Work on multilateral solutions to address international tax issues goes hand in hand with the UK’s competitiveness agenda, Treasury minister tells Tax Journal
The UK government believes in ‘fair, open tax competition’, David Gauke has told Tax Journal after last week’s Budget announced that the main rate of corporation tax will be cut to 20% in 2015.
Stainforth asked Gauke whether he feared an international ‘race to the bottom’.
‘This government believes in fair, open tax competition,’ Gauke said. ‘And we believe that our tax system should be an asset for the UK, supporting business investment and growth.’
He added: ‘By 2015/16, we will have reduced the tax burden on businesses by around £7bn per year, creating an attractive environment for inward investment and sending a clear signal that Britain is open for business. The steps we have taken to reduce the main rate of corporation tax has stemmed the flow of businesses leaving the UK and encouraged companies to come back, such as WPP, or to move here for the first time, such as Aon, Seadrill, Ensco, Lancashire and Rowan.’
The government would continue to raise ‘substantial sums’ from corporation tax, he said, ‘but it is in our interests to have a competitive rate’.
‘A global race’
As Tax Journal reported last week, George Osborne declared in his Budget speech that the government was ‘building the most competitive tax system in the world’.
Gauke said during a Commons debate on the Budget: ‘We must recognise that we are in a global race. There will be economies that succeed and those that fail. We must ensure that we are competitive.’
The focus on tax competitiveness has prompted some politicians and other commentators to renew criticism of the government’s approach.
The Tax Justice Network has argued that tax competition and tax incentives promote a ‘race to the bottom’ in taxation of corporate profits. Polly Toynbee, columnist for The Guardian, said in response to the Budget that Osborne’s ‘instruments of growth’ included ‘a cut in corporation tax to propel us in a mutually destructive global tax race to the bottom’.
Martin Wolf, chief economics commentator at the Financial Times said the proposed cuts in corporation tax would ‘encourage retention of corporate earnings, not higher investment’. Responding to last year’s Budget, Wolf said ‘zero-sum competition’ among governments to attract mobile headquarters ‘cannot make sense’.
‘Fair’ and ‘harmful’ tax competition
However, the EC and the OECD have distinguished between ‘fair’ and ‘harmful’ tax competition. The EC website notes that in 1997 EU finance ministers, having adopted a code of conduct for business taxation, had undertaken to ‘roll back existing tax measures that constitute harmful tax competition and refrain from introducing any such measures in the future’.
‘[ECOFIN], when adopting the code, acknowledged the positive effects of fair competition, which can indeed be beneficial,’ the EC said.
The criteria for identifying potentially harmful measures included ‘an effective level of taxation which is significantly lower than the general level of taxation in the country concerned; tax benefits reserved for non-residents; tax incentives for activities which are isolated from the domestic economy and therefore have no impact on the national tax base; granting of tax advantages even in the absence of any real economic activity; the basis of profit determination for companies in a multinational group departs from internationally accepted rules, in particular those approved by the OECD; and lack of transparency.’
Calls for justice ‘should not go unheeded’
George Bull, senior tax partner at Baker Tilly, has noted that while tax rates appear to discriminate in favour of smaller businesses, the government’s efforts to attract multinationals to the UK and the power of global corporations mean that ‘the effective rates of UK corporation tax paid by the UK operations of multinationals may be lower than domestic businesses’.
Writing in economia, Bull added: ‘After years of tinkering with the tax system to encourage multinational businesses, MPs have woken to the harsh realisation that – in the eyes of the electorate – they have got to the wrong place, albeit arguably for some of the right reasons. Calls for fairness and justice in this area should not go unheeded.’
Paul Aplin, chairman of the ICAEW Tax Faculty technical committee and a partner in AC Mole & Sons, said his firm conducted a survey of its small business clients at the start of this year. ‘They felt overwhelmingly that the government did not understand their issues, that large businesses had been favoured over small businesses, and that red tape was increasing rather than diminishing,’ he wrote in this week’s issue of Tax Journal. ‘This Budget suggests that the government may be starting to better understand these concerns,’ he added.
Work on multilateral solutions to address international tax issues goes hand in hand with the UK’s competitiveness agenda, Treasury minister tells Tax Journal
The UK government believes in ‘fair, open tax competition’, David Gauke has told Tax Journal after last week’s Budget announced that the main rate of corporation tax will be cut to 20% in 2015.
Stainforth asked Gauke whether he feared an international ‘race to the bottom’.
‘This government believes in fair, open tax competition,’ Gauke said. ‘And we believe that our tax system should be an asset for the UK, supporting business investment and growth.’
He added: ‘By 2015/16, we will have reduced the tax burden on businesses by around £7bn per year, creating an attractive environment for inward investment and sending a clear signal that Britain is open for business. The steps we have taken to reduce the main rate of corporation tax has stemmed the flow of businesses leaving the UK and encouraged companies to come back, such as WPP, or to move here for the first time, such as Aon, Seadrill, Ensco, Lancashire and Rowan.’
The government would continue to raise ‘substantial sums’ from corporation tax, he said, ‘but it is in our interests to have a competitive rate’.
‘A global race’
As Tax Journal reported last week, George Osborne declared in his Budget speech that the government was ‘building the most competitive tax system in the world’.
Gauke said during a Commons debate on the Budget: ‘We must recognise that we are in a global race. There will be economies that succeed and those that fail. We must ensure that we are competitive.’
The focus on tax competitiveness has prompted some politicians and other commentators to renew criticism of the government’s approach.
The Tax Justice Network has argued that tax competition and tax incentives promote a ‘race to the bottom’ in taxation of corporate profits. Polly Toynbee, columnist for The Guardian, said in response to the Budget that Osborne’s ‘instruments of growth’ included ‘a cut in corporation tax to propel us in a mutually destructive global tax race to the bottom’.
Martin Wolf, chief economics commentator at the Financial Times said the proposed cuts in corporation tax would ‘encourage retention of corporate earnings, not higher investment’. Responding to last year’s Budget, Wolf said ‘zero-sum competition’ among governments to attract mobile headquarters ‘cannot make sense’.
‘Fair’ and ‘harmful’ tax competition
However, the EC and the OECD have distinguished between ‘fair’ and ‘harmful’ tax competition. The EC website notes that in 1997 EU finance ministers, having adopted a code of conduct for business taxation, had undertaken to ‘roll back existing tax measures that constitute harmful tax competition and refrain from introducing any such measures in the future’.
‘[ECOFIN], when adopting the code, acknowledged the positive effects of fair competition, which can indeed be beneficial,’ the EC said.
The criteria for identifying potentially harmful measures included ‘an effective level of taxation which is significantly lower than the general level of taxation in the country concerned; tax benefits reserved for non-residents; tax incentives for activities which are isolated from the domestic economy and therefore have no impact on the national tax base; granting of tax advantages even in the absence of any real economic activity; the basis of profit determination for companies in a multinational group departs from internationally accepted rules, in particular those approved by the OECD; and lack of transparency.’
Calls for justice ‘should not go unheeded’
George Bull, senior tax partner at Baker Tilly, has noted that while tax rates appear to discriminate in favour of smaller businesses, the government’s efforts to attract multinationals to the UK and the power of global corporations mean that ‘the effective rates of UK corporation tax paid by the UK operations of multinationals may be lower than domestic businesses’.
Writing in economia, Bull added: ‘After years of tinkering with the tax system to encourage multinational businesses, MPs have woken to the harsh realisation that – in the eyes of the electorate – they have got to the wrong place, albeit arguably for some of the right reasons. Calls for fairness and justice in this area should not go unheeded.’
Paul Aplin, chairman of the ICAEW Tax Faculty technical committee and a partner in AC Mole & Sons, said his firm conducted a survey of its small business clients at the start of this year. ‘They felt overwhelmingly that the government did not understand their issues, that large businesses had been favoured over small businesses, and that red tape was increasing rather than diminishing,’ he wrote in this week’s issue of Tax Journal. ‘This Budget suggests that the government may be starting to better understand these concerns,’ he added.
