UK corporation tax planning - The new public enemy number one?
December 6th: KPMG's Eamonn Donaghy looks at the UK Government’s efforts to introduce a more attractive corporate tax regime at a time when public opinion against corporate tax planning measures employed by some companies operating in the UK is at an all-time high.
Nobody would argue that corporation tax has not always has been an important subject. In Ireland, the 12.5 per cent rate of corporation tax has been and is a key driver for the level of FDI that takes place and the retention of this rate has been a vital cog in the ongoing restructuring of the Irish economy. Indeed for those campaigning for a similar rate of corporation tax to be introduced into Northern Ireland, it is seen as the economic lever with most chance of being a ‘game changer’ to the current economic difficulties faced in the North.
However, for most UK citizens, corporation tax has never been seen as a headline grabber. Occasionally, at or around budget time, reference was made to significant changes to the corporation tax code and of course to any movements in the headline rate. However, other than this annual passing reference, corporation tax usually slipped quietly into the background and was rarely seen in the press.
How things have changed! For the past number of months, not only has corporation tax been taken out and dusted off, it is now regularly appearing as the headline story in newspapers. Indeed the lead editorial in The Times recently stated ‘The scale of tax avoidance by multi-national companies is unacceptable. The State must not incentivise businesses to forget that they have moral duties too’. Whilst it is somewhat rich for the press to take the moral high ground in this ‘Post Leveson’ world, the commentary does seem to reflect the current public mood in the UK.
What has caused such furore?
To answer this question, you must focus on the current state of UK public finances. The UK Government is now looking to extract taxes from whatever means possible. Whilst raising income tax has been the obvious source of raising funds in the past, this is now accepted as political suicide and therefore Governments have been forced to look at other means of raising revenue. At the same time, political activists have been hard at work demonising tax avoidance and likening it to tax evasion. Corporations are portrayed as evil empires that house fat cat bosses. With such background noise, the once thin but clear line between avoidance and evasion is under challenge.
Recent headlines involving Google, Amazon and Starbucks have been written so as to highlight the amount of corporation tax paid in relation to the turnover of the organisation. Little effort is made to explain that corporation tax is paid on profits and not turnover. Whilst the operation of corporation tax legislation is extremely complex and involves issues such as transfer pricing, OECD guidelines and a myriad of national tax laws, the stark headlines avoid such complexities.
There may be an element of schizophrenia in the way that the UK Government is currently acting. For the past three years, the current Government has been very pro-active in trying to make the UK corporation tax system much more attractive for multi-national organisations. The restatement of the controlled foreign company [CFC] legislation, the introduction of the Patent Box regime, the exemption of most dividends from the charge to corporation tax and the continued availability of interest relief to fund investments have been very effective in reversing the trend of corporate migration out of the UK. Indeed, the reduction of the UK corporation tax rate from 28 per cent to 21 per cent by 2014 has also been seen as very attractive by international business.
However, all of the above appearance of being business friendly is being threatened by the Government’s pronouncements that large corporations must pay their ‘fair share’ of tax or else be subject to public outrage and the questioning of their morality. This is hardly putting out the welcome mat for international business.
Whilst it is a good thing that corporation tax is subject to debate and scrutiny, one needs to remember that this is not a simple subject and should not be subject to simplistic analysis. Corporations have no moral obligation to pay more tax than they are legally obliged to do. It is up to Governments to make and enforce legislation which enables it to collect an appropriate amount of corporation tax from companies that operate within its jurisdiction. Indeed over the past few years and as recently as the start of December of this year, the UK Government has introduced a raft of anti avoidance legislation and has tightened up its tax scheme disclosure regime.
A new General Anti Avoidance Rule is due in 2013 to add a further layer of protection against the excesses of avoidance.
The vast majority of businesses would agree that taxation by legislation is entirely appropriate. However, most would agree that it is entirely unacceptable that corporations should be expected to volunteer tax and then be publically pilloried if they refuse to do so. Taxation by statute is the accepted modus operandi of international business. Taxation by the court of public opinion is entirely unacceptable and in this globally mobile world, it is doomed to fail.
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| Eamonn Donaghy |
However, for most UK citizens, corporation tax has never been seen as a headline grabber. Occasionally, at or around budget time, reference was made to significant changes to the corporation tax code and of course to any movements in the headline rate. However, other than this annual passing reference, corporation tax usually slipped quietly into the background and was rarely seen in the press.
How things have changed! For the past number of months, not only has corporation tax been taken out and dusted off, it is now regularly appearing as the headline story in newspapers. Indeed the lead editorial in The Times recently stated ‘The scale of tax avoidance by multi-national companies is unacceptable. The State must not incentivise businesses to forget that they have moral duties too’. Whilst it is somewhat rich for the press to take the moral high ground in this ‘Post Leveson’ world, the commentary does seem to reflect the current public mood in the UK.
What has caused such furore?
To answer this question, you must focus on the current state of UK public finances. The UK Government is now looking to extract taxes from whatever means possible. Whilst raising income tax has been the obvious source of raising funds in the past, this is now accepted as political suicide and therefore Governments have been forced to look at other means of raising revenue. At the same time, political activists have been hard at work demonising tax avoidance and likening it to tax evasion. Corporations are portrayed as evil empires that house fat cat bosses. With such background noise, the once thin but clear line between avoidance and evasion is under challenge.
Recent headlines involving Google, Amazon and Starbucks have been written so as to highlight the amount of corporation tax paid in relation to the turnover of the organisation. Little effort is made to explain that corporation tax is paid on profits and not turnover. Whilst the operation of corporation tax legislation is extremely complex and involves issues such as transfer pricing, OECD guidelines and a myriad of national tax laws, the stark headlines avoid such complexities.
There may be an element of schizophrenia in the way that the UK Government is currently acting. For the past three years, the current Government has been very pro-active in trying to make the UK corporation tax system much more attractive for multi-national organisations. The restatement of the controlled foreign company [CFC] legislation, the introduction of the Patent Box regime, the exemption of most dividends from the charge to corporation tax and the continued availability of interest relief to fund investments have been very effective in reversing the trend of corporate migration out of the UK. Indeed, the reduction of the UK corporation tax rate from 28 per cent to 21 per cent by 2014 has also been seen as very attractive by international business.
However, all of the above appearance of being business friendly is being threatened by the Government’s pronouncements that large corporations must pay their ‘fair share’ of tax or else be subject to public outrage and the questioning of their morality. This is hardly putting out the welcome mat for international business.
Whilst it is a good thing that corporation tax is subject to debate and scrutiny, one needs to remember that this is not a simple subject and should not be subject to simplistic analysis. Corporations have no moral obligation to pay more tax than they are legally obliged to do. It is up to Governments to make and enforce legislation which enables it to collect an appropriate amount of corporation tax from companies that operate within its jurisdiction. Indeed over the past few years and as recently as the start of December of this year, the UK Government has introduced a raft of anti avoidance legislation and has tightened up its tax scheme disclosure regime.
A new General Anti Avoidance Rule is due in 2013 to add a further layer of protection against the excesses of avoidance.
The vast majority of businesses would agree that taxation by legislation is entirely appropriate. However, most would agree that it is entirely unacceptable that corporations should be expected to volunteer tax and then be publically pilloried if they refuse to do so. Taxation by statute is the accepted modus operandi of international business. Taxation by the court of public opinion is entirely unacceptable and in this globally mobile world, it is doomed to fail.
Eamonn Donaghy is a tax partner at KPMG.