorific yield, with land that achieves its full potential attracting zero additional taxation (the LVT is an adjunct to current taxation, and excludes residential land, ie the land beneath housing). The further land strays from that potential the higher the taxation becomes. We currently have a situation where for £11m it is possible to buy 58000 acres of the Highlands for a few ‘Hoorays’ to kill things for a few months of the year, at a time when we are facing a future crisis in feeding the world’s population. Similarly, thousands of prime land are doing nothing more than being a home to little Jonty and Jocasta’s ponies.
Just a thought…
Let me be clear, this would still be taxed on companies
But it changes the design of what they pay, not that they pay it