Do we measure government receipts and taxes properly?

The FT reports today on the amount of tax which Vodafone pays and comments in particular on the amount paid in the UK:

“The report comes with justifications about why Vodafone pays “little or no UK corporation tax”, including listing other investments in building networks and buying mobile spectrum.”

Now it seems to me that there is a real confusion about the payments which companies make to governments for assets like licenses granted by governments and the tax consequences.

If we assume that a government sells an asset be it a mobile license or a license to extract minerals it will report the receipt as the gross payment made by the company, in large part to show what a good job it has done. This is misleading because in most cases it has sold an asset which will be tax deductible in the hands of the business. Whether this tax deduction is immediate or over time as tax depreciation doesn’t really matter (apart from the time value of money) because the government hasn’t received the gross amount but the net amount if it accounts prudently for the transaction. So if a UK tax resident company buys a license from the UK government in 2013 for £1bn the receipt is really just over £800m depending on the tax rate when the tax relief is received.

It is therefore rather harsh to criticize the company for the reduction in tax paid due to the tax relief it is entitled to, but part of this criticism comes from the idea that the government actually got £1bn in the example above when it didn’t. Companies need to think more carefully about the way they present these issues both when they acquire a license or generally make payments to governments and when they receive the tax relief. In fact, companies need to think about how they present any significant transaction which has tax consequences in the light of increased scrutiny.

By contrast when the government privatises an asset in a share issue it does receive the gross amount as the shareholders can only deduct the cost for tax purposes when they sell the shares and realise either a capital gain or loss not against general taxable income.

 

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