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Britain must lead calls for simpler, more certain tax regimes

December 3, 2013

Mark wrote the following article for this morning’s Daily Telegraph. To read it on their website, click the link http://www.telegraph.co.uk/finance/personalfinance/consumertips/tax/10489000/Corporation-tax-is-no-longer-fit-for-purpose.html

One would be easily forgiven for believing that in recent years, tax competition has acquired pariah status in the global economy.

The much-vaunted crackdown on multinational tax avoidance, the fresh attempt to regulate corporate transfer payments and the likely impact of the rolling out of the Foreign Account Tax Compliance Act genuinely means that those who wish to evade their obligations by arbitraging the complex labyrinth of global tax networks will find life much more difficult in the future. The spirit of the age is for national governments to side with ‘the little people’ against the lobbying power of global banks, corporate and tax havens.

However, amidst all the furore, we need to recognise that it is competition, and competition alone, that acts to bear down on the overall tax burden afflicting individuals and small businesses alike.

In truth, nowhere has there been a more inconsistent approach to this issue than from the UK coalition government. For once this owes little to any ideological splits between its Conservative and Liberal Democrat elements.

Instead, having proudly placed multinational tax avoidance ‘at the heart of the G8 agenda’ last June in Northern Ireland and earlier in the year at Davos by lecturing the Amazons, Starbucks and Googles over their highly publicised arrangements, the Prime Minister has simultaneously been making a robust case for favourable tax competition to benefit UK plc. He is right to do so.

Take the persistent and consistent reduction in UK corporation tax, now down to an eye-catching 20%. This has been expressly designed to enhance our relative competitiveness and attract (in the case of WPP, luring the firm back from Ireland) leading international corporations to domicile themselves here. The ‘patent box’, an explicit intellectual property tax break, has been aggressively targeting research and development investment to these shores…expressly at others’ expense. Next came George Osborne’s now fabled trip to China. Standing amongst the skyscrapers of Pudong (the sparkling new financial district of Shanghai, a kind of Canary Wharf on steroids) he announced a drive to allow the City of London to become the hub for Chinese financial investment, even daring to utter the words ‘light-touch’ in describing the regulatory burden he intends to impose upon newcomers.

This is all exciting stuff.

It is also an implicit recognition that a sustainable, lasting economic recovery cannot be built upon continued cheap credit and a renewed fillip in the housing market. The only way to encourage investment into the UK economy is to provide incentives and open the door to genuine competition in an intensely globalised corporate environment.

The trouble is that tax competition is the unique selling point of the offshore financial centres that in its rhetoric the coalition has done so much to condemn. The danger amidst the pragmatic approach to these matters is that the Prime Minister and Chancellor have laid themselves open to accusations of adopting a duplicitous policy when it comes to global tax affairs. We may still need friends close to home on the international stage, so whilst perfidious Albion holds sway amongst the future global economic powerhouses the UK needs to watch its back closer to home.

Just as Ireland’s low corporation tax rates attracted the jealous gaze of Brussels bureaucrats during that nation’s EU bank bailout, so Britain walks a tightrope in keeping our tax regime competitive without provoking hostile moves from our European partners. As the EU knows, ultimately the UK remains vulnerable to legislative penalty from the continent. While they may be willing to make some concessions to the UK on financial services in light of its overweening importance to our economy, there remains considerable antagonism towards the City. The current legal battle over the EU directive to cap bankers’ bonuses could prove an early battle in a longer war if the UK continues to push the envelope on tax policy.

So the government needs to be clever and it needs to be careful. The move towards lower taxes and the crackdown on so-called aggressive avoidance need not be mutually exclusive. In fact, they can easily be made complementary. Corporation tax is an imperfect levy that adds significant complexity to the system since it triggers endless dispute over what counts as profit. Armies of lawyers and accountants seek to bend definitions to lower tax liabilities. Loopholes are found and exploited. Governments end up introducing innumerable reliefs to aid particular sectors. And so the tax manual expands.

As a result, governments berate companies for following legislation that they themselves have created. Once the media has cottoned on to the avoidance activities of high profile corporations, the path is cleared for arbitrary and retrospective taxation that casts a damaging veil of uncertainty over all business activity.

Several recent studies have indicated that the real cost of corporation tax tends to be shouldered primarily by employees (such that countries with lower rates of the levy end up with higher wages and, as a corollary, higher income tax receipts). As such, the case for reducing, reforming or even removing this tax only increases.

We need to hear less from our political class about morality and see instead Britain leading calls for greater international commitment to simpler, more certain tax regimes as the key to solving the wide scale anti-avoidance issue. In actively reducing business levies, the UK’s choice should be presented as an implicit recognition that in today’s globalised economy corporation tax is no longer fit for purpose.