ACCA Comment: Corporation tax is due for a revamp
Company taxation in its current form is looking out of date
BUDGET fever has truly taken hold when even global super-group One Direction starts calling on the chancellor to do something about corporation tax. Last week, the boy band asked its millions of fans to “bombard” George Osborne with emails, urging him to crack down on corporate tax avoidance.
While it sets a good example to young people to get involved in tax issues, I don’t expect today’s Budget to include much that is new on corporation tax. Although it will be billed as having something for everyone, it will inevitably be about helping individuals rather than a Budget for business.
In previous Budgets, Osborne has looked to keep London and the rest of the UK as an attractive financial hub, with a plan to cut corporation tax to 20 per cent and a plethora of incentives, albeit focused largely on small businesses. But this week, the Global Financial Centres Index showed that New York has overtaken London as the world’s leading financial centre. Does Osborne now think he’s done enough to help the City and the wider business community? Or could he even make a grab for more business taxes, when companies are dragging us out of recession?
TAX AVOIDANCE
Our tax system needs to be much simpler for businesses of all sizes. Right now, it isn’t. Establishing the Office of Tax Simplification hasn’t given a return on investment, and the UK tax system remains a myriad of complexity.
Further, the last year has seen an escalation of concern about corporate tax avoidance. The mantra that businesses need to “pay their fair share” is now set in stone in the public psyche. The Treasury hasn’t been shouting the loudest. The Public Accounts Committee and others in Westminster are the keenest to see reform and for more tax to come from the UK’s business sector.
Perhaps the chancellor is aware of findings from The Hundred Group last month, which showed that the largest companies in the UK contributed a total of £78bn in taxes in 2013. Or perhaps he knows that taxing business too much sends a signal to the rest of the world that the UK is closing the door to overseas investment.
Maybe the Treasury has picked up on a recent ACCA-commissioned report by RMIT University School of Economics, Finance and Marketing in Melbourne, Australia, which provides extensive evidence that the corporate tax system is not “broken”. The report, Multinational corporations, stateless income and tax havens, argues that there is no evidence to support the belief that the UK or the US corporate tax base is being worn away, and that advanced economies face a fiscal challenge, thus creating the environment for a “tax grab”.
Sinclair Davidson, the report’s author, argues that it is one thing to point out that multinationals do not pay tax in some jurisdictions. But this says nothing about the actual corporate income tax base. To the extent that corporate income tax revenues have fallen in recent years, this is more likely to be a result of poor economic conditions than aggressive tax planning. The report also argues that the corporate tax burden reduces investment, leading to fewer employment opportunities, lower consumption and less innovation.
FINE LINE
Politicians need to be seen to be doing something if they are to command public support, and vilification of corporate tax scofflaws ticks a lot of the right boxes. It’s not necessarily the most cost-effective way of improving the public finances, but it’s certainly a popular one.
But there’s a wider recognition that outside any single tax system sits the web of global trade inhabited by multinational corporations. Unlike tax systems, which stick to rigidly defined legal and territorial boundaries, businesses have the choice of where to operate, which rules to put themselves under, and how to account for themselves.
The set of rules that countries have agreed upon to try to govern the taxation of international trade were mostly set out in the 1920s, a world before containerisation, the executive jet and the internet. Goods, people and information are now mobile in a way that the creators of the old system could never have envisaged. This brings challenges for tax systems and their designers, resolution of which have been brought to a head by the pressures of the global financial crisis.
We need a clearer and simpler tax regime to reduce uncertainty. Laws need to reflect the ethical framework society wishes to have. Policymakers need to recognise they cannot just point the finger at business – they need to ensure that the laws themselves are fit for purpose, especially in relation to emerging business models and the digital business era.
So a different way of taxing companies might be the answer. We have to at least consider whether corporation tax itself is workable at all in the new global environment, and therefore whether other forms of taxation of companies need to be developed.
WHERE RESPONSIBILITY LIES
But it is perhaps wrong to assume that this responsibility lies firmly at the chancellor’s door. No one expects Osborne to stand up and fix the tax system in one Finance Bill, but his department has a central, even a driving role, in finding the solution through the OECD.
In fact, everyone involved in the operation of taxes has a part to play in the reform and rehabilitation of the system. Tax is more than just a bill to pay. It’s an integral part of how society works. And the same can be said of business – reallocation of the productive surplus of society and aggregation of capital is what takes us beyond a subsistence society, and it gives us the scope to do things together that we could never do as individuals.
The contribution that a business’s activities make to the tax system and society as a whole cannot be disentangled. As the mantra of corporate social responsibility sweeps the world, a responsible attitude to tax is a fundamental part of good corporate behaviour.
Carrying those good intentions into practice relies upon buy-in from management, advisers and stakeholders. Owners and employees are affected alike by corporate attitudes to tax, and can influence them for good or ill. ACCA thinks its members should approach tax responsibly, setting out the rules of the system clearly, highlighting the key features and opportunities, the main risks and downsides.
And system designers – that’s you, chancellor – have a part to play. Trust and good faith are a two way process, and if taxpayers resent the system or the way it is applied, they are less likely to engage positively with it.
Perhaps because we are a global accountancy body, we can see that different countries have different needs from their tax systems, and different capacities to operate them. But the principles should be the same the world over, for taxpayers, for their advisers, and for the authorities charged with designing and operating the systems.
While I hope I am wrong about today’s Budget, and that the chancellor surprises me with some incentives for the UK economy, there is a bigger task for Osborne and other policymakers to shape a more coherent corporation tax system for the modern economy, a tax system that provides a clear direction for businesses.
Chas Roy-Chowdhury is head of taxation at the Association of Chartered Certified Accountants (ACCA).