As a tax professional, it’s not often people ask me about what I do in my day job. Sure, people will occasionally ask me about their personal tax returns, but UK corporation tax on foreign companies and branches? Not even my insomniac friends are that masochistic.
So I was surprised to see my local party debating this very subject (or so it seemed) based on an article George Monbiot wrote in The Guardian. I was curious: I’ve worked in corporate tax for 17 years, for professional firms and companies, large and small, and contributed to consultations by HM Treasury and HMRC, including the one upon which George Monbiot seems to have based his article.
But Monbiot’s article itself left me completely confused as it bears scant relation to the consultation document I’ve read. Monbiot has clearly decided there is some hidden scandal (a “corporate coup d’etat”, no less) which will result in the “biggest and crudest corporate tax cut in living memory” which has been kept from the Great British Public. Even tax professionals like me had never heard of it. Boy, was I intrigued. Until I read the article and discovered that Monbiot’s thesis has more holes in it than a colander filled with Swiss cheese.
So, for all those confused tax lawyers – and anyone taken in by Monbiot’s polemic, here are the top five things George Monbiot got wrong:
It’s not a big change
Monbiot is mostly railing against the proposed changes to the taxation of branches. At the moment, when a UK company has a branch in a foreign country the UK taxes the branch’s profits and the UK company gets relief for tax paid in the foreign country. This is a so-called “credit system”. Except that the system is imperfect and can lead to double taxation because the UK and foreign tax laws often calculate the tax base differently. More and more countries (including most in Europe) use an “exemption” or “territorial” system instead, where you simply tax the profits only in the country where they are earned and don’t try to tax them in the head office location (in this case the UK) as well.
Incidentally, if a UK company operates in the foreign location via a subsidiary (a separate legal entity) rather than via a branch, then there would not be UK taxation on those foreign profits anyway, so the proposals are bringing the taxation of branches in line with that of subsidiaries. That is essentially all that is being proposed – it is eminently sensible and much more consistent with what most countries do – but one of the less radical changes in the UK tax code in the last 10 years.
It’s not a tax break for big business
Not surprisingly, companies at present don’t chose to organise their foreign activities as branches if it means they pay more tax than they would operating via a subsidiary, so this change isn’t going to reduce the amount of tax they pay. On the contrary, if anything the mismatch between the taxation of branches and subsidiaries that exists at present lends itself to a well-established planning technique which this change is expected to remove. Under the current regime a company will initially set up a branch in the foreign location in the early years, while it is making start-up losses – that way it can offset those losses against its UK profits, saving UK tax. Then when the branch is about to turn to profit, they convert it into a subsidiary, such that those profits (being sheltered from foreign tax by the brought-forward losses) are not then taxed in the UK. Clearly bringing the taxation of branches in line with the taxation of subsidiaries will close down this planning technique so, ironically, I would actually expect this move to increase the UK tax take, as well as simplifying the system. A bit of a win-win, in fact.
It’s not peculiar to the UK
Most countries in Europe already operate an exemption system for foreign branches. The US de facto achieves the same result as it allows groups to elect whether to treat an entity as “transparent” or “opaque” for tax purposes. If anything the UK is rather behind the times and has been catching up in moving to a more territorial regime over the last few years. This includes the much more significant changes to introduce exemption systems first for capital gains and then dividends from trading subsidiaries (changes which both took place during Labour’s period of office).
The exemption system is both fairer (not subject to the vagaries in either direction caused by different methods of taxation in different countries) and more consistent with the UK’s international obligations under EU law and bilateral tax treaties with most countries worldwide.
It won’t encourage offshoring or drain wealth from the UK
For one thing, it isn’t much of a change, so it’s hard to work out how this would have all the consequences Monbiot ascribes to it. If anything, I would expect that these modernisation and simplification measures would encourage both inward investment in the UK and outbound investment by successful UK headquartered businesses.
None of this is likely to change where businesses conduct their main operations, but it may have an impact on the location of significant numbers of headquarters jobs (often highly paid and highly taxed in their country of residence). Over the last few years a number of UK groups (such as WPP and Shire Pharmaceuticals) have moved their headquarters to Ireland or Switzerland, largely in response to the complexity and overbearing nature of other aspects of the UK international tax regime.
I wouldn’t expect these changes to branch taxation specifically to alleviate the concerns that caused them to move, but they are certainly a move in the right direction towards achieving a simpler and less arbitrary regime. Interestingly the UK regime has been converging more and more with that in the Netherlands over recent years, and had these changes come earlier, we might not have seen companies like Shell choosing a Dutch over a UK unified parent company.
It’s not secret or a plot
Most bizarre is Monbiot’s claim that the proposed changes are some kind of secret plot or even a “coup d’etat”. Admittedly they weren’t the most riveting and exciting parts of their manifestos, but both the Lib Dems and Tories set out their plans to simplify the UK’s extraordinarily complex corporate tax system, and these measures are very much part of that. Indeed this consultation was originally kicked off by the last Labour government, so it’s hardly controversial, let alone hidden.
And as for Monbiot’s claim that “a kind of corporate coup d’etat is taking place”, it’s a public consultation exercise, for crying out loud – it’s not exactly tanks surrounding the Palace of Westminster. I like hyperbole as much as the next man, but this is just too silly.
You’ve got to give it to Monbiot, though – what a great way to create a scandal out of such a dull subject and such flimsy evidence. It’s a cunning journalistic wheeze: pick an unpopular target (big business); invent an entirely spurious (and unrelated) “plot” and then tell your readers that it’s too dull, complicated and obscure for them to understand (so no one challenges your proposition). Genius!