Economic and Social Research Council
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Fair tax for big business
UK 'laughing stock' of Europe; Minister promised cosy tax deals to US giants: the UK's tax deal with Google has created headlines and led to accusations of large multinational companies getting away with paying little or no tax, while small UK-based businesses and ordinary taxpayers are being taxed at a much higher level.
A new paper from the ESRC-funded Institute for Fiscal Studies looks at how the current tax system seeks to tax corporate profits, and the problems that can arise. The paper, written by Helen Miller and Thomas Pope, highlights several key challenges with the tax system.
The current tax rules are not designed to tax the profits from UK sales, or revenue or sales generated in the UK. Instead, they are designed to tax the part of a firm’s profit that arises from value created in the UK. However, it’s very difficult to calculate how much profit arises from value added in a specific country – for instance, if a UK worker and foreign worker collaborates on developing a product.
There are two key elements of the tax rules:
- Permanent establishment rules define when a firm has a taxable presence in a country
- Transfer pricing rules dictate the prices that a firm can charge for a transaction (including payments for services or for the use of ideas) that happens between two parts of the same firm that are located in different tax jurisdictions.
These rules can never be detailed enough to cover all eventualities. "This is why HMRC is often engaged with multinationals about how much tax they pay: not because they are busy cutting special deals, but because they are trying to apply the tax rules in a consistent manner," the IFS researchers point out.
"Governments can face a trade-off when deciding how to act: changing tax rules can help crack down on avoidance but come at the cost of reducing a country’s competitive position," they add.
Another option is to scrap the current corporate tax system, which was designed back in the 1920s before globalisation and multinational businesses. "We may not be ready for such radical change yet, but depending on how well the newly patched-up international corporate tax system works over the next few years we may find it is worth considering whether a new set of tensions would produce a more agreeable outcome," the paper concludes.
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