Reacting to news that Facebook has rearranged its tax structure, Jonathan Isaby, chief executive of the TaxPayers' Alliance, said:
"The fact that Facebook has taken a voluntary decision to change its structure so it pays more Corporation Tax just goes to show how absurd the system has become. The outdated tax system is simply not suitable for the modern, global economy and leaves the tax liabilities of multinationals open to honest dispute. Instead of announcing another round of ineffectual "clampdowns" at the Budget, the Chancellor should rethink Corporation Tax in it's entirety."
Today the TPA also launches a briefing note on reforming Corporation Tax. In 2012, TaxPayers' Alliance and the Institute of Directors jointly published the Single Income Tax, the final report of the 2020 Tax Commission which proposed replacing Corporation Tax with a tax on income distributed from capital. The Treasury Select Committee is considering the proposal and has named the 2020 Tax Commission in its recent inquiry to explore suitable replacements for Corporation Tax.
This briefing note explains the problems with the current system, the proposals of the 2020 Tax Commission and the shortfalls of the other reforms being proposed.
On reforming Corporation Tax, Jonathan Isaby, Chief Executive of the TaxPayers' Alliance, said:
"Corporation Tax has lost all credibility and needs to be replaced by a simple and workable alternative. Successive governments have responded to the challenge of modernising our tax code by tinkering around the edges and adding more legislation to the system, which has only made matters worse. It's high time the government introduced radical changes to the system and getting rid of the discredited Corporation Tax would be a good place to start."
Problems with Corporation Tax:
- It is inherently opaque and complex which undermines the legitimacy of the system
- The subsequent controversy and confusion leads many to believe that large companies are engaged in greater tax avoidance than actually take place
- The burden falls mainly on employees through lower wages and is disproportionately damaging to the economy
- Profits are tricky to locate, depending on transfer pricing, which places a huge burden on HMRC both in terms of time and resources
A single tax on distributed income would be an easier and effective replacement:
- It would be charged on net capital outflows, typically dividends and interest on loans
- It would be levied at a corporate level for administrative ease, similarly to PAYE on wages, on distributions which leave the UK corporate sector
- It would be levied at a flat rate but higher rate taxpayers could be asked to self-assess above this, and those under the personal allowance could claim a rebate
Other alternatives proposed will not meet the challenge:
- The destination-based approach would break the link between value creation and tax, with international agreement being required. While it may increase the UK tax base of foreign multinationals such as Google and Facebook, but it would decrease the UK tax base of companies
- The unitary taxation approach is hugely complex and would be hugely distortionary, as the extent to which value added can be attributed to assets, labour or sales varies greatly between industries.
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