We need a full-scale tax revolution

MP Margaret Hodge has berated multinational corporations for the lack of tax they pay. So does Britain need to overhaul its tax system? Emily Hohler reports.

The various tactics used by multinationals to avoid UK corporation tax were revealed last week when executives from Google, Starbucks and Amazon were interrogated by the chairman of the Public Accounts Committee, Margaret Hodge MP, says Peter Campbell in the Daily Mail. But the question is how do we tackle the issue?

Many believe the best way of making the giants pay more would be some kind of unitary taxation or imputation tax system. "Tax would be paid on turnover or sales attributed to the UK marketplace, taking account of numbers of people and assets deployed here."

Unitary tax, already used successfully in most US states, is the best solution, agree Sol Picciotto and Nicholas Shaxson in the Financial Times. The international tax system currently provides "vast subsidies" for multinationals, allowing them to "free-ride on tax-funded benefits roads, educated workforces, reliable courts" and helping them out-compete local rivals (as John Lewis's Andy Street noted, such companies will out-invest and ultimately out-trade' businesses paying full taxes in the UK).

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Broadly speaking, firms cut their tax bills via "two related types of hocus-pocus. First, they locate holding companies and assets in tax havens and then attribute large profits to those entities. Second, they engage in transfer pricing', where parts of the multinational trade with each other across borders at prices designed to suit their tax objectives."

Unfortunately, however, the Organisation for Economic Co-operation and Development (OECD), whose fiscal committee is steward of the international tax system, has refused to look at unitary tax, preferring to "patch up the present system". George Osborne and his German counterpart, Wolfgang Schauble, have said they will engage with the OECD to tackle the problems, but if the result is mere tinkering, they will fail.

They will, says Allister Heath in The Daily Telegraph. Nothing but a full-scale tax revolution will help. Some companies hand over vast amounts of corporation tax; similar ones don't. Firms with huge debts pay less tax than those with none. "There are endless other issues and loopholes thanks in large part to European single market rules." In order to do what is best for their shareholders, companies "game the system". In response, the tax code gets more complicated.

Taxes levied on companies are actually borne by people; either by investors (through reduced returns) or workers (via lower wages) or consumers (higher prices). So corporation tax is a "grossly unfair and opaque way of raising money", says Heath. We should replace taxes on business corporation tax, capital gains tax, tax on dividends, interest and all the rest by a single, lowish tax, not on profits, but on income distributed to investors.

Problems will remain, but when so much complexity has been swept away, the system will be easier to police. It's time for real reform that makes the UK more attractive to investors while "ensuring everybody pays a fair share".

Emily Hohler

Emily has extensive experience in the world of journalism. She has worked on MoneyWeek for more than 20 years as a former assistant editor and writer. Emily has previously worked on titles including The Times as a Deputy Features Editor, Commissioning Editor at The Independent Sunday Review, The Daily Telegraph, and she spent three years at women's lifestyle magazine Marie Claire as a features writer for three years, early on in her career. 

On MoneyWeek, Emily’s coverage includes Brexit and global markets such as Russia and China. Aside from her writing, Emily is a Nutritional Therapist and she runs her own business called Root Branch Nutrition in Oxfordshire, where she offers consultations and workshops on nutrition and health.