This is from Gabriel Zucman's latest work:
The UK is losing over 20% of all corporate profits that should be subject to tax before they ever get near the tax system if this data is right (and Zucman tends to understate things in my opinion).
Now look at this table:
That is the summary of the latest HMRC tax gap data. I have highlighted the large business line in blue: they're the ones who, by definition will be shifting profits out of the country.
HMRC say the gap by these businesses is 5%. So, you could argue that using the Zucman data HMRC are 15% short. But I would argue that the 5% is based on the profits stated after the shifting Zucman has recorded has taken place. HMRC do not recognise profit shifting as tax avoidance: they have persistently said so. In that case extrapolating their data, if the 5% loss is stated out of 80% of the total (i.e. the sum net of Zucman's 20%) then it's 4% of the real total, meaning that the tax gap Zucman might be identifying is worth at least five times as much, or £7 billion a year on top of the £1.4 billion HMRC already recognise.
Some obvious thoughts follow. The first is why is HMRC in denial on this?
The second is that if one tax gap is wrong by a factor of five how much are the others out by?
Third, if they're out by anything like the same amount why isn't this creating more of an issue?
And why, in that case, isn't HMRC's failure to get something so basic right the cause for censure in its own right?
And why isn't action to recover this sum resulting?
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The interesting question for me at this point is: what is it that distinguishes the profits that get shifted from those that do not?
Would knowing that answer well enough assist in resolving the problem? I know about some of the issues (transfer pricing, national vs multinational etc.). But the insights seem to come in erratic bits and pieces. I can’t help thinking that there must be some more readily identifiable pattern of criteria here otherwise it would all get shifted. Does secrecy obscure the answer?
I might be missing something obvious here. I don’t know.
Secrecy obscures the answer
Public country by country reporting would go a long way to revealing the truth
Surely the relevant definition of tax avoidance should be that taking into account the legal framework.
Correct me if I’m wrong but I believe that you choose to highlight many of the structures that are an implicit part of the EU single market (and therefore part of the relevant law) as tax avoidance, when they are simply strategies used to operate within that framework.
This inevitably means that you will calculate a much higher than the experts at HMRC who are simply applying the law as it stands.
Now obviously, you might believe that the current approach is unsatisfactory for whatever reasons and that the law should therefore be changed. But to suggest that the HMRC number is wrong and underestimates the true number is highly misleading.
Your number is only relevant if the tax rules were changed to how you wish they worked, not how they currently are.
Steve Bristow
CTA
I have done no such thing
Profit shifting is clearly unacceptable. Are you saying I should ignore it?
Are you also saying I should ignore 400,000 non-submitted CT returns?
And not do top down calculations even though the IMF say HMRC do?
In fact there is not a thing I do that fits your description that I can think of.
Would you like to point out what I am doing that you think inappropriate, and why?
If you can’t, please would you say why you made this suggestion?
Richard
FCA
Google in Ireland would be one obvious one.
You say you are a CTA
We have the DPT
Have you not noticed. I am not relying on anything but the application of UK law
If that is the best you can do you owe me an apology for making things up. That’s not something a professional should do
I think you’ve made up more than enough in your time Richard!
So a professional tax adviser makes a claim and can find no evidence to support it
Shame on you
I hope you do not do the same in your professional work
How about transfer pricing rules (Starbucks) , for example?
Yes
I asked for them to be applied
Your problem with that is?
And do you see that in my tax gap data anyway? Where
Please tell me or apologise and stop making a fool of yourself
While tranfer pricing was an issue, it is not going on so much now from my offshore experience. More an issue are intangibiles.
Setting up (or moving) your brand name in a low tax jurisdiction and charging royalties/licensing fees to the onshore companies, thus increasing taxable expenses in high tax jurisdiction and shifting those profits to a nil/low tax enviroment. Now that I have come across.
I think TP on intangibles is the issue
I agree with you on that
My eyesight’s not as good as it was, but from that diagram it looks like 80% of profits are moved to other EU countries. That’s a fundamental part of a single market, that a person in Bristol buying from Dublin is exactly the same as a person in Bristol buying from London.
The logical conclusion is to withdraw from that single market, so buying from Dublin is no longer the same as buying from London. With the added bonus that companies in Dublin will have to legally account in their tax returns sales made to UK customers if UK and Eire are not in the same single market, and the other way around. Bingo! Country-by-country reporting.
The obvious caution is how small a single market is functionally supportable. I think for the UK, “UK” is the smallest practical single market, having, eg, “Scotland” as a single market seperate from “England” as a single market would not be workable.
Oddly, the European Commission does not agree with you
Only one of you is right
I can tell you who my money is on
On which bit?
That 80% of profits are in EU countries?
That the single market means that Bristol buying from Dublin is the same as Bristol buying from London?
That if UK and Eire were not in the same single market that companies in Eire supplying to UK would have to state their foreign sales in their company reports, and the other way around?
That this would automatically give country by country reporting?
That “UK” is the smallest practical single market for the UK to be in?
I have my money (and about €13 billion of ECX money) on the fact you’re wrong
Hi Richard,
I think the problem with this is initially that, you objectively understand and realistically evaluate aggressive multinationals arrangements systematically, Steve is vaguely estimating tax without any thought.
Thanks for you analysis and insight
Is Brexit going to make international tax accounting more or less accountable?
If the EU is making a pig’s ear of it could we be better off out of it, or will we just get minced?
I have no doubt that with the current incumbents in charge things will get worse
I didn’t realise this until I came on here: it’s spend and then tax. If profits, income, wealth is hidden in secrecy jurisdictions then it can’t be taxed. Leaving aside the Tories belief in the quasi-religious dogma of neoliberalism, does this constrain the government’s ability to spend, knowing that companies and individuals have placed funds beyond the reach of taxation and therefore billions of tax will be missing and therefore spending has to take account of that shortfall? Do the Treasury tax experts know it’s “spend and then tax”?
I doubt it
They live in a 1950s bubble
Or maybe 1920s
“Or maybe 1920s”
Oh! Goody.
Time for a cocktail.
Call me a cynic, but in my view the reason they don’t worry about this is because they can’t work out a way to protect Tory donors if they do something about it.
Let me see if I get this straight, with an example if you could answer it please?
Let’s say two companies are based in Ireland, one is a branch of a US headquatered multinational and one just a local company which exports.
Both sell into European country where the corporation tax is 30% against Ireland’s 14%. What corporation tax should they be paying on those profits?
Id the economic substance of the activity is in Ireland and no BEPS is taking place then they pay Irish CT, or whatever the US wishes in the first case
But you well know that is not what we are talking about so your comment is utterly irrelevant or shows you do not understand the issue
You are not really answering my question.
let’s say both companies are retailers and that the “economic activity” in this case is happening elsewhere in Europe, not in Ireland.
What tax rate should each company, the Irish one and the Multinational based in Ireland, be paying? 14%, 30% or US corporation tax rates?
But you have just asked a different question
And what retailer in Ireland makes all their sale elsewhere?
And how? What kind of store is that?
I work for an online cycle retailer based in Ireland – 98% of our sales are outside Ireland to the UK and the rest of the EU. We have no “shop” front bar our web presence and we operate out of a warehouse. Hows that for an example?
Regardless, I was asking you for an answer to my question. I’ll clarify it though.
For the Irish retailer selling into a European country with 30% corporation tax, what tax rate should we be paying on our profits? 14% or 30%?
For a US multinational with an operation in Ireland, selling into a European country, should they be paying 14%, 30% or US corporation tax rates?
So you’re not a retailer are you?
You’re an international distributor / wholesaler
But if you really are shipping from Ireland then you pay Irish tax right now and I am OK with that
And that is what a US subsidiary pays, right now
That will change under new US rules
And under the Common Consolidated Corporate Tax Base
And under my Alternative Minimum Corporation Tax
But right now Irish rates apply assuming you have no branch in any other place
Next glaringly obvious question?
We are not a wholesaler or a distributor – that would imply selling to other retailers. We only sell to end user customers, individuals, and ourselves are customers of the distributors for various products.
What I was getting at though, is that what you are calling profit shifting or tax avoidance – paying the lower Irish corporation tax rate in this case – is part and parcel of the EU single market. If a company incorporates in Ireland it pays 14% tax, not the tax rate of wherever it sells into in Europe. You and Zucman are claiming tax is lost because of this, but the companies doing this are wholly within EU regulations in doing so. In the posts above you are incredibly rude to a couple of other posters who have pointed this fact of the single market out.
I highly doubt we’ll be seeing your alternative minimum corporation tax rate any time soon.
But you have made no point at all
You’re simply shipping a product from Ireland
The economic substance and legal form look identical
Zucman are talking about situations where that is not true
I am sorry – but your claims do not stack at all
The point is that the EU single market means that what you are calling profit shifting or avoidance is nothing of the sort.
We are incorporated and based in Ireland. We sell into Europe. Our “economic activity” if you want to call it that happens outside Ireland for the most part. It doesn’t matter.
If we happened to have a warehouse somewhere else in Europe, and were still incorporated in Ireland, it still wouldn’t change anything. We are incorporated in Ireland and therefore pay Irish corporation tax rates.
You might not like (and the EU powers that be certainly don’t) that some countries have lower tax rates than others, but thanks to EU law and the common single market, but that doesn’t mean companies are doing anything illegal or unethical by incorporating in a low tax jurisdiction – which is what you are implying.
With the very greatest of respect your argument is crass
Because you are Irish and sell from Ireland without (maybe) profit shifting does not mean everyone who sells from Ireland does not profit shift
And yes if you were trading from a warehouse elsewhere in Europe I can tell you quite categorically it would change everything. You would be paying tax where you had a permanent establishment elsewhere in that case and being an Irish company would not save you from doing so
You have convincingly proved you have no knowledge of international tax as a result
Respectfully, I would either stick to bicycles (a good thing to do) or learn a lot more about tax and argument because you’ve done pretty poorly at both here
Now, with respect, stop wasting my time
“And yes if you were trading from a warehouse elsewhere in Europe I can tell you quite categorically it would change everything. You would be paying tax where you had a permanent establishment elsewhere in that case and being an Irish company would not save you from doing so”
Now I thought this was the basis of why companies had their head offices in countries with low tax regimes. So I’m well and truly missing something here.
(I know….read ‘The Joy of Tax. It hasn’t arrived yet. Is it a very long book or is somebody just a slow reader I wonder)