Companies currently pay corporation tax in the country where they are incorporated. A campaign is under way, in the Guardian, and the Commons Public Accounts Committee, that companies should instead pay tax where they make their sales. The proposal has populist appeal, but is impracticable.
Many companies, including UK companies, make export sales without costly incorporation in each sales country. If a US coal producer sells 1m tonnes of coal to UK powerplants for £100m, and makes £5m profit, it submits accounts in the US for tax authority scrutiny, and pays US tax on the £5m. Should this profit be taxed in the UK instead, as the Guardian and the PAC demand?
The principle needs debate, as do practical questions. For companies not incorporated in a country where they make sales, there is no way of imposing local corporation tax. Foreign suppliers to the UK consumer market may incorporate in the UK for ease of administration, or to employ local staff. They then pay some UK corporation tax, rather than none if they did not incorporate a UK subsidiary. They then get slated by the PAC.
Taxing corporate profit in the country of sale rather than of incorporation requires all companies’ international accounts to be partitioned to every sales country. These accounts would be very large and very obscure. Proportioning revenues might be easy, but cost allocation to each country market would be problematic. It would need all countries to agree the scheme, define the accounting standards, and a supra-national tax agency to scrutinise accounts. This is all totally impractical. The US would object to losing US companies’ tax payments to the UK for US companies with UK sales. Try getting Brazil, Russia, India and China to agree to such a scheme.
What about UK companies? Take Rolls Royce. RR has sales of £11bn and profit of £850m, accounted and taxed in the UK. Most RR sales are exports to international airlines. A local corporation tax would mean RR paying tax in each of these markets. The UK tax paid by RR would decline.
The Guardian and PAC haven’t thought through the justification, definition, operational logic, and substantial requirements of their proposal. The result was this week’s ill-informed PAC ritual humiliation of 3 US execs. I have no interest in these companies (Amazon delivers a pretty good service for a profit rate of only 1.3% of its sales revenues, and Google search is free), but I cringed to hear the aggressive and often impolite questioning. Members regularly scoffed loudly over respondents’ replies. They had made up their minds before asking each question, and showed no interest in any response. In the meantime we probably have to live with companies paying corporation tax where they are incorporated, with national corporation tax gains and losses balanced in mutual trade, and seek to ensure that this incorporation is legitimate and not contrived.
* Geoff Crocker is a professional economist whose book A Managerial Philosophy of Technology is published by Palgrave Macmillan.