UK-based corporations and tax competition: what’s the story?

Last week Oxfam published this briefing about the tax rates of 25 of the biggest corporations on the London Stock Exchange, which I researched with a colleague and largely wrote. The idea was to see how their tax payments have been affected by the global phenomenon of tax competition – that is, countries slashing their tax rates to lure investment from elsewhere (which can also drive tax avoidance).

The briefing was a chunky piece of work. My colleague and I copied thousands of numbers from annual reports and used them to estimate corporations’ cash tax rates from 1998 to 2017. Then Oxfam discussed the findings at length with some of the corporations. You can read more in the briefing and in this Oxfam blog, but I thought I’d expand on a couple of interesting points.

The briefing suggests tax competition is a more complex phenomenon than concerns about a “race to the bottom” might suggest. Some of the 25 corporations are actually paying more of their profits in tax around the world than they were, though some have paid tax at pretty low rates for long periods. There is definitely a global downward trend in headline tax rates but the findings suggest it hasn’t affected all corporations equally.

(A quick note: a “headline rate” is a rate set out in law. A “cash” rate reflects the amount of tax actually paid in a given year. The latter is often lower than the former, for legitimate reasons. But if it’s much lower for a long time, you start to wonder why.)

You might say that a corporation’s tax positions arise from an interaction between the kinds of business it does, where it does that business and the choices its executives have made about its structure and finances. These things can evidently play out quite differently from one to another and not all have been willing or able to emulate US-based multinationals, some of which were said to pay tax at only around 17 per cent even before Trump’s huge tax cuts when the US headline rate was still 35 per cent.

I think this is a helpful finding for tax justice campaigners. It suggests that not all multinational corporations are equally problematic, when it comes to paying tax, and we may be able to focus more of our attention on those companies and sectors where low taxation and the risk of tax avoidance seems most egregious. Public country-by-country reporting would make this task much easier, at little cost to corporations themselves and possibly to the reputational benefit of those with relatively high tax rates.

A lot of the companies in our sample have been paying tax at rates higher than 20 per cent, sometimes much higher. This has implications for the OECD’s “BEPS 2.0” negotiations, where governments are currently arguing over new global tax norms. One idea on the table is a minimum effective tax rate on corporate profits, to put a floor under global tax competition by preventing further declines below that level.

A minimum tax rate is highly desirable in principle, and tax competition will be very hard to contain without one, but the numbers you hear talked about at the moment are in the range of 10-15 per cent. There would be a big fiscal problem if this came to be seen as an “acceptable” minimum and led countries to cut their headline rates down towards it, as the result would be many corporations paying less tax than they do now. We can’t say this would definitely happen, but it might. And I’d politely suggest that anyone who genuinely believes that to be a good thing, with all that’s going on in the world at the moment, really hasn’t been paying attention. So if there is to be a “floor rate”, it should be a good deal higher. Remember that even a decade or so ago, headline rates in many countries were 30 per cent or above (and some still are).

Encouragement might be derived from the long and detailed responses provided to Oxfam by some of the corporations in response to our findings. It’s not my correspondence to share, but what I took away is that these corporations are keen not to be singled out as poor taxpayers, let alone as potential tax dodgers. Tax justice campaigners have really changed the way that tax is talked about in industrialised countries like the UK and big business, or part of it, is seeing a need to respond in detail. In the titanic global contestation over the taxation of capital, where there are still strong downward pressures on tax rates, that seems like a small bit of good news.

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