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.