Charlie Elphicke, the Conservative MP for Dover and Deal, was asked by Ann for his views on corporate tax avoidance. This first post by Charlie looks at the issues raised and will be followed by a second outlining Charlie’s views on how to tackle the matter. The views expressed here are Charlie’s and do not necessarily reflect Ann’s opinions.
Over the past 18 months, the political wind has changed. The public have made clear how disgusted they feel at the industrial scale tax avoidance by big business, and politicians are now waking up to their anger.
A recent YouGov poll found that 62% of the public considered (legal) tax avoidance unacceptable. A ComRes poll found that 84% agreed that the Government should crack down on tax avoidance by businesses operating in the UK. Indeed 60% were prepared to call the bluff of every large corporation that threatens to disinvest from the rich UK market saying the Government should crack down on business tax avoidance even if it causes unemployment or some companies to leave the UK.
Tax avoidance is not illegal. However, aggressive tax avoidance on the scale which we have seen is unacceptable, unethical and irresponsible. The Government has a duty to tighten up relevant legislation to stop multinationals from gaming the system.
However, the move towards securing individual nation’s tax bases requires Governments to tackle both their own corporate tax policies and the international tax code, both of which have failed to keep up with the rise of the internet age and the spread of globalisation.
One major part of the corporate tax avoidance structure which has been built in recent years is the use of tax reliefs to depress profits in higher tax areas. Currently, the UK corporate tax code allows for the tax deductibility of interest payments and royalties. This has created situations where UK branches of multinational corporations are paying royalties and debt interest to other group companies in tax havens, so as to avoid paying any tax.
The ability of companies to trade across borders via the internet has led to grey areas over tax presence. This has come to the fore with a well known multinational handling their transactions over on the Continent, but storing the stock and handling shipping from within the UK. The concept of the company being based where the substance of the activity is undertaken is questionable in the modern era.
High levels of corporation tax favour foreign over domestic firms
Foreign based multinationals are always likely to find it easier to avoid paying UK corporation tax compared to their domestic competition. There is no perfect way to judge transfer pricing – allocating expenses for tax purposes between different countries – and therefore multinational companies will always be tempted to move their tax bill to those countries with a more generous corporation tax system.
There is a real need for reform. Tax avoidance on this scale is unacceptable, unethical and irresponsible. There needs to be a change in the way these large businesses think they can behave.
The Government has made real efforts to tackle the problem. These include a tax general anti-avoidance rule, anti tax haven measures and seeking international action to change the tax rules. These will make a difference. But none will be a silver bullet when it comes to stamping out aggressive tax avoidance. Until Governments address these key policy areas, the issue of tax avoidance will continue to raise headlines.
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.