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The Progressive Policy Think Tank

Bring in new tax to curb avoidance by multinationals

IPPR proposes new business tax measures including introducing a minimum tax for multinationals and raising corporation tax to fund lower NICs for employers

The UK should target tax avoidance by multinational companies and ensure a fair burden of tax between high-employment and high-profit businesses, according to a new report from IPPR.

The IPPR report argues that it is unfair to ask responsible businesses to bear a greater share of the tax burden while a few multinationals are avoiding it altogether. The report therefore proposes the introduction of a new ‘minimum corporation tax’ on multinational corporations tied to company turnover in the UK tackle tax avoidance through ‘profit shifting’. The vast majority of businesses behave responsibly and pay their taxes. This proposal is about a level playing field so that all business contribute their fair share.

The proposed new tax - Alternative Minimum Corporation Tax (AMCT) - would ensure that multinationals were no longer able to avoid tax altogether through shifting profits to low-tax jurisdictions. The tax would be levied on a company’s turnover or sales in the UK, and would be triggered when a company reported very low profits for five successive years.

At the same time the IPPR report proposes increasing corporation tax to fund a reduction in National Insurance contributions from employers (ENICs), which  would ease the tax burden for business that employ many people. IPPR proposes increasing the rate of corporation tax from 19 to 24%, and using the proceeds to fund a reduction in employers’ National Insurance contributions by 2% from 13.8 to 11.8%.

This change would be fiscally neutral (within £1billion over three years), but would shift the burden of taxation away from less profitable businesses with high input costs (such as high street shops) onto more profitable ones better able to pay (such as those in the financial sector). It would ensure that shareholders not workers bear most of the burden for business taxation and, by reducing the cost of employment, allow for an increase in wages.

IPPR’s analysis of the top 100 companies (PwC’s 100 Group Companies) shows that the proposed changes would have increased the tax burden of the top 100 group of highly profitable companies by approximately 5% in 2017, ignoring any behavioural changes or macroeconomic effects.

These two proposed measures outlined by IPPR would improve the UK’s system of corporation tax, raise revenues, and make the system fairer for businesses and citizens at both national and international levels.

Over the last 10 years, the rate of corporation tax has fallen, while the rate of employers’ National Insurance contributions (ENICs) has risen. The report produced for the IPPR Commission on Economic Justice, highlights that:

Since 2008, the main rate of corporation tax in the UK has been successively reduced, from 30% to 19%. This is the lowest rate in the G7, and one of the lowest rates in the 35 country strong OECD.

In 2006, at the peak of the last business cycle, when the headline rate of corporation tax rate was 30%, receipts amounted to 3.5% of GDP. Today, with the rate at 19%, receipts total just 2.6% of GDP.

Since 2012 the UK has simultaneously increased the value of reliefs and allowances available under corporation tax. These have included a significant increase in annual investment allowances (from £25,000 to £200,000) and the introduction of the Patent Box aimed at incentivising research and development.

UK corporation tax receipts have been consistently lower than the OECD average since the early 2000s.

The report further recommends:

Reducing reliefs and allowances for corporation tax: There is a strong case for the removal or reduction in the value of reliefs including the Patent Box and research and development (R&D) tax reliefs, the deductibility of corporate debt interest and the depreciation of write-down allowances. There should also be a presumption against introducing any additional reliefs, with a requirement to demonstrate that the desired effect could not be achieved through spending measures.
 

The UK should engage proactively in international attempts to reduce tax avoidance: The UK should immediately introduce publicly available country-by-country reporting; extend the public register of company beneficial ownership to cover overseas territories and crown dependencies; share with developing countries any tax and company data relevant to their tax affairs, and push for a new generation of global tax reforms to reduce avoidance and evasion still further.

Grace Blakely, IPPR Researcher, said:

“The UK’s system of business taxation is not fit for purpose. Over the last 10 years, the rate of corporation tax has fallen, while the rate of employers’ National Insurance contributions has risen. Some multinationals have found it easy to avoid corporation tax altogether.

“As a result, many highly profitable multinationals have seen a decline in their UK tax liabilities, whilst responsible UK-based businesses are forced to bear a greater portion of the tax burden. This is both inefficient, and unfair. Our reforms should go some way to improving the UK’s system of corporation tax, raising revenues, and making the system fairer at both the national and international level.”

Michael Jacobs, Director of the IPPR Commission on Economic Justice, said:

“Most businesses want a fairer tax system. The reductions in corporation tax and rise in employers’ National Insurance contributions changes over the last decade have penalised companies which employ a lot of people but are not highly profitable, and benefited those with fewer workers and more profits. At the same time some multinational corporations have been able to avoid tax, which has left domestic businesses effectively having to shoulder a greater burden. Our proposals would be fairer for business than the current system.”

Contacts

Sofie Jenkinson, 07981023031, [email protected]

Florri Burton, 07867388895, [email protected]

Notes

IPPR’s new report Fair dues: Rebalancing business taxation in the UK will be available on 00.01 Thursday 8th March at https://www.ippr.org/research/publications/lfair-dues

The technical justification for rebalancing the business tax burden away from payroll taxes towards profit taxes is that these two forms of taxation have different economic incidences. Specifically, corporate income taxation is more likely to be borne by shareholders and higher-paid workers, while employers’ social security contributions are more likely to be borne by workers further down the income scale.

This means that the balance of business taxation between corporate income and payroll taxes will have a significant distributional and macroeconomic consequences (p.11). On average, shareholders have higher incomes and wealth than employees. Given the higher propensity of the low-paid to consume in comparison with those with greater wealth, reductions in taxes on labour are likely to have a greater impact on aggregate demand than cuts in taxes on shareholders.

The counter argument that higher rates of corporation tax will lead to lower investment and potentially exit by established UK companies is also refuted by the evidence (p.9). This is because the wider business environment is a more significant determinant of even relatively mobile firms’ location decisions, and investment is determined primarily by expectations and the business cycle, not the user cost of capital. The objection that higher corporation tax rates will lead to profit shifting is countered by IPPR’s second proposal for an alternative minimum corporation tax (AMCT).

IPPR’s proposed AMCT would apportion a firm’s global profits to the UK based on its turnover in the UK at the main rate of corporation tax, and would be triggered if a firm declared profits below a certain percentage of its global profits for more than five years. Many other countries – from Italy, to India, to (until recently) the USA – have an alternative minimum corporation tax, which act as a backstop to the main rate of corporate income taxation.