Corporate Taxes Set For Major Overhaul to Cope With Cross-Border Avoidance

taxThe current outbreak of public venom directed towards multinational and digital companies who use highly dubious methods to minimise corporation tax payments in the various countries in which they operate will inevitably lead to a long overdue overhaul of individual tax systems and their enforcement processes.

Most finance directors and their providers of corporate tax services should not have too much to fear especially if their companies are primarily active in a predominantly domestic environment. It is the global giants operating across numerous national borders that are most likely to feel the full force of this wave of fiscal retribution.

At the forefront of this movement are the OECD and the G20 group of leading economies. The former has offered to draft proposals for combating the problem with the aim of enabling governments to introduce new international rules within a 2 year timespan.

Top of the list in terms of particular targets is the contentious practice of transfer pricing where existing rules have remained unchanged for nearly a century. This is the area where the crudest, most effective route to tax mitigation is to be found. By way of example, a global manufacturer of widgets can ensure that it makes little or no profit in higher taxed countries by charging its subsidiary in each country for the use of a brand name or certain intellectual property. These internal charges are invoiced by a subsidiary in a tax haven like Luxembourg or the Cayman Islands so that the underlying profitability of the enterprise is transferred from every country where it trades thereby depriving the local population of the corporation tax contribution it should be making to each country’s exchequer.

This blatant form of tax avoidance may, under present legislation, be legal but it is deemed grossly unfair for two obvious reasons. First, it creates an uneven playing field between companies operating in the same industry. The most common example cited is that of the ubiquitous coffee bar. In the UK, the Costa chain is owned by the British quoted company, Whitbread, and, being a largely domestic enterprise, pays its fair share of British Corporation Tax. It is therefore left with less net profits to re-invest in its business than its close competitor, Starbucks, which is a global chain deliberately concentrating its profits in the lowest tax areas.

Secondly, taxpayers in those countries where these global behemoths generate most of their revenues but pay very little or no corporate taxes resent the fact that they are not paying their fair share. They argue that these companies rely on infrastructure which is built and financed by the state and depend on workforces which have probably had their healthcare and education provided by the public sector. As such, it is unjust if they fail to pay local corporation taxes.

The companies’ standard riposte to all this is that they already pay plenty of other taxes on their revenues such as VAT, business rates, social security contributions and vehicle taxes etc. What they fail to add is that their competitors are all doing the same thing AND still paying their due corporation tax.

HW Fisher & Company is a commercially astute organisation – ranked as a mid-tier top 25 UK chartered accountancy firm, with a personal, partner-led service aimed at entrepreneurial small, medium enterprises (SMEs), large corporates and high-net worth individuals.

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