Politicians on both sides of the pond have become exercised over the issue of tax avoidance this past 6 months or so, but this problem that has been around for quite some time.
Maybe it is the silver lining to the financial crash cloud because for far too long, certain businesses have been cocking a snoot at the electors and taxpayers. Business doesn’t have a (formal) vote at elections but uses all sorts of other pressure on governments.
Voters are now beginning to take notice and insisting that politicians do something about it or be defeated at the next election. Because politicians can do one thing that even the biggest business can’t unless they own the politicians – they can pass laws and (try to) make them stick.
We have Amazon trading in the EU from Luxembourg where they have ‘favourable’ arrangements, Starbucks (in the UK for 15 years and ‘failing’ to make a profit in all but one of these years) with similar arrangements in the Netherlands, Google feeling the heat because it appears that some of its London staff were ‘selling’ when that part of the operation was claimed to be carried out from Ireland and that country complaining of a Senate investigation into Apple which concluded that very favourable tax arrangements meant that Apple paid little US tax. Senator McCain estimated that Apple, with some $140bn cash reserves, had avoided some $9billion of tax to Uncle Sam last year alone. Total US offshore corporate profits were close to $2trillion last year, which if repatriated would lead to $700bn tax. Proportionately similar amounts are being lost in the UK – figures of £70 billion are claimed.
It is not only the ‘first’ world that is suffering. Similar games played by multinationals with the developing world countries are estimated to be worth some $70bn in lost revenue to those poor countries, which in many cases is far more than the aid given by first world taxpayers. So not only are companies avoiding paying tax, they are keeping countries and people in poverty. Shame on them.
These are big numbers. The truth is that none of these companies is doing anything illegal. So the answer must be to change the law but that raises a lot of problems in international negotiations.
What should be done?
The key is that to carry out this (at least) moral fraud, companies need to actually trade in the country in question. Amazon has to deliver goods from the UK, bill people from the UK, employ or contract people in the UK to do this work. They should not be able to claim that the goods delivered belong to Amazon Luxembourg and Amazon UK is just the delivery service. There are already EU rules in place for electronically delivered goods – they are deemed to be in the place where the purchase takes place – but they need better policing. In the US, the variety of sales taxes (which is not the same as VAT) makes it even more complex. We need similar rules for physical goods and a declaration that trading is being carried out.
However there is one thing that could – and should – be done and would be fairly simple to implement. Impose a Withholding Corporation Tax on larger companies that wish to trade in a country. This would be based either on the disclosed national sales volume, some sort of VAT or sales tax receipts, or an estimate by the authorities from the global past profits as declared to shareholders. It should be paid monthly or quarterly, as for example VAT is currently paid. We cannot have multinationals declaring one profit for shareholders and another for the tax man – that is lying. Profit is profit and while there are different rules applied in different countries, if a company is not profitable it will go out of business.
Against the WCT can be set the actual day-to-day money spent in the country – wages and direct costs etc. Special allowance could also be included to promote research or other activities. There will therefore be no incentive for companies to up-sticks and move to a lower tax regime if they can set all their office costs against the withholding tax. And tax paid up-front could attract a small interest rate benefit compared to tax paid in arrears – that is logical. In fact these may persuade companies to move to countries which have implemented the tax.
Now you will immediately realise that this will present companies not only with an organisational problem – although I am talking only about a small number of large (ie global) companies of course which should be able to handle such problems. In the first year they will have to pay tax in arrears on their previous year’s profits as well as the new tax ‘up front’.
This is an opportunity to introduce WCT over a period of a few years and at the same time, scale company tax back. A lot of the reason why tax avoidance is so profitable is that tax rates in some countries are quite high. The US has one of the highest company tax rates at 35% and in the EU, Bulgaria is lowest at 10%. The UK is currently 24% going down to 20% but the target should be to move to lower tax all round which will mean less of an incentive to avoid tax and enable domestic companies to grow. Only then can small companies become big companies.
But to companies which have hitherto used transfer pricing and other tricks to minimise their tax bill – even to zero – it will mean that they will have to prove to the tax man that they were not trading in the country which may be quite difficult if invoices and receipts can be produced. It is a question of possession being 9/10ths of the law.
So it really is over to the politicians. While international agreement is ideal, it is not essential. Anyone trading within a country should report and pay taxes on money genuinely earned in that country. There will still be some transfer pricing but this will need to be proved and agreed between the tax regimes of the different countries. There is no suggestion that WCT should be applied to small companies.
What do you think?