The Guardian reported yesterday that:
Abolition of corporation tax is to be considered by a new cross-party group of MPs and peers who will subject ministers and business leaders to public interrogations in a bid to secure fairer and more responsible tax policies.
The all-party parliamentary group on responsible taxation will bring together senior Labour and Tory parliamentarians determined to keep up pressure on ministers to ensure multinationals and others pay their fair share.
The group will begin work in the new year and be chaired by Labour MP Margaret Hodge, with ex-Tory minister David Davis as a vice-chairman.
That Margaret Hodge has managed to secure cross party interest in an APPG on Responsible Tax is good news. I should also declare I am a registered participant in the work of the APPG.
What was worrying was the way that the article was written: I doubt any serious politician wants to abolish tax on company profits in the UK. Thankfully that is not the plan. A little further into the article it is noted that:
The first item on the [APPG's] agenda will be how to respond to G20 recommendations to crack down on corporate tax avoidance.
With evidence growing that the current tax on profits is unfair and too easily avoided, the group wants to debate whether it should be replaced by a new tax on location of activity and sales.
Corporation tax is levied on a firm’s profits, but there have been increasing concerns in recent years that multinationals with complex global operations can shift them to low-tax jurisdictions by making large royalty payments between different arms of their business.
What then becomes clear is that what is actually being reviewed is whether or not there should be fundamental reform of corporation tax so that it is charged on what is called a unitary formula basis, and not its abolition. As Labour’s Lord Wood was noted to say about the planned work:
“There is now strong public support for making sure that business pays its fair share of tax, and pays it in the countries where they make their money. At the moment it is clear that this is not happening in a consistent way.
“This cross-party group of parliamentarians is determined to press the government to demand greater transparency, ensure fairness and take steps to minimise avoidance. We want to engage and hear from the public.”
Stewart Wood (who I should declare that I know) is right to say just that and I am delighted that the committee takes this view.
The Tax Justice Network has fairly, and accurately, described the BEPS process as the application of a sticking plaster to a system that is already suffering long-term failure from which it cannot recover. The reality is that we need to tax corporations. I discussed the reasons for doing so in a lecture given in Montréal recently, accessible here.
If we are, however, to have an effective national and international corporation tax system then it must be based upon economic reality. The fundamental problem with the existing system is that it pretends that the companies that make up a multinational group are entirely independent entities that trade with each other at arms length when the actual economic fact is that no group of companies is created unless there is an advantage to them trading with each other on terms that a market would not set. Almost all the problems that exist in the current corporation tax system result from the adoption of this, quite literally, fantastic basis for tax assessment.
The most that can be hoped for from the BEPS process is that it will keep the world’s corporation tax systems functioning until such time as a proper alternative can be put in place. The obvious problem to which an answer is needed, and which can only be speculated upon, is to ask how long it will take for that alternative it be put in place, and whether the existing system can be kept going for that long. If there is a crisis in world taxation, it is in resolving the stresses implicit in the answer to that question.
In practice, by adopting country-by-country reporting as the basis the tax reporting in the future and, by implication, accepting a greater emphasis upon the profit split basis of transfer pricing, the BEPS process has done two things. The first of these is to recognise that multinational corporations do trade as single entities: this is the assumption underpinning country-by-country reporting (and as the original creator of country-by-country reporting I can state that fact with confidence). Second, there is an implicit move towards unitary taxation, which the supply of country-by-country reporting data is also meant to facilitate (again, something that I can state as a fact because I designed it with that intention). In themselves these two facts may be the single two most important consequences of the BEPS process: they suggest that progress is possible. Unless, however, that progress away from the existing basis of arm's-length pricing towards a unitary basis of profit apportionment (also implicit in the European Union's Common Consolidated Corporate Tax Base) does take place then we are at serious risk of seeing the complete breakdown of the worldwide corporate tax base.
This failure of corporation tax is something that some might welcome: there are those who argue that it is quite simply incorrect to tax profit, but this is an untenable suggestion to those who believe the taxing capital is an essential part of any comprehensive tax system. Abandoning corporation tax would, in effect, shift the vast majority of the burden of taxation onto individual people, making the overall tax system substantially more regressive as a consequence. If, therefore, tax justice is to be maintained worldwide we have no choice but pursue the ultimate goal of transforming the international corporate taxation base to a unitary basis. The foundation for that change has now been laid: the political will to ensure that the necessary change can take place must now be created and this is the ultimate challenge to those seeking responsible taxation, worldwide.
I look forward to submitting evidence to the APPG.