johnmortonJohn Morton, of Mid Fife and Glenrothes CLP, has a suggestion for how we can ensure large multinationals start paying their fair share of tax.

 

We are all familiar with income tax, which is the tax we as individuals pay on our income. We’re also vaguely aware of corporation tax. Originally, this was introduced to replace “income tax levied on corporations” and that is still pretty much what it is today. However, it’s not actually levied on a corporation’s income: rather, it is levied on its profits.

This, as has been highlighted recently, has enabled some corporations to receive vast sums of money in the UK, e.g. through the sale of goods, without paying much, if anything, in the way of corporation tax. This can happen because the profit has been conveniently made “elsewhere”, with (for example) some paper transaction sucking all the profit out of the UK business and creating it elsewhere.

Here’s a grossly simplified model of how this works. Let us imagine there is some global on-line retail outfit called, let us say, Euphrates (maybe coined as it sounds like “you-freight-ease”…). Obviously, to keep costs down, such a company is likely to source goods in the same location as it retails them, so far as is possible. Thus it is likely to have reasonably distinct sales and purchase accounts for each area it operates in, with comparatively little transfer between areas. It would, therefore, seem that its profits could largely be pinned down to a specific location.

However, the company has sited its head office in the Alligator Archipelago, a small, independent country in the middle of some vast ocean, with few natural resources, that fuels its economy by charging extremely low rates of corporation tax. Which is to say any company that trades in the Alligator Archipelago will pay very little corporation tax on its profits. But, of course, the Archipelago has few inhabitants to form a market, so not much actual trade goes on there.

So what does Euphrates do? There are two main approaches.

The first is to send money out to the various Euphrates outfits in other parts of the world to buy goods with and to collect the resulting sales revenues back to the Archipelago. Technically, then, while all the actual buying and selling was done in some high-corporation-tax country such as the United Confederacy, the actual profit and loss happens in the Archipelago.

The other possibility – far simpler and with no vast shipments of money involved – is that the various Euphrates outfits in other countries are set up as “franchises”, each having to pay an annual franchise fee for the right to trade under the Euphrates brand. And that fee can be set to be similar to the actual profit these “franchises” make during the year in the various high-corporation-tax countries where they’re situated. And, indeed, the head office can decide to keep most of its profits with its “franchisees” to ensure their liquidity.

Under the first option, a customer in the United Confederacy goes online and orders goods to the value of, say, £1,000; the local Euphrates outfit then buys the goods (if not already in stock), also in all probability from suppliers in the United Confederacy, but the transaction officially all happens in the Archipelago. Thus, if the goods concerned cost Euphrates £600, that’s £400 profit made – in the Archipelago, not in the UC.

Under the second option, the Euphrates “franchise” in the UC might make an annual gross profit of, say, £40,000,000. However, that vanishes when it pays its annual “franchise” fee to the main office in the Archipelago; a fee of, say, £40,000,000 a year…

Both operations involve the transfer, at least on paper, of a large sum of money out of the UC for no tangible return (there could be debates as to how much a “franchise” is actually worth – e.g., if the outfit wasn’t “franchised” but operated as, say, Tigris, would it then lose a significant amount of custom?). In the first case, the goods concerned were never actually present in the Archipelago, the physical sale happened in the UC and thus recording the profit on the transaction as happening in the Archipelago is spurious. In the second case, the amount paid for the “franchise” is a false purchase (or the vast majority of it is, anyway). In essence, both involve the transfer of money out of the UC in return for nothing.

I therefore propose an “outgo tax”. That is, a tax payable on money transferred out of the country when not directly used to purchase goods or services from abroad.

I would imagine similar rules to apply to such a tax as apply to income tax: for example I would see every person and every corporation entitled to take an allowance, say, up to £10,000 a year, out of the country without becoming liable for tax. That, I feel, would cover most holiday expenses, business trips and suchlike. Thereafter, I would see a progressive rate of taxation coming in, maybe starting at 10% and rising to 20%, but also with higher rates for larger amounts – as is the case with income tax (but not, since 2015, with corporation tax, now fixed at just 20% regardless).

On “franchises”, the onus would be on the “franchisee” to justify the amount paid as a “franchise fee”, which could usually be checked by comparative market analysis of non-franchised concerns operating in the same field of endeavour.

Other similar ideas for ensuring that profits are charged tax on where they are actually made include:

  1. standard rates of corporation tax to apply throughout the EU;
  2. a condition of charging at least the same rate of corporation tax before a non-EU country can enjoy tariff-free trade with the EU throughout the EU;
  3. a move towards closer similarity of income tax and VAT rates.

Whether one looks on the EU as a move towards ever closer union, or merely as a convenient trading bloc, it is vital to get an EU-wide agreement on corporation tax levels.

Anyway, comments welcome on the “outgo tax” idea!

 

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6 thoughts on “The outgo tax?

  1. We already have such a thing – it’s called Withholding Tax. Unfortunately, imposition of withholding taxes between EU Member States is an unlawful restriction on the free movement of capital, and the EU doesn’t have the competence to impose an EU-wide withholding tax on payments to non-Member States, and the applicability of such taxes between states are subject to the network of bilateral Double Taxation Conventions (i.e. different states will levy withholding taxes selectively, depending on the treaties).

  2. John, all the economic theories in the world will not overcome the wishes of international Chancellors/ Finance Ministers, to enter into a “race to the bottom”, either by not collecting taxes or reducing them in a competitive drive for company recruitment to their tax local.
    Sadly Labour, with Brown or Darling as Chancellor, were expert at this, while throwing dirt at anyone else who dared to suggest such a thing for a self governing Scotland to attract industry (which we badly need, especially high tech).

    But I agree. The world needs international clarity, and a common purpose in business taxation, AND in the proper regulation of the resources of the international rich who move their vast(and increasing) private wealth to tax free zones with ease and apparent impunity.

  3. It sounds imminently sensible John. However, as it goes against the neo-liberal economic consensus that blights all revenue/trade/financial matters globally, it would be picked apart by the metropolitan chatterati and city-bound economists to an extent that would make any politician think twice about implementing it … or anything similar.

    There was, apparently (I’m too young to have been fully cognisant of it at the time) something similar in place before Thatcher came to power. People were only allowed to take so-much out of the country when they went on holiday (not quite sure of the mechanism … too young again). To the extent that my dad was finding things a bit tight as we got to the end of our two weeks in Spain in the 70s. Luckily, some “dastardly tax dodger”/”Libertarian” had stuffed currency into every conceivable pocket and sock when he had gone abroad and was able to “accomodate”us with a favourable exchange rate. Which only illustrates that someone will find a way round any system, no matter what. Depressing really.

  4. John, I love the idea, I hate the multi-national tax dodging bastards with a vengence, the only problem is Scotland without independence or even the so-called powers of the scottish bill has no chance of being able to implement such laws.

    See, their is yet another down side to voting NO.

    And don’t forget a lot of those yielding power down at westminster already have their fingers deep in that pie, plus a couple of past MP’s from your party, are sucking from that trough, ehm Darling & Brown.

    Still a good idea.

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