For now…corporations, as responsible global citizens, should endeavour to pay their fair share of taxes to avoid threats to their own long term sustainability.
Multinational companies like Google, Starbucks, Facebook, Amazon and other global corporations are constantly coming under public fire for avoiding taxes on their British sales. For instance Amazon, which had sales in the UK of £3.35bn in 2011, only reported a “tax expense” of £1.8m. And Google’s UK unit paid just £6m to the Treasury in 2011 on UK turnover of £395m. Late last year, after a whistle-blower, Mr. Barnley Jones, a former sales executive, handed over tens of thousands of emails to investigators which laid bare how the search engine firm avoided paying tax in the UK, the corporation voluntarily agreed to pay £130 million settlement in back duty taxes to the HM Revenue & Customs. These corporations face the anger of the British Parliament and the press over avoidance of taxes as some of them (for instance Starbucks, Facebook and Google) have been summoned to appear before the Public Accounts committee more than once in the last five years.
These are corporations that claim to be socially responsible and ethical, yet they use complex structures and transfer pricing techniques to shift profits to low or no tax jurisdictions. Many tax practitioners have argued that if corporation tax rate could be reduced, it would encourage corporations to reduce the incidence of purchasing tax avoidance schemes. Unfortunately, the evidences available have proved otherwise. The rate has fallen from 52% in 1982 to 20% in 2016, but there is no end to tax games in sight. This is also probably due to the increasing pressure on management to increase return on investment.
Some analysts are calling for the outright abolition of the corporation tax, and then replace same with an increased VAT rate which is easier and straightforward to administer. Unlike the corporation tax, the burden falls on the consumers and not the company – which means that sales revenue levels may not likely change materially if the demand for such goods or services are inelastic in nature. If this is done, the issue of tax avoidance on a global scale as regards corporation tax would have been effectively eradicated. The proponents of the corporate tax eradication also argue that the increased profits arising would accrue to the corporation directly, which leads to increased returns in forms of annual dividends and monies available to plough back for reinvestment and capital growth. Presently, abolishing the corporation tax in the UK without a commensurate increase in the VAT would result in a £42 billion hole in the UK public purse.
…without an educated and healthy workforce, good security, transport and legal system they cannot make profits. Of course, companies will still want subsidies and taxpayer bail-outs, as in the case of banks. So we will move into the era of negative corporate taxes resulting in huge transfers of wealth from people to corporations.
Another option would be the increase of personal income tax by an effective yield of 26% to compensate for the abolition of corporation taxes. However, this would likely erode consumer purchasing power and make it difficult for the corporations themselves to sell their products and make profits, in which case the corporations would lose. Whatever option is chosen by the HM Revenue & Customs to combat tax avoidance and revenue leakage in the future would surely have profound effects on many commonwealth countries that operate tax regimes similar to what obtains in the UK.
Alternatively, people may have to give up their hard-won social rights, such as those relating to education, healthcare, security, pensions and social security benefits. This is damaging to big business too; without an educated and healthy workforce, good security, transport and legal system they cannot make profits. Of course, companies will still want subsidies and taxpayer bail-outs, as in the case of banks. So we will move into the era of negative corporate taxes resulting in huge transfers of wealth from people to corporations.
For now therefore, corporations, as responsible global citizens, should endeavour to pay their fair share of taxes to avoid threats to their own long term sustainability.
Posi Olatubosun teaches Accounting and Finance at Birkbeck College, University of London.