Archive for the ‘Taxation’ Category


April was a good month for bonuses. The reason is not hard to see. The upper tax rate was cut from 50 to 45 per cent in April so a lot of bonuses were deferred from the previous financial year. In all, April saw no less than £4.2 billion paid out in bonuses; that was £1.7 billion up on last year.

Not bad.

Of the total amount paid out, the finance industry saw £1.3 billion. The ‘FT’ reckons that by deferring bonuses in this way, roughly £35 million was saved in tax.

But this begs the question: did the cut in income taxes just impact upon the timing of the bonuses, or, as a result of the lower tax rates, did companies choose to pay out higher bonuses?

The government reckons that by cutting the top tax rate, pay awards will rise, and its tax receipts will increase too. Economic theory has a name for it. It is called the Laffer curve. If the tax rate was say 100 per cent, in a free society no one would bother to work, and tax receipts would be zero. If the tax rate was zero, tax receipts would also be zero. So the government has to find the optimal level.

The current government seems to be saying that level is less than 45 per cent. Is that right?

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“The existence of tax havens, coupled with high mobility of capital, means governments are constrained in the tax rates they could otherwise apply – crucial for both wealth and job creation,” or so says the Institute of Economic Affairs.

These are brave words, given the current climate.

The Institute also said: “Without tax havens, big businesses would move away from the UK. If tax havens could not be used by multinational corporations in the UK, then a single rate of corporate tax would have to be set. If set too low, then corporations’ contribution to the overall tax take would fall. If too high, then business would move overseas, damaging the overall economy.”

And: “without tax havens, many innovative products would be stifled by punitive tax regimes. Offshore tax havens allow the UK to make the most of its comparative advantage in financial services and avoid potentially damaging double or triple taxation on investment returns.”

Maybe so, but remember corporate profits to GDP have hit an all-time high. You can’t blame companies for trying to squeeze wages, but when they all try to do that, the result is less demand across the economy, which in turn is bad for corporate profits in the long term.

Surely, we need higher corporate taxes across the world, not lower ones. Tax havens, however, are a distraction from the bigger issues. What we really need is for some kind of international agreement that any country wishing to participate in global trade to be required to sign up to a minimum level of corporate tax.

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The penny has finally dropped. When individual countries try to tax companies the results is that the businesses go elsewhere, or hide behind their globalised operation to get around one country’s rules. We demonise Google and Apple, but the truth is that they are operating within the law. And when did it suddenly become immoral to try to reduce taxes while acting within the law?

The solution is global. EU leaders have agreed to agree, that one day they will agree. That may be a little harsh. The EU is to rush through rules to enforce greater transparency in how companies break down their business into the various regions in which they trade.

Ireland has spoken up. Its Enterprise Minister Richard Bruton told national broadcaster RTE that some companies “play the tax codes one against the other”. He said: “That is tax planning and I think we do need international cooperation through the OECD to deal with the aggressive nature of that.” He does, ever so slightly, have the veneer of a Turkey that has just voted for Christmas.

The big problem with the issue of corporate tax, indeed a financial transaction tax, is that the challenges posed by globalisation have been hijacked by those who favour tax cuts no matter what.

When one country, or even a region as large as the EU, imposes a financial transaction tax, or a tax on corporate profits, there is always a risk that multinational companies will simply move to another region, taking jobs with them. And they can always use the multinational nature of their business to circumnavigate paying taxes.

The fact is that across the world, corporate profits to GDP are approaching an all-time high. Much of the money generated by large companies is not creating wealth; rather it is sloshing around the system ending up in government bonds. And because, thanks to austerity, governments are not spending the money the markets want to lend to them, the result is economic stagnation.

The fact is that distribution of income and wealth across the world is becoming more uneven. You don’t need to be a diehard flag carrying member of the Communist Party to think this is a problem. Right now, the global economy needs to see taxes used to take money from profits that are not otherwise being spent, and from financial transactions, to help alleviate the lot of those who are being penalised by globalisation.

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It is tempting to say the real evil was the ‘double do’. Margaret Hodge, chair of the UK’s public accounts committee, said to Google’s northern Europe boss, Matt Brittin: “You are a company that says you ‘do no evil’. And I think that you do do evil.” It’s odd that no one else picked up on her saying “do do.” But that is not the crime here. But then neither is the real crime Google’s tax policy.

The company has done nothing illegal, but it is its legal duty to conduct its finances in a tax efficient way.

What is clear is that the problem of companies with sales across the world avoiding tax cannot be solved easily. International cooperation is essential.

But there is a wider point. Right now, company profits to GDP are approaching an all-time high. Companies are making profits, in part by paying staff less money. You can’t blame them; they pay the market rate for staff.

But the rational behaviour of companies paying less for staff is perhaps the single biggest reason why the global economy – or at least the global developed economy – is in such a sorry state.

The solution lies in higher corporate tax everywhere.

Instead, we are being told that the UK needs to charge less corporation tax to be more competitive.

The rational behaviour of finance ministers wanting to reduce taxes on company profits is perhaps the single biggest reason why the global economy – or at least the global developed economy – is in such a sorry state.

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The tax system is a touch odd, but there is not much we can do about until… George Osborne has become a fan of cutting UK corporation tax. In the last budget it was reduced to 20 per cent, making the UK one of the more attractive countries in the developed world for tax on company profits.

It does not really make sense when you have income, corporation and capital gains tax all being charged out at different rates. We need one tax rate for all, otherwise the potential for tax avoidance and indeed fraud is overwhelming. But we are going in the opposite direction in the UK.

There is a more important point, however. At a time when companies are making profits but not doing much with them – not giving out that high a proportion as dividends, investing, and certainly not upping wages, how does it make sense to cut the tax companies pay on their profits?

The truth is, however, even if the UK government wanted to raise corporation tax it can’t, not really, because we live in a world of global competition. The UK has low corporation tax because that is the way to get companies to move here from abroad.

Profits to GDP, not just in the UK, but as this diagram shows, in the US, and actually across much of the world, are close to an all-time high.

It is not hard to find an explanation. It is not hard, even, to find two explanations.

Globalisation has had the effect of creating higher rewards to capital, lower rewards to labour. The IMF calls this the globalisation of labour.

Then there is technology, which has had a hollowing out effect; again pushing down median wages. This hollowing out effect is surely set to increase.

What we need is a minimum global corporation tax; one that is administered so that all countries that do not comply with it are shut out from, say, the World Trade Organisation. The money would be collected and spent in each country by that country’s government. The tax does not have to be especially high, say 20 per cent, and any country that wants to charge more would be free to do so.

It won’t happen because the problem that requires this fix is not being seriously considered. Getting governments around the world to agree to such an idea would be devilishly difficult. But just because something is hard, it does not mean it should not be attempted. But first there needs to be popular backing for such an idea, and opinion formers need to get behind it. Contrast this instead with what is happening.

The Cayman Islands, the other Overseas Territories – Anguilla, Bermuda, the British Virgin Islands, Montserrat and the Turks and Caicos Islands – have agreed to much greater levels of transparency of accounts held in their jurisdiction. They have agreed to pilot the automatic exchange of information bilaterally with the UK and multilaterally with the G5 – the UK, France, Germany, Italy and Spain. Under this agreement much greater levels of information about bank accounts will be exchanged on a multilateral basis as part of a move to a new global standard.

George Osborne has urged others to join this growing initiative. He said: “This represents a significant step forward in tackling illicit finance and sets the global standard in the fight against tax evasion.” He added: “I now hope others follow these governments’ lead and enter into similar commitments to this new level of transparency, removing the hiding places for those who seek to evade tax and hide their assets.”

He is right to hope for that, but he should be hoping for a lot more besides.

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Justin King, Sainsbury’s boss, has done an outstanding job for the retailer, but even so his latest gripe seems a tad unreasonable.

Great, we are paying less corporation tax he said, or words to that effect, but: “For every £1 we have benefited from the reduction in corporation tax we have incurred more than £2 of other taxes, in particular business rates and employers’ national insurance.”

He then turned his ire on online rivals. “There is a difference between bricks and mortar retailers who pay rates, National Insurance and all the other domestic taxes that are due, and online retailers who by virtue of their lack of physical presence in the high street don’t contribute in the same way.” Or so he told the ‘Telegraph’. See: UK tax ‘not a level playing field’, says Sainsbury’s chief Justin King 

One of the big advantages pertaining to online stores is that they don’t need an expensive high street presence paying out high business rates; they don’t need lots of staff smiling and being nice to customers.

Okay, finding ways to avoid paying corporation tax is a different matter, but then again, see: A global corporate tax rate is what we need, but at least we are getting a touch more global cooperation.

© Investment & Business News 2013