Corporate taxation - a broken model?

kabayiri

It does seem like the idea of relying on major corporations for taxation income is to hark back to a bygone era. Two stories from our friendly Private Eye illustrate the modern view.

1) Thames Water

Since their takeover in 2006, the company has additional cost outflows. Last year it made water business profits of £580m but paid £635m interest, half of this on bonds issued by its own Cayman finance company. Far from paying tax, they in fact received a £70m rebate. The owners enjoyed £165m in dividends of course, but it doesn't stop Thames claiming it has no funds for the billions required for sewer updates. That will fall on the consumer.

2) BAA plc

Another 2006 buyout, accompanied with much leveraging of debt. The new BAA pays interest of more than £800m a year, nicely balancing out operating profits of £750m. Again, nothing left for corporate taxes.

Both examples are backed by foreign ownership. Both companies provide nothing by way of corporate tax revenue to a treasury strapped for cash.

You would imagine core business like Airports and Water Utility to be essentially stable and profitable.

I fear like I am quoting from Socialist worker when I relay these articles. I sincerely hope not.

However, I fear the traditional segment of corporations adding to tax revenue will not be with us much longer.

Do we need to rethink taxation across the board?

Generali

If you want to see some really creative 'tax planning' Google 'google tax planning Bloomberg'.

As someone wrote in reply to a piece in the FT today, the Internet has made the distinction between trading in and reading with blurred for many companies. So what to do?

You could try to get a worldwide tax treaty going; good luck with that as the more people sign up to a high tax treaty, the more there is to gain from holding out as a low tax country.

My opinion is that there is little point in having a tax which can be avoided with ease. Perhaps Corporation Tax should be gotten rid of entirely.

chewmylegoff

kabayiri wrote: »

It does seem like the idea of relying on major corporations for taxation income is to hark back to a bygone era. Two stories from our friendly Private Eye illustrate the modern view.

1) Thames Water

Since their takeover in 2006, the company has additional cost outflows. Last year it made water business profits of £580m but paid £635m interest, half of this on bonds issued by its own Cayman finance company. Far from paying tax, they in fact received a £70m rebate. The owners enjoyed £165m in dividends of course, but it doesn't stop Thames claiming it has no funds for the billions required for sewer updates. That will fall on the consumer.

2) BAA plc

Another 2006 buyout, accompanied with much leveraging of debt. The new BAA pays interest of more than £800m a year, nicely balancing out operating profits of £750m. Again, nothing left for corporate taxes.

Both examples are backed by foreign ownership. Both companies provide nothing by way of corporate tax revenue to a treasury strapped for cash.

You would imagine core business like Airports and Water Utility to be essentially stable and profitable.

I fear like I am quoting from Socialist worker when I relay these articles. I sincerely hope not.

However, I fear the traditional segment of corporations adding to tax revenue will not be with us much longer.

Do we need to rethink taxation across the board?

If you pay interest to a foreign entity you have to deduct witholding tax at 20% and pay it to hmrc, so whilst you may not pay CT you are still paying tax (albeit at a reduced rate).

Double taxation treaties do apply so you can claim the WHT back but since there is no corporation tax in the caymans that wouldn't work in the first instance.

Thrugelmir

kabayiri wrote: »

Do we need to rethink taxation across the board?

I suspect that the next issue for the banks will be highly leveraged private companies.

The owner of the M6 toll road amongst other companies, Macquarie Infrastructure Group (MIG) of Australia, has debts of £2 billion to refinance. Yet to pay a penny of corporation tax in the UK. As still utilising tax allowances.

We may well be heading for a Japanese era. If assets are unloaded cheaply to repay bank debt.

Corporation tax still has a place in the system. Just needs tightening up in certain regards.

CLAPTON

a tax should be neutral in the sense that one company should not benefit relative to another

corporation tax massively fails that test.

also it seems on average to benefit foreign companies to Uk based companies

grizzly1911

CLAPTON wrote: »

a tax should be neutral in the sense that one company should not benefit relative to another

corporation tax massively fails that test.

also it seems on average to benefit foreign companies to UK based companies

Interestingly successive governments have been happy for companies to be taken over by foreign companies. Not to mention those that engineer it that way even though they are still nominally a UK company.

In the case of the former this part of the equation must have been understood, surely?

Not only do we have to battle the outflow of funds from negative balance of payments, funds are further leeched out though these tax avoidance schemes.

I appreciate we get FDI but this seems more like temporary relief.

I get the feel we are slowly having the life blood sucked out leaving diseased lumps behind.

Thrugelmir

CLAPTON wrote: »

also it seems on average to benefit foreign companies to Uk based companies

Seems as if times are changing.

Australia's parliament with fellow technology giants Microsoft Inc and Adobe Systems Inc to explain why local consumers pay so much for their products, despite the strong Aussie dollar.

Broadening a row between the world's most valuable company and Australian lawmakers over corporate taxes paid on Apple's operations, Apple executives were formally summonsed on Monday to front a parliamentary committee in Canberra on March 22.

http://www.reuters.com/article/2013/02/11/us-australia-apple-pricing-idUSBRE91A04H20130211

chewmylegoff

CLAPTON wrote: »

a tax should be neutral in the sense that one company should not benefit relative to another

corporation tax massively fails that test.

also it seems on average to benefit foreign companies to Uk based companies

Most taxes fail that test don't they?

kabayiri

I must add a vote of thanks at this point.

More than half a dozen posts in and no sign of 'it was Labours fault' or 'its all them nasty rich Tory types'

It's not a party issue. It's really about the fact that the interests of global corporations and nation states don't always align. This is an ever changing situation, I doubt there is any simple solution.

[apart from make the citizen pick up the tab, of course ]

CLAPTON

chewmylegoff wrote: »

Most taxes fail that test don't they?

In what sense?

I had in mind the situation with two companies basically providing the similar services to the UK market.

One home grown that pays corporation tax and one foreign that doesn't.

The former is at a disadvantage.

CLAPTON

Thrugelmir wrote: »

Seems as if times are changing.



http://www.reuters.com/article/2013/02/11/us-australia-apple-pricing-idUSBRE91A04H20130211

we will see

I believe that foreign executives have appeared at Parliamentary committees here with much grandstanding but few results.