Why we need to crack down on the multinationals

The big story this weekend? Tax. And how the biggest companies in the UK aren't paying much of it. The Observer went big on the "scandal of the water giants that pay no tax on profits" thanks to their "byzantine structure of private equity financing".

The Mail on Sunday had a go at Nissan for selling "UK cars via Switzerland as a tax ruse", something that is particularly rude given how many tens of billions we have bunged it in bribes to manufacture here.

The Independent fingered Pfizer in an article asking how a company that makes Viagra and has sales of £1.8bn in the UK "escaped paying any tax at all to the UK last year".

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The Telegraph noted that Margaret Hodge is to face "embarrassing questions" given that her family company's tax bill (steel trader Stemcor was founded by her father) appears to come in at around 0.25% a year.

And of course everyone kept us updated on Google, Amazon and Starbucks and the almost non-existent taxes they pay to the UK government on the profits they make here.

If you wonder exactly how these companies manage to pay no tax, you should probably look at Tim Bennett's video on the matter: Why does Starbucks pay so little tax?

But the key point is that it is mostly perfectly legal and only to be expected in an era of globalisation. These companies are entirely free to exploit the differences in the tax systems of the various countries in which they operate. And that is exactly what they do.

This matters for the simple reason that it is yet another barrier to free competition in the UK. When we look at the way in which all our book shops have disappeared from our high streets, we blame the fact that everything is cheaper on the internet. But we don't ask enough about why that is.

Sure things are cheaper if you don't have to pay for prime retail sites, but you can also charge a whole lot less for your products if you have a business model that doesn't involve paying taxes on your profits. And how can a taxpaying business compete with the prices a non-taxpaying business can charge? The answer is on your high street.

You might think about how Google operates, too.The world of journalism is a tough one these days. Magazines aren't just competing with every blogger in the world for eyeballs, they are also competing with a huge multinational entity for their advertisers one that isn't handicapped by the pesky problem of corporation tax. Is this a problem?

The answer is on your local newsstand (or not on your local newsstand, depending on how you look at it). All this makes the fact that the government is finally taking a look at the problem a good thing (Starbucks, Amazon and Google are all giving evidence at the Public Accounts Committee(PAC) of which poor Margaret Hodge is chairman - today). But that doesn't necessarily mean they'll find it easy to come up with a solution.

When I interviewed Douglas Carswell MP a few weeks ago (subscribers can read it here: Government is dead; long live iDomocracy), he was clear that there is nothing to be done about this. The tax base is shrinking, he said, and all governments can do about it is to accept that they at least get something in the form of VAT and employment taxes and to cut their cloth accordingly.

However, there are ways to force something out of the multinationals that currently tread so heavily on our economy but feature so little in our tax revenues. The obvious one is a sales or revenue tax of some kind. But the one that might work better is a unitary tax as discussed here.

It makes sense for governments to crack down on the multinationals to a degree. We need a level playing field for domestic companies to play on if scale and international mobility are to be the only drivers of corporate success in the future, the future is likely to be a pretty miserable place for most of us. So we aren't against a co-ordinated effort to insist on multinationals paying tax at a rate somehow approximating the rate paid by their competitors (although we aren't particularly convinced this is possible).

However, if you are an investor in big multinationals (and as a Moneyweek reader, you probably are), it is also worth remembering why all this suddenly matters to governments. Governments are broke and corporates are solvent. Governments would prefer it the other way around. That's a risk.