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Opinion: What future for corporation tax?

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15th Apr 2005
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AccountingWEB contributing editor Richard Murphy considers the future of corporation tax in the light of recent developments in Europe.

Richard MurphyThese are interesting times for those involved with international tax.

First there was Advocate General's Opinion in the Marks & Spencer group relief case, and now guidance on the way in which the Halifax etc. VAT case might go.

But the interest is not just in the detail of these cases, fun though there is to be had there. At a policy level these issues, and especially the M&S case, leave many questions in need of answers.

That the Advocate General has found broadly in favour of M&S is no great surprise to anyone given the history of the ECJ and the current state of thinking in Europe on the application of competition and rights laws to taxation.

Profound effect
But the issues it gives rise to are profound, especially when we currently have a Chancellor who is adamant that taxation issues affecting the UK will remain within his sole domain, and the main opposition party are fundamentally hostile to European based intervention in our economy.

What the case says is that whether they like it or not, their positions are now untenable, and the businesses (whose support they are so keen to foster) appear to wish it that way.

It's a simple fact that Europe is having a profound effect upon the development of UK taxation law and practice, and this is likely to be the case. And the failure to engage with that process at a political level is profoundly harmful to the best interests of the UK.

What we now have is a situation where a company based in the UK cannot be directly taxed on the trading profits it does not earn in the UK if they are held (and not distributed) in a European subsidiary (certain CFC conditions excepted).

But such a company can suffer losses in those territories and use them to relieve taxation liabilities in the UK. Now I am aware that the Advocate General has suggested minor changes to UK legislation that might prevent this situation arising in the future, but the fact that it has occurred is indicative of some things more important than the detail. These are:

1. That the UK's supposed territorial limits on the control of taxation are not absolute, but are highly permeable. But this is a one way flow. Taxation revenues may leak from the UK, but the reverse is not true. This makes no sense at all.

2. The balance of power in the battle between the global corporate taxpayer and the UK revenue authorities is shifting towards the corporations and away from the forces of law.

3. The EU is the agency that does, at present, have the means to correct this situation.

These three observations pose further questions, all of them based on what I think is a reasonable assumption, that we will remain members of the EU. They are not as such political; they are instead pragmatic. They are:

  • How much revenue does the UK have to lose before the fact that its taxation system is, as a matter of fact, part of a wider European system politically recognised?
  • When will the governments of the EU realise that the simplistic model of competition enshrined in EU competition law acts contrary to their own duties to their citizens, to impose fair taxation and to act in unison to either change that model or to limit its impact on taxation law (in which respect the Halifax case might be a welcome step)?
  • When will the EU realise that if a fair market is to be created on a Europe-wide basis (which is a concept with which I have, overall, little difficulty) then a European basis of taxation of the resulting profits earned is the only appropriate consequence?

Of course taxation on a European basis is controversial, but as a matter of fact we have lived with EU-based VAT for over 30 years now. And we are, whether we like it or not, living with EU-influenced corporation tax law now.

European corporation tax
So it is only a matter of time before the inevitable consequences of behaviour as evidenced by the legal actions led by M&S and others will require appropriate political responses, whatever Gordon Brown and Oliver Letwin might say now.

All that troubles me is that we should be prepared for such changes. A European corporation tax is made easier by the introduction of IFRSs.

It would be made easier still by appropriate requirements for nationally-based segmental reporting within those statements. And it will be assisted by sound research now on methods of apportioning consolidated profits to geographical places.

Of course this will involve an element of judgement, and occasional arbitrariness. But then, so do current systems. Certainty is a holy grail in taxation that will never be achieved.

But what is better? A system where the arbitrariness of the outcome is dependent upon the whim of corporate structure, ongoing tax arbitrage and the shifts of political whim in newly admitted member states, or one based on sound technical research designed to ensure as far as possible that profits are taxed once, and once only in the country in which they are earned, determined in accordance with a system known in advance?

I suggest the latter, and think it only a matter of time before politicians will as well.

M&S and their advisers might be well pleased with themselves right now, but pendulums have a habit of swinging, and I don't think it will be long before this one does. Pressure on the UK budget will mean it has to.

Richard Murphy

Richard Murphy is a chartered accountant and director of Tax Research Limited.

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