The Nonsense on Taxation

Whilst politicians prance and pose over the issue of how much Corporation Tax Google, Starbucks, Amazon etc pay, the simple facts are that they are ALL negligent in (a) Explaining the Issue to the public and (b) Failing to do anything practical about it.

The sooner people stop talking pure bullshit on the topic and instead switch to whatever limited brain power they have at their command, the better. This is an international issue that is outside of the control of any national government working by itself to resolve and as it has major implications for consumers, a better informed public needs to get involved.

Hard Facts

To best understand where we are today, we might best go back to the inter war years and remind ourselves of a couple of court judgements concerning taxation. There really is no “moral” issue here, it is very simple, tax avoidance by legitimate means is legal, tax evasion where resources are not declared/ deliberately hidden to avoid legitimate taxation, is illegal.

Lord Clyde gave this famous quote in the case of Ayrshire Pullman Motor Services v Inland Revenue [1929] 14 Tax Case 754, at 763,764:[10]

“No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer’s pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue”

Around the same time in the USA, an American judge Billings Learned Hand in the case of Helvering v. Gregory, 69 F.2d 809, 810-11 (2d Cir. 1934), made a similar observation.

“Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”
Now whilst both of the above may be said to reflect personal rather than corporate taxation, the same principles apply but complicated in a global economy by multiple countries and legal jurisdictions.
The Global Economy

Although not quite the same the above ‘principles’ have been applied to global companies, most of whom and at least up until now, are American. Given the US propensity for “class action” law suits it is hardly a surprise that the managing boards of companies arrange their tax affairs to benefit their shareholders (owners), most in terms of profit generation. Although rather like the Germans care not a jot for the economic prospects of other eurozone countries, the US for all the pious words cares not a jot for the tax revenues of other economies and changing this attitude is crucial.

In a sense it reflects the problems that British authors faced in the Americas during the 19th Century where no copyright protection was available, American publishers just printed what they liked. This attitude only changed when US “creativity” and engineering design became something they wanted protected. The managing boards of Google etc are perfectly correct, even if they wanted to, there is no legal mechanism by which they could pay more tax, they didn’t make the rules but they do have to live by those that exist. So the simple answer is: CHANGE THE RULES, the problem is, just how do you establish a right and fair basis, more than that, you need the same rules to be agreed and applied globally including by the Chinese and Americans.

Basic Principles

Where the current problem with corporate taxation falters is that it is based upon the principle that you take gross sales, subtract the costs of earning a ‘profit’ and then pay the appropriate amount of tax on that profit. However if you are in the business of ‘virtual goods’ such as a Twitter or Facebook account, your revenue is wholly derived from the sale of advertising, your data centres are spread globally as is your development teams, how do you efficiently and fairly tax the revenue stream ?

Perhaps the answer lies in levying a tax rate based upon revenue generated in each country with companies like Google depreciating the tax bill by the direct operational costs of being in that country with an apportionment based upon percentage of global sales of R&D and Support. In other words a business tax that is a “presumption of guilt tax” rather like VAT where you charge a percentage tax on your output and deduct the VAT inputs on what you have purchased.

In this case, if a company had a £100,000,000 UK turnover and the levy was set at 10%, then the default tax bill would be £10,000,000. However, when the business adds up its UK operational costs plus its share of global R&D and Support costs, the ‘exposed’ turnover might drop to £50,000,000 thereby halving their tax bill to £5,000,000. Whether from this starting point you then want to take them through the local corporation tax rate process with “whichever is the greater/lesser” outcomes at the end, is another matter.

The main point is that all global businesses would need to declare a “tax domicile” where their HQ is and to where all profits from overseas activities are repatriated and final tax assessments are made. This switch to the tax being levied in the country where the income is earned and there being an internationally agreed rate like 10%, should obviate trying to harmonize corporation tax rates internationally which would be likely, impossible.

Conclusion

Instead of MPs in Select Committees grandstanding for the TV, they should start a public debate which looks at the issues, discusses potential solutions, looks at any downside consequences and presents them to the public. If we want to build solutions for the future of these islands, we need to abandon the petty party slogans, take a hard and principled look at the issues that confront us with a view to constructing solutions.

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