Inquiry coincides with OECD review of the international tax system and will address some of the key concerns that have fuelled the corporate tax debate
The House of Lords economic affairs committee has launched an inquiry examining whether a new approach is needed to taxing corporations in the modern global economy.
‘Recent high profile cases involving multinational firms have raised the profile of the level of tax paid by large corporations and it has been suggested that for large firms corporation tax is becoming now a voluntary arrangement,’ the committee said today.
The inquiry will address some of the key concerns that have fuelled the corporate tax debate, and seek to assess the extent to which corporation tax has become a ‘voluntary tax’ for some multinationals.
It will consider the case for reform of the allocation of multinationals’ profits between countries, and whether any change should be based on existing conventions or a more fundamental reform. Some tax campaigners advocate a system of unitary taxation, with formulary apportionment of profits between countries.
House of Lords economic affairs committee
Last week’s Budget report noted that the recent OECD report Addressing Base Erosion and Profit Shifting underlined the importance of international cooperation in ensuring that ‘domestic and multinational companies pay their fair share of tax and do not engage in aggressive tax planning’.
HM Treasury said: ‘The OECD has identified three main clusters of work: a review of ways to counter base erosion, looking at how to determine tax jurisdiction in particular in relation to the development of the digital economy, and an examination of how the transfer pricing rules allocate profits between different countries. The UK will use its involvement in these groups to work towards reform of the international tax standards. These issues will be examined by the OECD, which will present a comprehensive action plan to the G20 in July 2013.’
Peers examing the draft Finance Bill said a fortnight ago that the OECD’s review of the international tax system should be completed ‘as rapidly as possible’. Lord MacGregor said: ‘There is a misconception that GAAR will mean the likes of Starbucks and Amazon will be slapped with massive tax bills. This is wrong and the government needs to explain that to the public.’
However, the economic affairs committee will consider whether there is a need to reform the UK base for corporation tax: ‘For example, should the preferential tax treatment of debt over equity be removed? Should reforms encourage more capital investment, particularly in UK infrastructure?’
Incidence
The committee will consider who ‘bears the burden’ of corporation tax. Last month the Institute for Fiscal Studies suggested that ‘practical and conceptual difficulties in defining and tackling tax avoidance’ were inherent to the current tax system and arose from the way in which the system attempts to measure profits created in the UK.
‘A more radical change in the corporate tax system – for example, moving to a common European tax base – therefore merits consideration,’ the IFS said. But it added that ‘the ultimate incidence of corporate tax always lies with households and is borne either by the owners of capital (in the form of lower dividends), by workers (in the form of lower wages) or by consumers (in the form of higher prices)’.
There was ‘reason to believe that at least a part, and in some cases a large part, of the corporation tax that companies are subject to is ultimately passed on to workers in the form of lower wages’, the IFS said.
Some tax campaigners insist that this analysis is flawed, and that it does not add weight to any argument for abolition of corporation tax.
Should SME taxation be reformed?
Peers will consider whether the taxation of SMEs should be reformed. Stephen Herring, senior tax partner at BDO, has suggested that the taxation of ‘middleweight’ businesses is unduly complex. ‘The time is ripe for reform in this area,’ he wrote in Tax Journal in January.
‘Would it not be better to simply allow certain businesses to be treated as tax transparent and thereby entirely remove the incidence of corporation tax?’ Herring asked.
His firm has written to HM Treasury, suggesting that companies with a group turnover of up to say, £250m that are neither listed nor have an unusually wide shareholder base should be able to elect to be treated as tax transparent. As an alternative to fuller tax transparency, middleweight companies ‘ought to be permitted to elect to be taxed on a similar basis to UK real estate investment trusts’, he said.
Call for evidence
The committee has invited written evidence on any or all of the issues set out below, or on any other relevant aspects, by 30 April:
"The inquiry will seek to answer questions such as:
1. Is there a good rationale for the existing system of taxing corporate profits? What proportion of total tax receipts should come from corporation tax? Who bears the burden of corporation tax?
2. How vulnerable are UK corporation tax revenues to a recession, or tax avoidance activity? To what extent has corporation tax become a voluntary tax?
3. How does corporation tax affect decisions by firms to incorporate, where to locate, how much to invest, how to finance activities and where to record profits?
4. Is there a need to reform the UK base for corporation tax? If so, how? For example, should the preferential tax treatment of debt over equity be removed? Should reforms encourage more capital investment, particularly in UK infrastructure?
5. Is the taxation of companies too narrowly focused on a complex definition of profits? Could a tax based on a broader measure of economic activity less susceptible to manipulation help to ensure that the burden is spread more fairly across the corporate sector? What would be the consequences of shifting the corporate tax base from profit to sales/turnover ?
6. Should the taxation of SMEs be reformed? Are schemes such as the Enterprise Investment Scheme successful in leveraging additional investment in the UK and do they represent good value for money?
7. Is there a need to reform the basis of the international allocation of multinational profits between countries? If so, should this be based on the existing conventions, as recently suggested by the OECD, or is there a need for more fundamental reform? What other feasible alternatives are there, consistent with international law?
8. What scope is there for the UK government to act alone in addressing concerns about the taxation of international business?
9. Is there a meaningful distinction between “harmful” and “fair” tax competition? Where will future competition lead the UK corporation tax?
10. Is there a problem in the UK that foreign companies are able to gain a competitive advantage through greater tax avoidance opportunities?
11. How successful is the HMRC in dealing with large international business?
12. Has the use of aggressive tax avoidance schemes increased or decreased over the last decade? Why? How successful has the DOTAS scheme been? Should promoters of tax avoidance scheme be named and shamed?"
Inquiry coincides with OECD review of the international tax system and will address some of the key concerns that have fuelled the corporate tax debate
The House of Lords economic affairs committee has launched an inquiry examining whether a new approach is needed to taxing corporations in the modern global economy.
‘Recent high profile cases involving multinational firms have raised the profile of the level of tax paid by large corporations and it has been suggested that for large firms corporation tax is becoming now a voluntary arrangement,’ the committee said today.
The inquiry will address some of the key concerns that have fuelled the corporate tax debate, and seek to assess the extent to which corporation tax has become a ‘voluntary tax’ for some multinationals.
It will consider the case for reform of the allocation of multinationals’ profits between countries, and whether any change should be based on existing conventions or a more fundamental reform. Some tax campaigners advocate a system of unitary taxation, with formulary apportionment of profits between countries.
House of Lords economic affairs committee
Last week’s Budget report noted that the recent OECD report Addressing Base Erosion and Profit Shifting underlined the importance of international cooperation in ensuring that ‘domestic and multinational companies pay their fair share of tax and do not engage in aggressive tax planning’.
HM Treasury said: ‘The OECD has identified three main clusters of work: a review of ways to counter base erosion, looking at how to determine tax jurisdiction in particular in relation to the development of the digital economy, and an examination of how the transfer pricing rules allocate profits between different countries. The UK will use its involvement in these groups to work towards reform of the international tax standards. These issues will be examined by the OECD, which will present a comprehensive action plan to the G20 in July 2013.’
Peers examing the draft Finance Bill said a fortnight ago that the OECD’s review of the international tax system should be completed ‘as rapidly as possible’. Lord MacGregor said: ‘There is a misconception that GAAR will mean the likes of Starbucks and Amazon will be slapped with massive tax bills. This is wrong and the government needs to explain that to the public.’
However, the economic affairs committee will consider whether there is a need to reform the UK base for corporation tax: ‘For example, should the preferential tax treatment of debt over equity be removed? Should reforms encourage more capital investment, particularly in UK infrastructure?’
Incidence
The committee will consider who ‘bears the burden’ of corporation tax. Last month the Institute for Fiscal Studies suggested that ‘practical and conceptual difficulties in defining and tackling tax avoidance’ were inherent to the current tax system and arose from the way in which the system attempts to measure profits created in the UK.
‘A more radical change in the corporate tax system – for example, moving to a common European tax base – therefore merits consideration,’ the IFS said. But it added that ‘the ultimate incidence of corporate tax always lies with households and is borne either by the owners of capital (in the form of lower dividends), by workers (in the form of lower wages) or by consumers (in the form of higher prices)’.
There was ‘reason to believe that at least a part, and in some cases a large part, of the corporation tax that companies are subject to is ultimately passed on to workers in the form of lower wages’, the IFS said.
Some tax campaigners insist that this analysis is flawed, and that it does not add weight to any argument for abolition of corporation tax.
Should SME taxation be reformed?
Peers will consider whether the taxation of SMEs should be reformed. Stephen Herring, senior tax partner at BDO, has suggested that the taxation of ‘middleweight’ businesses is unduly complex. ‘The time is ripe for reform in this area,’ he wrote in Tax Journal in January.
‘Would it not be better to simply allow certain businesses to be treated as tax transparent and thereby entirely remove the incidence of corporation tax?’ Herring asked.
His firm has written to HM Treasury, suggesting that companies with a group turnover of up to say, £250m that are neither listed nor have an unusually wide shareholder base should be able to elect to be treated as tax transparent. As an alternative to fuller tax transparency, middleweight companies ‘ought to be permitted to elect to be taxed on a similar basis to UK real estate investment trusts’, he said.
Call for evidence
The committee has invited written evidence on any or all of the issues set out below, or on any other relevant aspects, by 30 April:
"The inquiry will seek to answer questions such as:
1. Is there a good rationale for the existing system of taxing corporate profits? What proportion of total tax receipts should come from corporation tax? Who bears the burden of corporation tax?
2. How vulnerable are UK corporation tax revenues to a recession, or tax avoidance activity? To what extent has corporation tax become a voluntary tax?
3. How does corporation tax affect decisions by firms to incorporate, where to locate, how much to invest, how to finance activities and where to record profits?
4. Is there a need to reform the UK base for corporation tax? If so, how? For example, should the preferential tax treatment of debt over equity be removed? Should reforms encourage more capital investment, particularly in UK infrastructure?
5. Is the taxation of companies too narrowly focused on a complex definition of profits? Could a tax based on a broader measure of economic activity less susceptible to manipulation help to ensure that the burden is spread more fairly across the corporate sector? What would be the consequences of shifting the corporate tax base from profit to sales/turnover ?
6. Should the taxation of SMEs be reformed? Are schemes such as the Enterprise Investment Scheme successful in leveraging additional investment in the UK and do they represent good value for money?
7. Is there a need to reform the basis of the international allocation of multinational profits between countries? If so, should this be based on the existing conventions, as recently suggested by the OECD, or is there a need for more fundamental reform? What other feasible alternatives are there, consistent with international law?
8. What scope is there for the UK government to act alone in addressing concerns about the taxation of international business?
9. Is there a meaningful distinction between “harmful” and “fair” tax competition? Where will future competition lead the UK corporation tax?
10. Is there a problem in the UK that foreign companies are able to gain a competitive advantage through greater tax avoidance opportunities?
11. How successful is the HMRC in dealing with large international business?
12. Has the use of aggressive tax avoidance schemes increased or decreased over the last decade? Why? How successful has the DOTAS scheme been? Should promoters of tax avoidance scheme be named and shamed?"
