How to Tackle Corporate Tax Avoidance
This is the second post by Charlie Elphicke, the Conservative MP for Dover and Deal, on corporate tax avoidance. In his first post he set out the issues and in this post he considers ways to tackle corporate tax avoidance. The views expressed here are Charlie’s and do not necessarily reflect Ann’s opinions.
In my previous blog post, I highlighted the problems with current policy decisions and corporate tax rules which have failed to keep up with the new globalised world, and allow for industrial scale tax avoidance. Without ripping up the existing tax code and building one suitable for the internet age, there are some changes which Governments can take in order to minimise the level of tax avoidance.
At an international level, the tax presence rules should be reformed so as to reflect a wider economic location of business test. This would ensure that internet retailers and other who trade in the UK would be taxed in the UK.
Minimise transfer pricing
HMRC should take a more aggressive position on transfer pricing. If a company states that a deduction is justifiable, such as in the range 8 – 12%, then HMRC should naturally take the position that the deduction should be set at 8%. This could be sweetened by indicating to companies that those groups who go for lower deductions will find it more likely that their profits will be agreed by HMRC. Linked to the aforementioned proposal, introduce a rule whereby in the event of a dispute over the level of deduction, then the tax difference would have to be deposited, where it will accrue interest over the period between the dispute and the resolution at a tribunal. Using the example of 8 – 12% range, it is in the interest of companies to agree to a lower deduction (such as 8 ½%) if the difference (3 1/2%) will be held in deposit.
Alternatively, a rule could be introduced where the price of goods or services for transfer pricing purposes is deemed to be the acquisition price of the worldwide group. This would, in effect, ensure that where an overseas affiliate acquires goods for a lower price that price is the amount which has to be brought into account for UK corporation tax purposes.
Transparency from companies receiving government contracts
The Government should rule that all companies which are in receipt of Government contracts would be expected to publish their effective tax rate (total revenue attributable to UK market, profit from activity in UK market and corporation tax paid to HMRC). This would be effective particularly with ICT companies who receive large amounts of Government money, yet abuse the UK tax system. It is recognised that EU procurement law makes this harder to achieve – however a form of establishment for the rule should still be possible as is action in the EU given this is a problem for many member states.
Limit deductions where tax is not applied
Introduce a rule whereby tax deductions for interest/management charges where recipient jurisdictions did not levy tax on the interest are a pre-determined level (such as 15%), or where less than 20% of the gross payment from the UK remained in charge due to a corresponding deduction. It would be cautionary to also include legislation stating that any lack of deduction is not to be regarded as a change entitling a PFI (Private Finance Initiative) company to require payments to be increased because of a lack of deductions.
Urgent reform of the European Market
The European rules that undermine the tax bases of Member States should be reformed with the intention of securing each country’s own tax base. Further, the implementation of EC VAT Directive (2006/112/EC) should be accelerated so that VAT on goods and services into the UK from companies based across the European Market is always at 20%, so as to remove competitive tax advantages which are hurting British business.
Tax avoidance on the scale which we have seen lately is unacceptable, unethical and irresponsible. However, tax avoidance is legal, and as such if Governments wish to address the issue they must address their own laws. These suggestions would strengthen the current corporate tax system, and make it easier for nations to secure their tax bases.
Charlie Elphicke is the Conservative MP for Dover and Deal. Before his election he was a partner and tax lawyer at an international law firm. As a research fellow for the Centre for Policy Studies he frequently comments on tax, the economy and pensions.