Corporate taxation - a broken model?

grizzly1911

N1AK wrote: »

Exactly: It can treat a 5% revenue tax in the same manner. It will have to price in such a way that it can pay it. If firms can account for VAT then they can account for a revenue tax. Can you think of any way that managing a 5% revenue tax would be more complex for a company than VAT would be?



Assuming total tax intake remains the same then people currently employing aggressive tax avoidance will pay more tax; that would either mean raising prices or decreasing profit. In most markets it is likely to be decreased profits. Take Starbucks for example. They are competing against Costa who appear to pay about the right amount of tax currently. Costa's tax bill would likely fall while Starbuck's bill would increase. Unless Starbucks could increase prices when its competitors don't need to then it would have then their profit would decrease.

Companies that don't aggressively avoid tax should on average see tax fall (if total tax is static and avoiders are paying more) thus they could either increase profits or decrease prices depending on the competitiveness of the market.

The difficulty would be modelling any additional "effective" VAT increase against a reduction in tax reduction. You would need to factor in differeing levels of underlying profitability of each sector. Presumably even within sectors there would be profitability distortion dependent on the relative worth of the brand (or lack of it)?

N1AK

grizzly1911 wrote: »

The difficulty would be modelling any additional "effective" VAT increase against a reduction in tax reduction. You would need to factor in differeing levels of underlying profitability of each sector. Presumably even within sectors there would be profitability distortion dependent on the relative worth of the brand (or lack of it)?

Any change in tax model is going to be more disruptive at the point of transition; the question would be what is the better alternative? Can we really fix profit based tax to stop avoidance or is there another better option. You can always put in place mechanisms to protect firms who screw up in the first couple of years by deferring taxation etc. You could even transition slowly if you so wished with 2-3 slight increases in revenue tax (with matching profit tax decreases).

Government doesn't need to worry about sector profit margins. Companies can adjust to tax, regulation changes perfectly well as is and the entire point is to simplify taxation so that it is harder to avoid.

To give you an idea of how it might work lets take a restaurant chain earning £100m a year with a profit of £8m. Currently if they weren't avoiding taxation then they'd pay ~£1.92m corporation tax (I'm just going to use the 24% band rather than the small profit band and relief bands as it doesn't make much difference and is much more complex).

If the corporation tax band was decreased to 10% and a 1% revenue tax was brought in then they would pay £0.8m corp and £1m revenue tax; total tax £1.8m. The slight decrease in total tax would likely be more than countered by the decrease in companies dodging all profit based taxes.

I can honestly say that if the tax model changed to that set-up tomorrow it would barely affect our business (low margin, high revenue). We'd still make a profit and increasing prices by 0.4% would more than make up for the tax increase.

antrobus

kabayiri wrote: »

...Do we need to rethink taxation across the board?

The OECD seem to think so. See their report Addressing Base Erosion and Profit Shifting
http://www.keepeek.com/Digital-Asset-Management/oecd/taxation/addressing-base-erosion-and-profit-shifting_9789264192744-en

George Osborne seems to think so
http://www.bbc.co.uk/news/uk-21482242

Thrugelmir

N1AK wrote: »

Pithy yet ill considered 3/10

Income tax ignores expenses and living cost. If you can't make a profit selling a service then you probably shouldn't be doing it. Companies have to collect VAT which decidedly is a tax on turnover already. So have you got a more nuanced argument to oppose with?

You are assuming that all business does is provide labour.

What about the costs of goods that are recharged?

How would co-operative (buying and selling) groups operate ?

dtsazza

The problem with both profit- and turnover-based taxes, as I see it, is that they are based on "stories". That is, the amount of tax is derived from a figure which is not fundamentally linked to the economic activity that company involves itself in. In particular, it is possible to carry out effectively the same activity, yet change both profit and turnover substantially, through administrative trivialities.

And the root cause of this problem is that taxes are somewhat arbitrary. They're not levied on the basis of what a company actually does for a country, or what they "use up" from a country; it's more a case of charging what you think you can get away with.

So a quite radical proposal would be to address this issue. Don't tax companies "just because"; but rather, collect money from them in exchange for the services that the company provides them. Just like a utility company, you would charge them for what they use regardless of who they are or how much profit they make. You don't need to know what their turnover or profit is; you just need to know what goods or services they are requesting from the country, and bill them an appropriate amount. (Plus the nice benefit is that if they don't pay the asking price, you withhold your goods/service - unlike now where there's no direct exchange, so nothing to withhold.)

This does require us to identify exactly what public goods it is that we consider companies to be using; what is the justification for us to levy taxes on them in the first place? Or in other words, what are we effectively selling to them in exchange for tax? My proposal is simply to make this sale explicit.

Kennyboy66

Thrugelmir wrote: »

Shipping is cheaper to the USA. that's one point to consider. 10-12 days from China to west coast by sea. To UK takes 4-6 weeks depending on weather.

The ships consume around £500,000 of fuel a week. Plus the charter fee. So an expensive business these days to move containers.

For small electrical goods this is almost irrelevant. This sea cost for small electrical items (phones / cameras etc) is pennies.

A rough rule of thumb used to be that the shipping cost of a 20' container, was roughly the same as the internal UK road cost to the North West ex Fxt.

Shipping is a more expensive now, but roughly £900 depending whether its into Fxt / Soton and ex Shanghai , Shenzen or Ningbo

Sailing time is 19 - 23 days.

Containers make shipping and handling ridiculously cheap.

Charter fees for Cape size ships are still on the floor.

Kennyboy66

N1AK wrote: »

VAT is a tax on revenue for most businesses; theoretically it is paid paid by the buyer but in almost all retail it is de facto paid by the company. Why would saying that companies have to pay 5% of revenue in tax (and decreasing corp tax accordingly) be all that different. At least hiding revenue is harder than profit.

.

NO IT IS NOT.

The businesses collect the tax.
The end user bears the burden.

All the supermarkets have net margins of a little either side of 5%.

A 5% revenue tax would effectively turn profitable companies into break even / loss making companies.

Kennyboy66

Generali wrote: »

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.

There are plenty of good reasons for corporation tax even before the £50bn it rakes in.

1) Without it, earnings could be reclassified as corporate income and tax avoided.

2) Limited liability allows companies to dump problems on society - why should they not pay for this ?

3) many corporation profit when economic rents. Even Adam Smith thought these should be taxed and taxed hard.

It would make sense is corporation tax, at least in Europe was set within a fairly narrow band. The beggar thy neighbour approach set by Ireland is ultimately self defeating.

Thrugelmir

N1AK wrote: »

my income would be £1,250,000 and I would pay £250,000 in VAT on my customers behalf. Thus I would lose £750,000.

Your income is only £1,000,000. The VAT is charged (if applicable) on the supply and paid across to the HMRC.

However you can also recover input tax paid. So the net tax is paid across.

Retailers have special schemes to account for the fact that they supply both vatable and non vatable items.

Thrugelmir

N1AK wrote: »

Take Starbucks for example.

Starbucks are in the main franchises. Starbucks itself makes it money from supply of management services and coffee products to its franchises. Primary operations are therefore out of the jurisdication of the UK tax authorities.

Starbucks UK makes minimal profits hence its low rate of tax.