There is little evidence of a long term downward trend in UK corporate tax revenues, despite falling tax rates and despite ‘long running concerns’ about corporate tax avoidance, according to the Institute for Fiscal Studies.
Disagreements over what constitutes avoidance arise ‘partly from a lack of understanding about what the UK is trying to tax and partly because it can be conceptually hard to define tax avoidance’.
‘Tackling corporate tax “avoidance” relating to international activities is genuinely difficult. The UK attempts to tax profits created in the UK. Especially for multinational companies these can be hard to measure. There is no reliable estimate of how much is lost to corporate tax avoidance,’ the IFS said as it published its Green Budget, funded by the Nuffield Foundation.
‘These practical and conceptual difficulties in defining and tackling tax avoidance are inherent to the current tax system and arise from the way it 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 noted that the term tax avoidance is used to encompass a wide spectrum of activities. ‘At one end, firms may reorganise or relocate their real activities in response to the incentives in the tax system. Such behavioural responses may be larger than the government expected but arguably are not avoidance.
‘Towards the other end of the spectrum, firms may manipulate intra-group prices, undertake wholly artificial transactions or establish tax haven companies. It is these strategies that are frequently characterised as “aggressive” or “abuse” (sic) forms of tax avoidance that attract the most opprobrium.’
Country-by-country reporting was ‘one policy option’, the report said. ‘This would not help to determine the allocation of profits, but, by increasing transparency, could help reduce avoidance by putting more pressure on companies to defend where their profits are created.’
However, the IFS also argued that corporation tax is a ‘particularly distortionary form of taxation that can work to reduce investment’, and 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)’.
It added that 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’.
‘There are educated guesses but no one knows’
The IFS said: ‘The HMRC analysis estimates a £4.1bn corporate tax gap in 2010/11. This compares with total net corporate tax receipts of £42.1bn (and therefore implies that £46.2bn should have been collected). In calculating the corporate tax gap for large companies, HMRC essentially uses internal knowledge on where there are risks that tax is not being paid and on the estimated size of those risks. The measure is geared towards cases involving disclosed avoidance schemes or genuine uncertainty over the correct tax treatment. Importantly, the method will not capture most of the tax that is lost when firms shift profits offshore. For example, agreed-upon transfer prices may represent a certain degree of avoidance but will likely not be identified as a risk by HMRC, such that the tax consequence is not captured in the measured tax gap. This is a key criticism of the HMRC measure and means that it almost certainly underestimates how much tax would have been paid in the UK if there were no avoidance. However, it should be noted that it is hard to imagine how some avoidance behaviours discussed above could be accurately measured.
‘Attempts have been made to quantify the effect of profit shifting by considering the difference between the amount of tax paid as declared on firms’ accounts and an estimate of the tax due. Such measures tend to make assumptions about how much taxable profit was made in the UK and how much tax “should” have been paid, and do not directly account for the deliberate elements in the structure of the tax system that mean that tax liabilities can be reduced (such as capital allowances, the R&D tax credit and loss carry-forwards) or the genuine commercial reasons why tax may be paid in other jurisdictions. As such, while estimates have suggested much larger tax gaps for the UK’s largest companies than those implied by the HMRC analysis, they are likely overstated (possibly by a wide margin).’
Source: IFS Green Budget: February 2013
There is little evidence of a long term downward trend in UK corporate tax revenues, despite falling tax rates and despite ‘long running concerns’ about corporate tax avoidance, according to the Institute for Fiscal Studies.
Disagreements over what constitutes avoidance arise ‘partly from a lack of understanding about what the UK is trying to tax and partly because it can be conceptually hard to define tax avoidance’.
‘Tackling corporate tax “avoidance” relating to international activities is genuinely difficult. The UK attempts to tax profits created in the UK. Especially for multinational companies these can be hard to measure. There is no reliable estimate of how much is lost to corporate tax avoidance,’ the IFS said as it published its Green Budget, funded by the Nuffield Foundation.
‘These practical and conceptual difficulties in defining and tackling tax avoidance are inherent to the current tax system and arise from the way it 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 noted that the term tax avoidance is used to encompass a wide spectrum of activities. ‘At one end, firms may reorganise or relocate their real activities in response to the incentives in the tax system. Such behavioural responses may be larger than the government expected but arguably are not avoidance.
‘Towards the other end of the spectrum, firms may manipulate intra-group prices, undertake wholly artificial transactions or establish tax haven companies. It is these strategies that are frequently characterised as “aggressive” or “abuse” (sic) forms of tax avoidance that attract the most opprobrium.’
Country-by-country reporting was ‘one policy option’, the report said. ‘This would not help to determine the allocation of profits, but, by increasing transparency, could help reduce avoidance by putting more pressure on companies to defend where their profits are created.’
However, the IFS also argued that corporation tax is a ‘particularly distortionary form of taxation that can work to reduce investment’, and 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)’.
It added that 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’.
‘There are educated guesses but no one knows’
The IFS said: ‘The HMRC analysis estimates a £4.1bn corporate tax gap in 2010/11. This compares with total net corporate tax receipts of £42.1bn (and therefore implies that £46.2bn should have been collected). In calculating the corporate tax gap for large companies, HMRC essentially uses internal knowledge on where there are risks that tax is not being paid and on the estimated size of those risks. The measure is geared towards cases involving disclosed avoidance schemes or genuine uncertainty over the correct tax treatment. Importantly, the method will not capture most of the tax that is lost when firms shift profits offshore. For example, agreed-upon transfer prices may represent a certain degree of avoidance but will likely not be identified as a risk by HMRC, such that the tax consequence is not captured in the measured tax gap. This is a key criticism of the HMRC measure and means that it almost certainly underestimates how much tax would have been paid in the UK if there were no avoidance. However, it should be noted that it is hard to imagine how some avoidance behaviours discussed above could be accurately measured.
‘Attempts have been made to quantify the effect of profit shifting by considering the difference between the amount of tax paid as declared on firms’ accounts and an estimate of the tax due. Such measures tend to make assumptions about how much taxable profit was made in the UK and how much tax “should” have been paid, and do not directly account for the deliberate elements in the structure of the tax system that mean that tax liabilities can be reduced (such as capital allowances, the R&D tax credit and loss carry-forwards) or the genuine commercial reasons why tax may be paid in other jurisdictions. As such, while estimates have suggested much larger tax gaps for the UK’s largest companies than those implied by the HMRC analysis, they are likely overstated (possibly by a wide margin).’
Source: IFS Green Budget: February 2013
