Summary: Multinational corporations have too many options of avoiding paying corporation tax. So let’s forget about it and introduce an infrastructure charge based on the proportion of audited profits worldwide. This is an updated version of an earlier post (23/09/16) on this site giving estimates of the likely yield of such a charge. Again updated (20/10/16) to reference Richard Murphy’s Alternative Minimum Corporation Tax proposals. GDP figures updated 13/03/17. Further updated on 3/04/17 in light of Google’s undeclared turnover in the UK.
Multinational corporations have an extraordinary range of options for moving profits away from where they are actually made to where they can be taxed minimally. An OECD report today said five countries reduced their tax rates for corporate profits in 2015 and another four announce planned reductions for the future. There is widespread anger about the unbelievably low rates of taxation for some of the largest companies in the world such as Apple, Vodafone, Starbucks and Google. These low rates keep profits high and benefit the wealthy. At the same time VAT rates throughout the OECD are gradually rising, from 17.6% in 2008 to a record high of 19.2% in 2015. VAT rates disproportionately hit the poor.
The capacity of corporations to manipulate their accounts so that they pay essentially no tax is limitless. They employ accountants and lawyers of great skill who are always several steps ahead of governments. Governments are extraordinarily slow at agreeing anything so little happens and profits continue to accumulate. What is needed is a completely different system that is relatively immune to corporate fiddles, is fair and returns the proper amount to each nation.
Every company no matter how big has to produce reliable accounts. They all have shareholders and the legal penalties in most jurisdictions for falsifying these accounts are very serious indeed. We can start with these accounts as being something reliable and dependable and relatively honest. The second piece of information that we can get fairly easily is what fraction of each company’s turnover takes place in the UK (or indeed any other country). If Apple sells 5% of its output in one year into the UK then we are looking at 5% of the total profit of Apple worldwide as the base to talk about. We must forget entirely about corporation tax but instead make an “Infrastructure Charge” which might coincidently be levied at what is deemed to be an appropriate UK corporation tax level, currently 20 %. The usual concern about high tax levels is that it discourages investment in a country. That it is claimed is why Apple is now resident in Ireland. However the Infrastructure Charge is independent of where anything is located, it simply is a crude but reliable method of coming to a fair charge. Of course each company paying the Infrastructure Charge can deduct that from their overall tax bills in their accounts as usual. However it does not require any agreement between governments in other countries. The only way that a multinational can avoid paying the Infrastructure Charge is by withdrawing from that market and foregoing the profits it already makes in that area.
How much money is involved? It is quite difficult to put this all together but a recent report by McKinsey & Co suggested that global corporate after-tax operating profits were in the region of US$8 trillion. The UK has approximately 1% of the world’s population and 3.5% of the worlds GDP. The UK proportion of those profits is therefore $280 billion. Let’s be generous and suppose that half of that has already been properly taxed and the other half has magically vanished to some more favourable tax haven. In that case 20% of $140 billion is about £28 billion. It is difficult to exaggerate how much difference that would make to the British NHS! To think this is been going on for many years could easily make someone quite angry.
Amazingly, companies like Google have no compunction about lying through their teeth (see: http://www.itv.com/news/2017-03-31/google-accused-of-being-less-than-transparent-after-revealing-latest-uk-tax-payments/ ). Recently Google paid a small amount of tax on their UK turnover which they stated as being £1 billion. However the global Google turnover declared by the company that the UK turnover was actually £5.65 billion. Under the AMCT proposed here, Google would pay closer over £1 billion, rather than the £36.4 million it actually coughed up.
The Infrastructure Charge as described above is fair and reasonable and will produce a very substantial income stream for the Treasury at a time when the great majority of the British people want to see much greater fairness in the way our society operates and the way that each of us pays our dues as we should and as we can afford.
Readers may be interested in the post from Richard Murphy on 30 September 2016 with a link to his article on Bloomberg dated 29 September 2016 entitled “Time for an Alternative Minimum Corporation Tax?” which you can find at: http://tinyurl.com/ho6yy73 . It is also interesting that the US does already have a version of AMCT which may well be why Donald Trump’s tax returns for 2005 show that he paid quite a decent amount of tax.