Since Friday I’ve been thinking about DC’s comments on the fallout from the UK PAC hearings and Starbucks and Google and Amazon. Of course he has had to respond to what first Google said and then Martin Sorrell’s comments on the voluntary nature of corporation tax. As reported in the Independent he said: ” We’ve got to crack that, you’re absolutely right. This is a really important issue, I think we’re offering a fair deal to businesses. We’re saying “Look, we’re going to have a really low rate of corporation tax” but I want to make damn sure that those companies pay it. Its simply not fair and not right what some of them are saying “I’ve got lots of sales here in the UK but I’m going to pay a sort of royalty fee to another company that I own in another country that has some special dispensation.” He then said he wanted to start a debate about “really aggressive tax avoidance”.
In political terms, its understandable why the Prime Minister needed to respond as the man in the street thinks that large MNCs are not paying enough tax. Undoubtedly some companies are stretching the envelope in terms of their transfer pricing, but what the PM is complaining about is the well established system of international taxation which UK governments have adhered to for a long period of time, ironically his comments echo some of the concerns expressed by BASIC countries about that system – the Indian and Chinese governments would agree with the statement about lots of sales.
So is the current system of international tax unworkable and why are the politicians surprised about its results? Well part of the reason is that in most countries politicians don’t spend enough time thinking about the design of a tax system to promote growth because they spend most of their time on how to spend the money raised by taxation (or borrowed). Good tax design takes time – and politicians should devote more time to it – they should not be surprised by the results of the tax system which their legislation creates (after all, all tax treaties are put to Parliament for approval).
Specifically on the point about “another country that has some special dispensation”, the tax systems of the world are full of dispensations for individuals and companies and they are not all bad – we all benefit from one or other special dispensation. The problem is the inability of governments to agree with each other on which dispensations are good and which are bad – the usual line is that ours is fine and yours aren’t! So is the Dutch dispensation which Starbucks and other US multinationals uses (which I assume is the target of the PM’s comments) bad compared with the new Patent Box rules which are about to come into effect in the UK ? Will the patent box foster “really aggressive tax avoidance”?
Given the changes in the Global economy and the spread of economic power outside the OECD countries we do need to re-examine the groundrules for International tax and make them fit for purpose and widely acceptable in a changing global and globalised economy. International collaboration is the only way to achieve this in a way which fosters sustainable growth, but that collaboration has to tackle some of the elephants in the room about international tax and not skirt the difficult issues.
Business needs to accept that the mantra “our tax planning complies with the letter of the law” won’t work going forward. Under the OECD Multinational Guidelines companies should comply with “the letter and the spirit of the law”, but they can only do this if governments spend the time during the legislative and treaty process to articulate what is the purpose of the law.