Just a few days ago, the EU ordered Amazon to repay €250m and announced that it planned to take the Irish government to the European Court of Justice over its failure to collect €13bn in unpaid taxes from Apple. To many, these were signs of a tough new stance on tax avoidance. However, is the EU merely playing to the galleries?
Many years ago, when industrial businesses dominated the landscape, the buildings from which they operated governed their taxable presence. Global supply chains were a distant dream, and most businesses produced mainly for their local domestic market with little cross-border trade. It was difficult to justify moving buildings that housed people and equipment, and as a result, collecting corporate tax was easy. However, the landscape has changed significantly in the last decade, and too much of the debate fails to acknowledge those profound changes.
The modern economy is built on technology and global supply chains, where cross-border movement of goods and services is commonplace and can be managed from the other side of the world. Establishing a taxable presence used to be as obvious as bricks and mortar, but recently it has become a science.
Those clamouring for the big corporations to pay more tax are harking back to a bygone age that fails to recognise that in the modern world countries, as well as companies, are competing for business. The benefit of employment in terms of tax take (almost 50% of government revenue in the UK), disposable income that will circulate in the economy and feel-good factor, far outweighs corporate tax revenue (just 8% of total government revenue in the UK). It is only natural, therefore, that forward-thinking countries will offer different incentives and lower corporate tax rates to attract jobs.
The UK’s Corporate Tax Regime
The UK currently asks for 19% corporate tax (down from 30% in 2008) versus Ireland’s 12.5%. Those who suggest that the UK’s reduction in corporate tax over the last decade is wrong – or those such as the Labour Party who suggest the rate should increase – need to be aware of the potentially disastrous consequences. It might sound like a great rallying cry in divisive, “them and us”-style politics to attack corporations, but does it really help anyone?
When the UK rate was 30%, numerous companies moved their registered offices to Dublin to reduce their tax burden by tens of millions. Overnight, the UK not only lost all the corporate tax, but the income tax and disposable income for every role that was relocated. In addition, some people who chose not to go were made redundant and went from being tax contributors to being potential burdens on the state.
For this same reason, the likes of Apple, Facebook, Airbnb, Google are all based in Dublin while Amazon, Nestle, Ikea and Microsoft have all operated in other similarly beneficial tax havens. However, the real trick is to restructure the company and use inter-company pricing to ensure that profits are minimised where tax is high and maximised where tax is low. In other words, utilising a European headquarters to suck the profit into the lowest tax domain.
The Moral Issue
Although it might sound immoral, tax avoidance is not illegal and is actively encouraged by the country benefiting from the inward investment. Many like to complain, but those complaints seem hollow when the aforementioned companies continue to grow at an almighty pace because we choose to buy from them. How many UK citizens, for example, have stopped buying from Amazon because they are significantly reducing the UK’s ability to invest in the NHS or education? Either way, it is patently unfair on those smaller companies, unable to create complex tax structures, who do pay their taxes and enable the population to enjoy the public services their revenue provides. Therefore, things need to change.
The idealistic notion that countries could adopt a uniform corporate tax rate, free from other inducements is fantasy. It has not even come close to happening within the EU, so it is difficult to imagine it elsewhere. Different tax rates are a fact of life, and individuals and companies must deal with them accordingly.
The idea of raising corporation tax in the modern world will place an even bigger burden on those who do pay, whilst those listed above will remain unaffected. Most likely, many companies would move their taxable presence in a matter of weeks and the net result would be a much lower tax-take overall. Such proposals might be a vote winner with the sheep, but they are stuck in the past and at a time of Brexit they are irresponsibly dangerous.
The Next Step
The reality is that corporation tax applied to profit is no longer appropriate for the modern world and must be replaced by something more relevant. Corporation tax should be removed as a natural part of evolution that recognises the changing environment in which companies now operate. If countries want an even playing field for all businesses, this has to happen. If governments want to encourage companies to invest their countries, this has to happen. If they want to avoid losing the revenue created from employment, corporation tax must be removed. It would a brave move for any politician in “marketing-contest” democracies, but the correct one.
Suspect Detained in New York
Following an explosion in midtown Manhattan, a male suspect has been arrested in New York.
The blast occurred on Monday morning near 42nd Street and Eighth Avenue, just one block from Times Square, in one of the busiest parts of New York. Eyewitnesses have said that a man entered the train station with a pipe bomb attached to him before detonating it on a platform. The suspect, Akayed Ullah, suffered burns after the device failed to explode properly and three others sustained minor injuries. New York’s mayor Bill de Blasio confirmed that the incident was a terror attack, making it the second in less than two months. Back on October 29th, a terrorist killed eight people by driving a truck into a busy Manhattan park.
Trump Attacks the WTO
Argentina joined Latin American leaders to strengthen the WTO system in the wake of Trump’s recent comments.
Over the past several months, President Trump has accused the WTO of an anti-American bias and his government is actively blocking the appointment of new judges to site on the WTO’s body. Other WTO nations view this as an attempt to fundamentally alter the system, which has for decades prevented trade wars among its 164 members. Yesterday, at the WTO meeting in Buenos Aires, WTO nations urged the US to re-commit to the organisation’s principles and strengthen the existing relationships within the current system.
Republicans Without Principles: Roy Moore and the Tax Bill
The Republican National Committee (RNC) joined with Mitch McConnell and approximately 18 Republican Senators in urging Roy Moore to resign. They pulled campaign funding and took the moral high ground…until the Senate voted on the tax reform legislation and they discovered that they only had one vote to spare.
The Alabama election takes place on December 12, 2017, before the date of a final vote on the reconciled tax bill that Republicans hope to place on the President’s desk before year end. And so, following the lead of the President, who is satisfied that Roy Moore not only denies but “totally denies” all allegations against him, the RNC changed direction and agreed to re-dedicate its support for the alleged perpetrator of over eight sexual assaults, four of which were on minors.
The Senate Tax Bill
Analysis of the Senate Bill has been extensive in the past few days. It has highlighted several problems arising from the hasty way it was passed.
Firstly, the alternative minimum tax (AMT) has not been repealed. Under current law, AMT is 20% compared to a regular tax rate of 35%. The bill passed by the Senate has both at 20%. Because certain deductions permitted against the regular tax liability are added back for AMT purposes, most corporations will, unless this is fixed in conference, now pay AMT rather than regular tax.
Additionally, the base erosion anti-abuse tax (BEAT) is a problem. It’s complicated. It’s intended to protect the tax base from US parent companies making payments to overseas affiliates whose earnings will be subject to a lower tax rate. But it will have negative consequences for the US taxpayer who reduces its US tax bill by any number of legitimate tax credits available to investors in renewable energy or low-income housing.
It’s not clear if these problems are oversights or intended features. It’s hard to admit the truth – that this was passed too quickly and without due consideration – because that is the point made by the Democratic Senators. Perhaps, as Nancy Pelosi said in respect of the Affordable Care Act, “We have to pass the [healthcare] bill to know what’s in it”. It was a terrible argument then; it’s a terrible argument now.
Christmas for the 1%
The 1% wealth bracket in the so-called Blue states of California and New York will be negatively impacted by the elimination of deductions for state and local tax and the limitation of the property tax deduction to $10,000. Overall, however, it is clear where the benefits of the Senate Bill flow, state, local and property taxes notwithstanding: to those making over $1,000,000.
The reduction in the corporate tax rate that has been approved will, according to many the CEOs interviewed, result not in additional investment in human or other capital but rather in share buybacks and increased dividends.
Why is the 1% Angry?
Senator Charles Grassley observed that the importance of repealing the estate tax was to ensure that those productive members of society would not be punished for a lifetime of thrift and hard work:
“I think not having the estate tax recognises the people that are investing, as opposed to those that are just spending every penny they have, whether it’s on booze or women or movies.”
The quote from Grassley raises a great point: fundamental attribution error. People are comfortable attributing outcomes to others based on their character and disposition: the poor are lazy; that’s why they are poor; the rich are rich because of hard work and intelligence. When explaining their own misfortunes, however, people are inclined to attribute causation to external circumstances. Gressley reinforces this fundamental error by his tactless comment.
The last ten years have been extremely rewarding for the top wealth slice of US society. Corporate earnings have been strong, and the financial markets have delivered robust returns to those who have been able to participate. It is not clear why either corporations or the wealthy have any reason to complain.
The middle and lower classes, on the other hand, have struggled with wages that have been essentially flat over the same period and with health, education and housing costs that have been climbing. It was this constituency that Donald Trump appealed to in his bid to be elected.
One of the unfortunate features of this tax bill is that, while everyone will enjoy tax cuts for the next ten years, the benefits will flow disproportionately to those with incomes over $500,000 after ten years. Individual tax cuts will phase out unless extended, whereas corporate taxes will remain at the same level. Consequently, the benefits of the corporate rate cut – increased dividends and share buybacks – will continue to flow to those with incomes over $1mn.
There is hypocrisy on both sides of the political divide, but the Republicans are running the show at the moment and the ‘house’ is beginning to look very crooked indeed.
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