It’s time multinationals paid more tax. And the way to do that is with a point of sales tax.
Tax avoidance is huge. Take Google: The company generated more than GBP17billion in UK sales between 2005 and 2013, but paid only GBP52 million in Corporation Tax on UK profits for that period. Even George Osborne’s subsequent back taxes deal with Google, announced earlier in 2016, netted only an additional GBP130million, including interest.
A tax recorded at the point of sale would be harder to avoid than Corporation Tax. It won’t matter if a salesman is based abroad, which in Google’s case is Ireland, because a portion of the income made on a sale in the UK could be diverted to the Crown just like it is with VAT.
A sales tax of 0.5 or even 1 per cent would be difficult for multinationals to argue against. Only a company about to go out of business would struggle to pay that, and don’t forget this is only being levied on sales in Britain, not elsewhere in the world, so its overall impact on a multi-national’s global earnings would be tinier still.
A 1 per cent tax on Google’s UK sales would have raised GBP170 million between 2005 and 2013, more than three times what it paid in Corporation Tax before the Osborne deal.
It’s possible a slightly higher rate than 1 per cent could be charged. Many companies might absorb the extra cost to keep ahead of competitors, so it wouldn’t necessarily lead to significant inflation.
And, even if companies did pass on the costs of a sales tax to others, society might accept that just as it has done with employers passing on the costs of the latest increase in the Minimum Wage, because of the obvious benefits that brings to low income earners.
A sales tax ought to complement Corporation Tax not replace it as Nigel Lawson wants. A sales tax that replaced Corporation Tax would have to be levied at a much higher rate than 0.5 or 1 per cent, possibly at a level that could hurt companies with tight margins and potentially cause significant inflation, hitting the poorest consumers hardest.
A sales tax could benefit society’s least well-off by funding construction of low-rent council homes, reducing prescription charges and/or improving low cost public transport, and so on.
Deciding on a sales tax rate that’s sustainable would be a delicate business, but, if it became a significant revenue generator, Corporation Tax could be cut, which might mean fewer companies try to avoid paying it; indeed, more multi-nationals might base themselves in Britain because of that. Alternatively, it could help pay for Tim Farron’s plan to cut Business Rates for smaller companies, making it easier for them to compete with the multi-nationals: Independent coffee shops would be delighted; tax-avoiding Starbucks less so. That would balance the scales of justice.
* Richard Warren is a journalist who is a member of Richmond Park Liberal Democrats.
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35 Comments
The issue with a sales tax is that it’s a shift from taxing companies on profitability to simply taxing them on turnover. It would see massive tax cuts for Goldman Sachs and KPMG and a shift to taxation focused on Tesco and the high street.
The challenge we have with corporation tax is that few people appear to be willing to entertain that the solution is complicated. It is not unilateral and it has to take general accounting principles into account – and that does not involve neglecting the important principle that the revenue declared by country should be proportional to the actual value created.
Why does an article about corporations mention sales tax? A sales tax is a tax on consumers, not on corporations.
Right so basically you want a 0.5% to 1% increase in VAT, fine but this is hardly “replacing Corporation Tax” there are serious considerations around Corp Tax bust pretending that a small increase in VAT shouldn’t be sold on that basis.
Try selling that to the public and it will be rightly be regarding as dishonest. It is a normal tax rise (which could well be considered worth it depending on what it is intended for).
Hi Richard
I can see where you are coming from with this but this method would just amount to an increased VAT rate for individual companies. I do think there is an argument for looking at a company’s world wide profit and the percentage share of sales per tax authority and billing the corporation tax on an apportionment of profits by sales ratio. Maybe some accounting tricks that companies would try but no more difficult to investigate than the transfer pricing tricks that they play at the moment in order to shift profit to low tax dominions. Maybe some accountants can say why this wouldn’t work.
P.J.
“Maybe some accounting tricks that companies would try but no more difficult to investigate than the transfer pricing tricks that they play at the moment in order to shift profit to low tax dominions. Maybe some accountants can say why this wouldn’t work.”
There are often agreements reached with transfer pricing so something may be possible. Personally I think a more fundamental change to the way we tax is required but any system that is an improvement (thinking about the economic incentives) could be open to abuse in avoidance terms.
I think the issue is that a positive change will be a complex question that probably wouldn’t be short enough for a LDV article.
But any change should incorporate LVT as well…
The loophole that needs closing is the shifting of profits. A sales tax is a tax on turnover, which doesn’t feel much different from VAT. Are their ideas out there that address the problem that profits are taxed away from the country where the profits were made?
Very good to see the article and comments trying to deal with those who do deals !
It is the fact that corporate businesses do what they do , that means something needs to be done . There is room for genuine internationalism in our radicalism on this one .
Several people seem to think I’m arguing for a sales tax to replace Corporation Tax. I’m not. I’m saying it ought to complement Corporation Tax. Please see paragraph eight. Here is again below:
“A sales tax ought to complement Corporation Tax not replace it as Nigel Lawson wants. A sales tax that replaced Corporation Tax would have to be levied at a much higher rate than 0.5 or 1 per cent, possibly at a level that could hurt companies with tight margins and potentially cause significant inflation, hitting the poorest consumers hardest.”
Hi PJ,
What you suggest sounds interesting and could be a better option to what I’m pitching here – to be honest I don’t know. I’m no tax expert, but I do know that too many multi-nationals are not paying a fair portion of tax, and we need to do something about this. If this article can generate some debate on this as Lorenzo Cherin says, then that’ll satisfy me.
Superb idea. Simple,.. effective,… unavoidable. I’d suggest keeping it simpler still, by creating a two tier VAT level. By way of example :
Coffee house 1 (with headquarters in the UK)… VAT of 20% on sales.
Coffee house 2 (with headquarters outside of UK )… VAT of 22% on sales.
Either Coffee house 2 absorbs [ takes the hit ] the extra 2% to compete with Coffee house 1, or it puts its prices up , and lets the consumer choose whether to support corporation tax avoiding Coffee house 2,.. or full corporation tax paying Coffee house 1.
This also ‘incentivises’, a company to balance its potential sales within the UK against the saving of its 2% extra VAT penalty.
Of course it goes without saying that this idea, can only be legally implemented, once we’re out of the VAT interference of the EU.? Another good reason to Leave,.. and Take back control.
It’s still possible to generate billions of revenue but have billions more in costs. We should stick with corporation tax, but reform it so it is hard to avoid.
I hope to go back into tax advice soon and last time I was in the industry I felt the coalition got individual tax avoidance wrong. Any group of decent accountants, tax lawyers or financial advisers could close lots of loop-holes, but they are often defended by politicians, even those on the left, as growth generating (especially in fashionable industries like tech and manufacturing). They need to be phased out.
Get some of the best chartered accountants to work on multinational taxation, but it doesn’t take geniuses to reduce tax avoidance from individuals and small to medium sized businesses. It is fairly easy to see what is going on.
J Dunn.
Unfortunately you’d be looking at an offshore ISDS claim for discrimination. I do however agree with your proposals, but some would call them protectionist.
PS, I’ll provide an illustration of how the coalition got tax avoidance wrong and the why current thinking is wrong when it comes to the “General Anti-Abuse Rule”.
1. In 2012 the coalition announced the Seed Enterprise Investment Scheme (SEIS), providing tax relief up to 103% of initial investment. Too generous in my view and the maximum amount of tax relief wasn’t explicitly stated, so it was left to tax professionals to figure out.
2. The coalition announces the “General Anti-Abuse Rule” which outlaws any tax laws “being used in ways they were not intended”.
So back to the SEIS. Is it legal in some circumstances to claim the 103% relief? We don’t know, because the intention of the law wasn’t explained properly and we risk big fines if we get it wrong. I emailed HMRC at the time and asking if it was legitimate to claim the full amount and they gave a vague response (they didn’t know either).
It would have been simpler to just introduce less generous tax reliefs in the first place.
No need to reinvent the wheel with this one. Plenty of ideas on Tax Justice Network’s website. You also get to see what activists are trying to do around the world. Country by country reporting, across the whole world, would be a good start. The UK should be pushing for it.
“A sales tax could benefit society’s least well-off by funding construction of low-rent council homes, reducing prescription charges and/or improving low cost public transport, and so on.”
Not that this isn’t a good idea, but why do people always justify new taxes with an emotional plea to the social good it create?
We don’t live in a society the explicitly hypothecates taxes to a given purpose. We tried with that great holy of holies the NHS via NICS, but that is the greatest sham of all.
Tax is tax, it is used for whatever the priority of the day is, and even if you pretend some portion of it is hypothecated you only really deceive yourself as you reallocate other resources on the margins to to accommodate this change.
A tax must stand on its own merits as an efficient and effective mechanism for raising revenues for the exchequer, or to moderate behaviour such as a pigot tax, pretending otherwise is illogical.
A tax recorded at the point of sale would be harder to avoid than Corporation Tax.
Corporation Tax is a voluntary tax: retain the ‘profits’ as cash and pay Corporation Tax, reinvest the ‘profits’ and pay no Corporation Tax. ‘Avoidance’ only happens where a company is able to retain monies by moving them through various ‘legal’ mechanisms that may at times, be questionable.
i>Tax avoidance is huge. Take Google: The company generated more than GBP17billion in UK sales between 2005 and 2013, but paid only GBP52 million in Corporation Tax on UK profits for that period.
As Sales income has little impact on the amount of Corporation Tax, a voluntary tax, that is paid, these figures do not represent a tax avoidance smoking gun.
In Google’s case a look at their published accounts show that much of the profits from the search and advertising business activities are sunk into various R&D business/projects among them driverless cars.
Roland, re-investing doesn’t write all revenue off against profits, but capital allowances have become more generous since 2010 so it might seem like that.
Re-investing still risks money, it just means if you invest £100,000 you might save £20,000 in tax because it comes off the bottom line.
Again, a big problem for the Treasury has been how to get companies to invest big piles of cash they are sitting on, and one of the answers seems to have been capital allowances…
Eddie – agree will all your points – I was trying to keep it simple.
I think your last point is actually the important one. Many times it has been noted on LDV that it is more efficient for monies to be reinvested by business (to create jobs) than for the government to collect monies and then redistribute them (to create jobs). Hence one purpose of the tax system is to encourage businesses to invest. I seem to remember one of the discussions recently was how to link various schemes so as to positively incentivise companies to invest in training as simply giving tax breaks on training spend wasn’t delivering the desired results.
Obviously, the other area where governments have been successful is for companies (such as Google) to see the UK as a place to do R&D and have their (European) HQ. Whilst these are not business profit centres, from a government perspective these are all activities that employ people, encourage the development of local supply chains (ie. independent businesses) and hence generate tax receipts. [Aside: Brexit, throws a curved ball as to whether this will continue to be a successful business pitch.]
Thus I suggest the issue isn’t so much about taxing more, but increasing the incentives for businesses to conduct business in the UK, in ways that create employment and enhance the local economy.
Sales taxes are widely used by states in the USA and cover most retail goods and some services although not usually medical or legal services. Prices are often quoted exclusive of sales tax. However, there is no VAT in the US,
The UK had a retail tax, purchase tax, prior to the introduction of VAT in 1973, but is was quite complex with many different rates. VAT has proved a far more efficient tax and generates a substantial element of total tax receipts.
In terms of tackling tax avoidance, I think LVT on land and the radio spectrum could be a good starting point. Together with country by country tax reporting that enables different jurisdictions to assess taxes on the basis of economic value added LVT could address many of the current concerns.
Isn’t the issue with Google that it has no UK sales, because it insists all its advertising is sold from Ireland? So a 1% tax on Google’s UK sales would raise nothing.
I think this highlights some of the broader problems with trying to tax business activity, which is inherently mobile. I agree with @Joebourke above that country-by-country tax reporting could offer a better way to tax profits and that it makes sense to tax things that can’t move, such as land.
Interesting idea. It’s also worth looking again at a financial transactions tax (or Tobin Tax) as an extension of stamp duty on shares (which financial institutions pay happily enough and for which they compound)
Hi Roland,
Google told investors at the end of 2015 that it had an overseas cash pile of USD42.9bn, so I don’t think it can be said R&D is swallowing up revenues. The company can and should pay more tax.
Hi Joebourke,
Yes, I agree with you on LVT.
corporation tax is effectively paid by the customers anyway. If a company moves its profits somewhere where it pays less, then it can either make more profit, or cut prices. Yes I know, competition doesn’t really work, but look at the price before tax of cars in various jurisdictions that charge different purchase tax rates on them. HIgher the tax, lower the rest of the price, so it comes out about the same. Cut corporation tax to zero, put VAT up to compensate, cue screams from the Daily Heil.
Hi RBH,
I’m pretty sure (correct me someone if I’m wrong) that Google/it’s UK customers pay VAT on sales made in the UK by its Irish operation, so it would be possible to have a sales tax.
Just as an interesting point of information, The Guardian says Google made GBP5.6bn of sales in the UK from its Irish-based operation in 2015.
Hi Richard – I think we do need to be careful about the figures we use. Whilst Alphabet Inc., who own Google Inc., who in turn own all the various Google subsidiaries around the world, may have a significant cash pile. I suggest we need to focus on the consolidated earnings from Google’s various UK companies, and understand where these go and how UK tax is being avoided.
Also we do need to decide on relative merit of investment decisions. For example is it more important for Google (UK) to invest in building a new HQ in London at a cost around £1bn that is anticipated to create 3,000 new jobs by 2020 [https://www.theguardian.com/technology/2016/nov/15/google-commits-to-massive-new-london-hq ] – which if they are at Google’s current average UK wage of £160,000 pa [https://www.theguardian.com/technology/2016/jan/28/google-uk-staff-salary-earned-2015 ] would mean substantial future Income Tax receipts, or do we demand that Google (UK) declare that £1bn as profit and so derive £200m in tax receipts and a box ticked. I also suspect the new London HQ will also impact the geographic location where UK sales are treated as having occurred for accounting and taxation purposes.
This isn’t to rubberstamp Google’s activities, only to note that matters are not so clear-cut as some people would have us believe.
Hi Roland,
You make a good point about needing to protect investment. Do you think a 0.5 – 1% cent sales tax would be big enough to stop investment?
More generally, from looking at your points, it seems to come down to this: We want businesses to invest so they create wealth, but we want to stop them avoiding taxes unreasonably. How would you go about the tax avoidance issue? Some ideas have been suggested above. Any of them sound good to you or ought we try something else?
What a well informed and intelligent series of comments in this thread.
Richard re: sales tax
The problem with sales tax is that it doesn’t address the issue that keeps being raised, namely, the monies retained after the payment of sales tax/vat! Obviously, in the case of Google, one of the questions no one seems to be asking is how much UK VAT did Google pay on those 5.6bn GBP of sales it attributes to its UK operations.
Given VAT at point of sale is effectively a sales tax, we can see from the history of vat the effects of increases in sale tax (remember in 2011 the higher rate of vat was raised from 17.5% to 20%), namely, within a relatively short period of time prices increased to take account of the rate increase, resulting in an increase in the cost of living and inflation…
Looking at Google, Apple, Amazon, Starbucks and others it does seem there are a few well-used avoidance schemes being used:
1. The use of a favourable tax jurisdiction in which to book sales. Remember for many years if you purchased something from Amazon.co.uk the invoice would reveal the transaction was actually with Amazon EU Sarl, Amazon’s Luxembourg arm. It was only through sustained EU pressure that Amazon started to book UK sales in the UK. I expect part of the HMRC deal with Google has been an agreement as to when Google will also be booking UK sales in the UK.
2. The offshoring of IP and specifically the use of the Netherlands favourable tax regime for IP. This enabling company’s to put a subjective goodwill price on their IP and thus charge their operating companies for its use. Naturally, this is a tax-deductible business cost…
3. The supply of company/brand specific products (eg. coffee in the case of Starbucks) at a price premium, through offshore holding companies…
4. The use of a legal and tax regime that is favourable to overseas earnings, namely Ireland, in which to accumulate revenues from other countries.
5. The US tax regime, which effectively is encouraging US multinationals to find creative ways to sheltering oversea’s earnings from the US tax authorities.
Thus the need I suggest isn’t to simply implement a sales tax, but to address the above which permit a company to both artificially inflate it’s (tax deductible) cost base and to protect monies from taxation.
Hi Richard re: “How would you go about the tax avoidance issue?”
I suggest the best way forward on most of the above is actually to remain a member of the Single Market, and support the efforts being made to create a level playing field between members… 🙂
Obviously, if the UK were to leave the Single Market then it would need to become an IP and tax haven and so encourage companies to use the UK as a collection centre and clearing house – something that most probably wouldn’t go down too well with our neighbours and trading partners…
Hi Richard Warren,
This point about VAT turns out to be interesting and I learned some new things so thank you. As I understand it, what happens is UK customers of Google must declare AdWords purchases on their VAT return (Google itself does not pay), but simultaneously deduct it as an input to their business. If they’re VAT exempt (e.g. a charity) then they pay the tax as final customers and can’t reclaim.
These links were interesting:
http://inbound360.com/blog/google-adwords-vat-business-expenses/
http://ec.europa.eu/taxation_customs/business/vat/eu-vat-rules-topic/where-tax_en
https://www.gov.uk/guidance/vat-imports-acquisitions-and-purchases-from-abroad#services-received-from-overseas-suppliers
This is pretty troublesome for the idea of a sales tax. You’d actually be collecting from Google’s customers, not Google, presumably by declaring part of their AdWords purchases non-refundable for VAT. You’d need quite a lot more information to work out who the tax falls on in economic terms, but I suspect demand for AdWords is pretty inelastic, so it most likely turns into a fairly regressive tax on UK consumers.
RBH – “…VAT exempt (e.g. a charity)…” I’d just like to clarify this point because I deal with a lot of charities, many on which think that because they are a charity they don’t have to pay VAT, which is not correct. There is a (last time I looked) 19 page guidance booklet from HM Customs on this subject, the nub of which is that in some circumstances charities can claim exemption on some items which they would otherwise have to pay VAT on. The rules on VAT are so complicated that it is virtually impossible to avoid making mistakes. If I was being cynical I would think that this gives the Revenue an opportunity to fine practically every company after a VAT inspection: fortunately I have only had three inspections in 37 years, but my last fine was £3500.
@RBH – Precisely, the issue isn’t so much getting the multinational to collect more tax, which is what an increase in sales tax represents, but to get them to actually declare more of their earnings in the tax jurisdiction where the sales actually occurred.
Perhaps in the light of the evidence we now have, we need to reexamine the rules used to determine the geographic location of sales and hence tax regime in which it needs to be reported. I would advise against setting it at a monetary threshold because that would potentially impact the sales of big ticket (eg. power stations, aircraft etc.) items.
RBH, Roland and Tony Hill,
Fascinating and informative comments. Thanks for that. I’m learning plenty too 🙂
The charity VAT issue is breathtaking, and the complexity of the tax system is an issue in it’s own right it seems.
And yes, leaving the EU does seem to be a regressive step for the reasons you state.
I get what you’re saying about getting companies to declare earnings in the tax jurisdiction where sales occurred, but the problem is whether we can really stop them using The Dutch Sandwich (I think it’s called) and other tax-avoiding measures you mention. To do this requires plenty of international cooperation and, not least, HMRC tax experts to genuinely tie-up those loopholes. From what I’ve heard and you probably have too, there are taxmen who leave HMRC to take high paying jobs at accountancy firms to show clients how to slip through the loopholes they’ve created or not properly tightened up. And from what Eddie Sammon says, governments are culpable in creating/protecting loopholes too.
A sales tax is a blunt instrument, but it’s simple, clear and can’t be avoided. It would only be levied on multi-nationals, so in the high street scenarios mentioned in this thread, customers could always go to non-sales taxed smaller shops if price too high in Tesco, etc. However, it’s possible many multi-nationals in competitive markets would cut their prices to absorb the tax, so they can continue attracting customers. I guess the proof would be in the eating.
In a sense, all company taxes are ultimately paid by the customer, including Business Rates, Employer NIC and even Corporation Tax, as Jenny Barnes says, because all of it comes out of the price of the product or service that’s sold.
Anyway, I’m not a tax expert and the answers probably do lie with people who are, because it is such a complex subject.
LVT as suggested by Joe Bourke and Tobin tax suggested by Mark Frankel may be complementary (or better) ideas. Maybe, a range of taxes at low rates, rather than a few at high rates, are the best way forward. That, and tightening those loopholes and getting companies to declare their earnings in the place where sales are made. In short, there’s no silver bullet, we have to do a lot of different things, because none of them are perfect.
It’s a myth to say Google pay no tax. Their USA SEC filings reveal that they were liable for an average of $1bn a quarter to the end of the first quarter of 2017. They are a USA company so they pay the majority of their taxes in the USA. This is the same as UK companies operating overseas who pay the majority of their taxes in the UK even if they are operating in the USA. If we start trying to change the balance then all that will happen is that the USA tax authorities will react to start penalising UK companies so they can claw back lost tax and you will enter what is known in the trade as ‘tax competition’ (Google it). Amazon is a different kettle of fish because they still have a historical loss making position so they will be using those losses to reduce their corporation tax burden (just as UK companies do in this country and elsewhere). Google’s tax numbers are low compared to their world-wide income but that is something for the USA tax authorities to be concerned about (as indeed they are).
We have a tax treaty between the UK and the USA so taxes paid in the USA are normally allowable against UK tax and vice-versa. You can’t just tear this up because you are unhappy that USA companies are benefiting from something that UK companies benefit from as well. Sales tax won’t work because online sales could be engineered to be done from any country and it’s always the consumer who pays sales tax in the end anyway.
What is needed is a complete ‘drains up’ review of the whole corporation tax system on a world-wide basis. This is already underway but Rome was not built in a day. Vince Cable was driving a UK review until somebody called ‘May’ decided to make us put everything on hold. So, this whole area is being looked at but we are working against nearly 200 years of taxation law and it’s not going to take five minutes to fix. I suppose the promise is ‘we, and the rest of the tax jurisdictions, are on it (honest guv)’.