Sustainable Tax In A Competitive World

At the end of the day, governments need to raise sustainable amounts of revenue, to fund public services, the welfare state, and other common goods.

More than ever, however, they have to compete for business and investment from companies and investors who have more options than ever before.

Tax too high or tax capriciously and the goose that lays the golden eggs will fly away.

The UK government has undertaken work to make Britain more attractive to multinational businesses and investors, including cuts in the headline rate of corporation tax, a more generous tax regime for control foreign companies, and a preferential regime for tax arising from patents.

These are all very interesting headlines, in addition to suggesting firmer ways of dealing with queries, responses and disputes, which are all very valuable.

Co-operative compliance and binding resolutions as a way of increasing the efficiency of the tax service and therefore enabling resources to be deployed to those who have less ability to help themselves.

In some areas the UK has clearly been a leader but in other areas we are playing catch-up.

What we have in common in all these areas is that we are in constant competition with the rest of the world – the US, other EU countries, and so on.

London is in competition with New York and Tokyo and all those other existing and want-to-be financial centres on every continent.

Does Britain have the most competitive tax regime in the G20?

Well, the findings of a KPMG survey have indicated that we have certainly improved, but there is still plenty of room for progress.

And there is the question of can our politicians hold the course?

One clear message is that we shouldn’t get hung up on the corporation tax rate.

It’s a great headline – good in the shop window – but it’s not the be all and end all.

Ultimately, we need a holistic approach on building an efficient and effective tax system.

An annual survey by PWC on total tax showed that last year, for every pound in corporation tax paid in the UK, companies paid nearly £3 in other taxes.

As this shows, it is not just about levels of tax, it’s about other issues.

Low effective tax rate has dropped down the matters of most concern to business executives, after stability, simplification, and the need for advance warning on change.

The concerns about the complexity is why the Offices of Tax Simplification have been asked to look at the UK administration – it’s not just the rate, it’s how it’s administered, and how that can be reformed to improve UK tax competitiveness.

Of course, tax is not the only thing – or even just the one thing – that makes a difference to a country.

There’s regulation, wages, education, skill levels, visa rules, location, EU membership, stability, proximity to your customer base, markets (if you’ve got a great market people will come).

Although there has been much talk about competitiveness, one man’s competitiveness is another man’s race to the bottom.

The OECD BEPS Project puts at its centre three core themes, which are coherence, substance (encompassing taxing profit where the economic value is created), and transparency (which includes certainty as well).

The task at the OECD is of course to try and pull these together and get some agreement.

While I was initially cynical as to whether one could, after hearing the debate I feel a lot more encouraged that we may actually make some progress by the end of 2015 and 2016.

A billion Euros of tax is lost every year through avoidance and evasion in the European Union, and at a time when all the European economies are under stress, the fair payment of tax suddenly rose up the political agenda, and in the mind of the public.

Transparency and public pressure are good weapons.

The public are now more interested in what tax advisers are doing, and no doubt when you’re all retired and your grandchildren are on your knee, they’ll be going, “Grandad, what did you do in the Great BEPS Debate?”

Maybe they won’t –I hope they won’t!

I’ll stick to my VAT.

You can never reiterate enough the importance of public trust, and that transparency would be good for business, because hopefully it would repair the severe breakdown of trust in big business.

And that the greater the level of agreement in tax – and on tax matters between countries – ultimately has to be good for business.

It allows businesses to do what businesses do best, and that’s to do business!

I always used to get asked, “Stephen, how do I avoid paying tax?”

And I used to say, “Easy – make a loss!”

And they said, “Don’t be silly.”

And I said, “Well you started it, your job is to make a profit, when you’re making a profit we’ll talk about the tax, but a business’s job is to make profits.”

Also, there is the concept of “rent seeking”, which may be legal but is social unproductive, and the inherent conflict between national tax revenues and international global businesses.

And there is also the recently introduced concept of relational contracts – trust between employers and employees, and translating that as trust between the corporate sector and governments, and leading to, hopefully, good societies.

The fundamental point is that what we have seen is an erosion of ethics rather than an erosion of the tax base.

Change undoubtedly needs to come.

The system designed for the mid-nineteenth century, and predicated on tax being paid somewhere at least once, is not well equipped for dealing with the world of seamless multinationals and internet-based services, which can delivered, globally, from pretty much anywhere.

Tax is a wonderful invention, and I’m not saying that just because I make a living out of it, it is the way we come together, we as a society come together, to fund common causes and collective goods, without which we would lack infrastructure, education, and all the other things that make business and wider society work.

The tax system isn’t broken but it is straining, and it falls to all of us to play our part in updating the international tax rules for the twenty-first century.