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  • Tax & Public Perception; The Politics of Making Profit

    3 September 2018

    Andy Wood


    Since long before I was born, politicians the world over have been dangling the prospect of favourable changes to their respective tax systems before voters in an attempt to secure electoral support.

    Even after grasping the reins of power, they remain well aware of how important being seen to manage taxes effectively can be when it comes to determining their standing with public and media alike – and their chances of re-election.

    Whilst it is terribly difficult for ministers of any persuasion to keep everyone happy with their economic policies, they realise that one key element in achieving satisfaction for the majority is by maintaining taxes at levels which are generally regarded as fair.

    That doesn’t just entail avoiding tax hikes which affect the finances of private citizens and business alike but by being tough with those individuals and organisations trying to get out of paying their share.

    I was interested, therefore, to read about new proposals from the Labour Party for a new tax in response to concerns about the ability of some of the world’s biggest digital enterprises to limit the chunk of their enormous profits which goes to the Treasury.

    Jeremy Corbyn has suggested that there should be a “digital licence fee… collected from tech giants and internet service providers” which goes to fund the BBC (read full article).

    All well and good, some might say, given the difficulties for a public service broadcaster founded almost a century ago in competing against the giants of the new media age.

    Topping up the licence fee paid by you and I with a supplement drawn from the likes of Google and Facebook might perhaps level the playing field.

    However, although the idea might sound okay in theory, the details mean it might never come about.

    You see, this isn’t the first time that politicians at home and abroad have sought to reconcile creaking tax jurisdictions with the way in which – and where – companies now do business.

    The former Chancellor turned Evening Standard editor, George Osborne, incurred the wrath of the Organisation for Economic Co-operation and Development (OECD) by introducing something known as the Diverted Profits Tax, which came into force in April 2015.

    Perhaps misleadingly dubbed the ‘Google Tax’, it targeted multi-national companies that created profits from trade within the UK and routed those sums to territories where the Corporation Tax levels are less than the rate levied by HMRC.

    Earlier this month, the Revenue revealed that the amount of tax reclaimed as a result of the measure was a record £388 million – more than 10 times the receipts during the first year that the tax was in operation (source).

    One apparent high profile use of the DPT came in the case of the drinks manufacturer Diageo which, in 2017, was hit with a £107 million demand.

    However, last month, it announced that it had reached settlement with HMRC under which it was agreed that although diversion of profits wouldn’t apply, it had handed over a much larger figure (£190 million) “in respect of transfer pricing” (view source).

    As I’ve been telling The Times, that may well be due to a common desire among the business community to avoid the stigma of tax avoidance which comes with the DPT (read more).

    The DPT annoyed the OECD because it considered that Westminster had stolen a march on its own, very similar initiative. Months after Mr Osborne’s tax took effect, leaders of the G20 group of countries endorsed action on Base Erosion and Profit Shifting.

    Its purpose was to stop firms “exploiting gaps and mismatches in tax rules” and has been bolstered only this summer with the adoption of a Multilateral Instrument, a series of specific actions to combat the sharp commercial accounting practice (read more).

    When it comes to taxing the digital behemoths, though, things become rather more tricky.

    Once again, it appears that the British Government and the OECD are in a tax race to see who will be first to develop a framework capable of taking what’s regarded as a fair chunk out of huge rewards delivered by trade on the internet.

    The outcome was a somewhat inconclusive dead heat. In March, both the UK Treasury and the OECD published their own strategies on how to resolve the issue.

    For all the time and effort taken, the entire problem – if it can be viewed as that – comes down to one central question: where do these firms’ profits actually arise?

    We as consumers effectively sign contracts for the services which they provide in the ether. If they have structures which are perfectly legitimate and not based in the UK, even the most imaginative notions about how to take a slice of their billions may be unenforceable.

    Certainly, tax law does need updating in relation to these matters. That’s made abundantly clear by the fact that the most relevant case law in England actually dates back to the 19th-century and deals not with bytes and the worldwide web but bottles of wine.

    Furthermore, Labour’s idea about using new laws to tax new media businesses in order to sustain a far older media rival surely runs the risk of being interpreted as drawing a distinction between whether an organisation is ‘good’ or ‘bad’.

    Leaving aside the question of tax, that is an action likely to inflame both competition and criticism.

    It might, of course, simply be that Mr Corbyn’s original sentiments have been lost in transmission, if not in translation but I think his taxation plans – like those of the current Chancellor and his OECD counterparts – need a bit more work if they’re to achieve their objective.

    Read more on UK politics tackling taxes here or be sure to check out this article on financial transparency here @Enterprise Tax…

    Enterprise Tax Consultants can advise on all aspects of personal & business tax.