Debate About Corporation Tax Paid by Multinationals (Essay Sample)

Corporation Tax paid by Multinational Corporations
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Debate on Corporation Tax in UK
Introduction
There has been an amplified debate in the United Kingdom about corporate tax issues and specifically around concerns that government revenue from corporate taxes has been reducing due to multinational companies shifting their profits to other countries where they have branches. A statement from one backbench Member of Parliament (MP) in 2013 stated that there is a growing crisis of the national tax system operating in the international business environment, and this calls for radical action. It was observed that the UK was borrowing more than predicted, especially because of lesser corporation tax collections from companies. Issues of morality and the line between tax evasion and avoidance were cited severally. One MP said that tax avoidance should be a matter of law and not moral persuasion, and another still asserted that companies that avoid tax simply reflect rational behavior. However, there have been different opinions among the committee members of the House of Commons over what constitutes avoidance. These came up partly from a lack of understanding about what the UK is trying to tax and fairly because it could be theoretically hard to define tax avoidance. It has also been unclear how much revenue is mislaid as a result of UK firms transferring profits offshore, not least because there are no good actions (Devereux et al., 2014). The paper proceeds to explore the key elements of the debates on corporate tax paid by multinational corporations in UK as well as how the government can deal with the issue.
Amazon, Google, and Starbucks were interrogated by the Public Accounts Committee of the House of Commons on the levels of corporation tax paid by those groups. After years of being overlooked, the whole topic of tax evasion and avoidance has ascended to the top of the political agenda and whether multinational enterprises are paying their "fair share" of tax has become a substance of public concern. Politicians are constantly keen to come up with proposals that fit the public mood, and thus there have been plenty of reports and initiatives in the UK. There is a serious challenge of corporation tax avoidance faced by the UK partly due to the regime tax complexity in the UK, but majorly because the tax system offers multinational companies chances to shift profits between countries in ways that reduce their liabilities in the UK. The House of Lords Economic Affairs Committee opines that this damages the economy and undermines trust in the tax system (King et al., 2010).
The happenings in 2012 elevated public and political awareness of multi- nationals’ transfer pricing practices radically. Much of this came up from the Public Accounts Committee’s (PAC’s) annual examination of HMRC’s accounts, which led to the public questioning of representatives from Starbucks, Amazon, and Google. The PAC’s s report, released in early December 2012, termed the situation as "outrageous”. It also called for a change in attitude at HMRC, which was to be more aggressive in policing and prosecuting companies that paid too little tax and to challenge ill practices. In 2013, the potential role of transfer pricing and avoidance of corporate tax remained in the news and very firmly on the political agenda (Grant et al., 2014).
The debate on the subject matter encompasses several elements as follows. Firstly, Tax avoidance that commonly involves taking advantage of ‘loopholes’ between taxed activities and those not taxed or favorable interpretations of uncertainty in tax legislation. Chances of avoidance also arise because it can be difficult to outline ‘UK profits’. Broadly, firms can decrease UK taxable profits by increasing the deductions allowable from taxable revenue and by shifting income to a lower-tax authority. HM Revenue and Customs (HMRC) defines tax avoidance as bending the rules of the tax system to gain a tax advantage that Parliament never intended. It involves operating within the letter but not the spirit of the law. The reasons why avoidance is hard to characterize precisely and causes much debate is that not everyone agrees on, nor feels obliged to adhere to, the ‘spirit’ of the law. Tax avoidance incorporates a wide range of activities. Firms may reposition their real activities in response to the incentives in the tax system. Such behavioral responses may be greater than the government projected but arguably are not avoidance. Companies may use intra-group prices, embark on wholly artificial transactions or launch tax haven corporations. It is these strategies that are commonly characterized as ‘aggressive’ or ‘abuse’ forms of tax avoidance that draw the most criticism. Avoidance can result in less tax revenue being collected than was planned. It can also create alterations between different companies or different investments if some have greater ability to avoid taxes. This is as revealed by the investigation by public accounts committee (PAC) on the books of account of HMRC. The UK experiences a fatal challenge of corporation tax avoidance, partly due to the complexity of the taxation system in the UK, but mainly because the international tax system provides multinational companies openings for shifting profits between countries in ways that reduce their obligations or tax liabilities in the UK. The House of Lords Economic Affairs Committee says that this harms the economy and demoralizes trust in the tax system (Karkinsky et al., 2012).
Referring to the report by PAC, some of the companies with scandals on tax avoidance include; Starbucks, which made sales of £400m in the UK, but paid no corporation tax. It moved some money to a Dutch sister company in royalty payments, bought coffee beans from Switzerland and paid high-interest rates to borrow from other parts of the business. Amazon, had sales in the UK of £3.35bn in 2011, but only stated a "tax expense" of £1.8m. And Google's UK unit paid the only £6m to the Treasury in 2011 on UK turnover of £395m. Facebook’s latest accounts filed at Companies House shows it made a pre-tax loss of £28.5m in the year 2014. However, it is recorded to have offset 362 staffs from the UK their wages a great amount. The resultant pre-tax loss on their UK accounts permitted it to pay next to nothing in corporation tax. However, the company confirmed that all their staff whose bonuses were disbursed remitted their income tax afterward. This definitely would have increased the tax take for the UK exchequer to more than £14m, compared to the £1.5m it would have received on the net profit that the company would have otherwise banked. It is more pressing whether the company only made the £105m revenue it officially posted in the UK last year as it reported $2.9bn (£1.9bn) globally. Avoidance of corporation tax causes loss of revenue to the Exchequer. It also means an irregular playing field for trade in the UK in that firms based at home remit corporation tax while multinationals escape it. Open avoidance also saps trust in the tax system entirely. Continued effective taxation depends on agreement, which requires taxes to be broadly accepted as fair. In contemporary democratic societies where public expenditure ranges up to half of GDP or more, the related high levels of tax make the agreement more offending (UK parliament, 2014).
According to the debate also, HMRC has been mentioned as having had a problem in their accounts after examination by PAC. Due to this fact the UK government stipulated the responsibilities of HMRC, which included; safeguarding the flow of money to the Exchequer through the collection, compliance, and enforcement activities, making sure that there is cash available to facilitate public services. HMRC should as well facilitate legitimate international trade, and protect the UK’s fiscal, economic, social and physical security within and at the border as well as collect UK trade statistics. It is their mandate to administer Statutory Payments such as statutory sick pays and maternity pay. Help individuals and families with a certain amount of money through payment of tax credits. They must aim to administer the Government Banking Service and the tax system in the simplest, customer focused and efficient way. The HMRC should, therefore, ensure that taxes are collected. HMRC has not sufficiently challenged multinationals’ noticeable artificial tax structures. It is acceptable that HMRC is limited by funds, but it is strange that it has not been more challenging the Google’s corporate arrangements given the vast disparity between where profit is produced and where tax is paid. Variations between the form of the company’s structure and the material of its activities only came to light through the efforts of investigative journalists and whistleblowers. Any common sense reading of HMRC’s guidance and tests suggests HMRC should strongly question Google’s claim that it is acting lawfully. In disparity to the evidence given previously, Google has also conceded that its engineers in the UK are contributing to product development and creating economic value in the UK. It is important to note that HMRC has never confronted an internet-based company in the Courts on the question of its permanent establishment (Dharmapala, 2008).
Clausing, (2009) points out that UK tax rules are complicated and have not kept pace with the way businesses operate globally and through the internet. While people are apprehensive about HMRC’s effectiveness in tackling tax avoidance, they also admit that it has to operate within ...