Has globalisation made corporation tax redundant?
The debate about corporation tax intensifies. Is the tax on profit no longer viable now that the global nature of modern business is making it ever harder for individual governments to enforce? Director asks two business leaders, has globalisation made corporation tax redundant?
Yes, says Stephen Herring, head of taxation at the IoD
The percentage of total revenue raised by corporation tax has fallen in all major economies. The OECD/G20 are currently launching the outcomes of their BEPS (base erosion, profit shifting) initiative but few believe this will reverse the trend.
There are two overarching problems with corporation tax; one concerns multinational corporations (MNCs), the other owner-managed businesses (SMEs). First, if we assumed there was no tax on profits whatsoever, would MNCs be able to split their global profit into intellectual capital, design, manufacturing, distribution, marketing and sales functions to the general satisfaction of informed opinion? It seems very unlikely, despite the best efforts of the transfer pricing specialists of both tax advisers and authorities. Now consider the added complexities and self-interest that inevitably arise when these functions are in different countries, monitored by separate authorities.
For SMEs, why should tax be dependent on whether profits are distributed in pay (deductible against corporation tax), dividends (not deductible) or retained in the business (liable for corporation tax only)? Same profit, three treatments, a variety of outcomes.
We need alternatives which are fairer, harder to avoid and easier to assess and collect, such as payroll, sales, property and social security taxes. Corporation tax is already withering away; now is the time to kill it off.
No, says James Raby, a Sainsbury Management Fellow, venture capitalist and chartered director
Lawyers may argue whether corporations are legally ‘people’ – but there is no doubt they use resources the way real people do. They depend on the legal, financial and social institutions of host countries to protect trade and assets, both physical and IP, provide transaction and currency systems, and educate and care for the welfare of staff and clients. Where are these resources? Not ‘offshore’. So why shouldn’t companies contribute through tax?
Some argue taxes will ultimately be paid through shareholders. But often this route is blocked by the huge cash piles kept on offshore balance sheets. Taxes should be paid in the communities that generate the economic value. The new tax treatments advocated by the OECD and supported by most ‘real’ countries do this. If the money is not raised through corporation tax, the fallback is higher consumption taxes, which fall disproportionately on lower-income consumers. That is not politically sustainable. Luxury and ‘mansion’ taxes would just beget more ‘creative’ structuring of asset ownership.
One could concede defeat and allow legal avoidance through aggressive transfer pricing. But when the logo on the cup is more valuable than the beverage in it, it’s time to apply a brake to the runaway train of IP valuation. We need a balance between costs and taxes for any community – the companies that prosper there must be a part of that balance.
