The Sunday Times on 27 October gave a preview of Labour’s plans to ‘launch a £14bn tax raid on big companies such as Amazon’, if the party wins the next general election.
The plan is to move to a system where companies would be taxed on the basis of where their sales, assets and labour force are located, so that: ‘If multinational X (like Amazon or Google) has 10% of their sales, assets and labour in the UK, they ought to be taxed on 10% of their global profits.’
Sounds great, doesn’t it? And apparently between £6bn and £14bn could be raised in the UK, at current corporation tax rates – and of course that sum would be higher if tax rates increased. I hate to be a killjoy, but it’s certainly not going to be that simple, and it probably won’t raise £14bn any time soon.
Labour’s plans are based on a detailed paper Taxing multinationals: a new approach, produced by Public Services International. The paper begins by explaining that the current system for taxing multinationals is outdated, and it says that the fundamental problem is that the tax system treats a global corporation as a collection of independent entities, rather than as a single global company. Their proposed solution is ‘simply to tax each multinational as a single entity – the “unitary principle”'.
Let me be clear. I don’t have a fundamental problem with the unitary principle, and it may well work better in the long term than the current arm’s length pricing system. But it would cause a huge upheaval to move from where we are now and, crucially, it can’t be done without wide international agreement. This is not something which Labour (or any other political party) has the power to deliver, although I welcome the suggestion that the UK should continue to take a leading role in international negotiations.
Unusually, I have direct personal experience of a unitary system. I worked for a company which had operations in several US states; we had a single US company which was required (for regulatory reasons) to apportion its costs by reference to a formula based on sales, assets and labour. What happened in practice was that each of the states had a slightly different formula, so that significant resources were consumed in trying to agree how much should be apportioned, and the end result was that there was always a gap between the total costs and the amount we could deduct. There were therefore practical flaws in applying what, in theory, was a reasonable system.
Let me take another example. Suppose there is a company which has significant amounts of UK property, lots of employees, and makes a high level of UK sales. Clearly it should pay lots of UK tax, shouldn’t it? A brief look at WeWork’s accounts shows why sales, assets and labour do not always lead to profits.
The reason why the UK cannot simply move to a unitary system is that it is a member of the OECD, and it has entered into more than 130 double tax treaties with other countries. All of those treaties – yes, all of them – use the current arm’s length principle to allocate taxing rights. Moving to a unitary system would require each of those treaties to be renegotiated. As recent experience with Brexit has shown, it is not an easy job to amend a complex treaty.
It is true that detailed work is under way at the OECD to reform the international tax system, and in fact the current proposals do have elements of a unitary system. A public consultation was issued recently which set out an outline of their proposals, on which it is hoped to reach agreement in 2020. The OECD makes the same point about the international system needing to be updated, but it is more cautious in its proposals. First, it recognises that the arm’s length principle works reasonably well most of the time – so to move to a radically different system would be a severe case of throwing the baby out with the bathwater. Second, it states firmly that ‘it is essential to design a solution that attracts support from all members of the Inclusive Framework’, i.e. the group of more than 100 countries who are participating in the OECD process. It is, in my view, extremely unlikely that all countries would agree to a full unitary system – not least because major capital-exporting countries with a high level of innovation, such as the US, would almost certainly lose out under the proposed allocation formula.
So what might Labour, or any other party, do instead?
They might, for example, turn their focus on VAT rather than corporation tax. If you want to impose a tax by reference to sales, VAT does precisely that. Of course, VAT is paid by customers rather than by companies – but arguably imposing additional corporation tax by reference to sales is also likely to be borne, at least to some extent, by customers. That leads into complex arguments about who really bears company tax burdens, which is a debate for another day, but it is at least worth noting that a much (much) easier way to raise a sum close to £14bn would be to increase the rate of VAT from 20% to 22.5%.
The Sunday Times on 27 October gave a preview of Labour’s plans to ‘launch a £14bn tax raid on big companies such as Amazon’, if the party wins the next general election.
The plan is to move to a system where companies would be taxed on the basis of where their sales, assets and labour force are located, so that: ‘If multinational X (like Amazon or Google) has 10% of their sales, assets and labour in the UK, they ought to be taxed on 10% of their global profits.’
Sounds great, doesn’t it? And apparently between £6bn and £14bn could be raised in the UK, at current corporation tax rates – and of course that sum would be higher if tax rates increased. I hate to be a killjoy, but it’s certainly not going to be that simple, and it probably won’t raise £14bn any time soon.
Labour’s plans are based on a detailed paper Taxing multinationals: a new approach, produced by Public Services International. The paper begins by explaining that the current system for taxing multinationals is outdated, and it says that the fundamental problem is that the tax system treats a global corporation as a collection of independent entities, rather than as a single global company. Their proposed solution is ‘simply to tax each multinational as a single entity – the “unitary principle”'.
Let me be clear. I don’t have a fundamental problem with the unitary principle, and it may well work better in the long term than the current arm’s length pricing system. But it would cause a huge upheaval to move from where we are now and, crucially, it can’t be done without wide international agreement. This is not something which Labour (or any other political party) has the power to deliver, although I welcome the suggestion that the UK should continue to take a leading role in international negotiations.
Unusually, I have direct personal experience of a unitary system. I worked for a company which had operations in several US states; we had a single US company which was required (for regulatory reasons) to apportion its costs by reference to a formula based on sales, assets and labour. What happened in practice was that each of the states had a slightly different formula, so that significant resources were consumed in trying to agree how much should be apportioned, and the end result was that there was always a gap between the total costs and the amount we could deduct. There were therefore practical flaws in applying what, in theory, was a reasonable system.
Let me take another example. Suppose there is a company which has significant amounts of UK property, lots of employees, and makes a high level of UK sales. Clearly it should pay lots of UK tax, shouldn’t it? A brief look at WeWork’s accounts shows why sales, assets and labour do not always lead to profits.
The reason why the UK cannot simply move to a unitary system is that it is a member of the OECD, and it has entered into more than 130 double tax treaties with other countries. All of those treaties – yes, all of them – use the current arm’s length principle to allocate taxing rights. Moving to a unitary system would require each of those treaties to be renegotiated. As recent experience with Brexit has shown, it is not an easy job to amend a complex treaty.
It is true that detailed work is under way at the OECD to reform the international tax system, and in fact the current proposals do have elements of a unitary system. A public consultation was issued recently which set out an outline of their proposals, on which it is hoped to reach agreement in 2020. The OECD makes the same point about the international system needing to be updated, but it is more cautious in its proposals. First, it recognises that the arm’s length principle works reasonably well most of the time – so to move to a radically different system would be a severe case of throwing the baby out with the bathwater. Second, it states firmly that ‘it is essential to design a solution that attracts support from all members of the Inclusive Framework’, i.e. the group of more than 100 countries who are participating in the OECD process. It is, in my view, extremely unlikely that all countries would agree to a full unitary system – not least because major capital-exporting countries with a high level of innovation, such as the US, would almost certainly lose out under the proposed allocation formula.
So what might Labour, or any other party, do instead?
They might, for example, turn their focus on VAT rather than corporation tax. If you want to impose a tax by reference to sales, VAT does precisely that. Of course, VAT is paid by customers rather than by companies – but arguably imposing additional corporation tax by reference to sales is also likely to be borne, at least to some extent, by customers. That leads into complex arguments about who really bears company tax burdens, which is a debate for another day, but it is at least worth noting that a much (much) easier way to raise a sum close to £14bn would be to increase the rate of VAT from 20% to 22.5%.
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