IntroductionMany multinationalcompanies, apparently operating very successfully in the UK, are paying littleor no local corporation tax.
Corporation tax is a tax on profits, so if acompany makes no profits, it should not have to pay corporation tax. Theinternational corporate tax standards have struggled to keep pace with changesin global business practices, with an increasing share of trade taking placeonline. International tax standards have remained largely unchanged for over ahundred years and now need to be updated to prevent gaps from being exploited. InFebruary 2013, G20 are initially reported by the international Organization forEconomic Cooperation and Development (OECD) for dealing with profit shifting bymultinational corporations. Although governments enforce by displaying rulesand regulations, still multinational companies try to avoid paying taxes.
Tax avoidance involves bending the rules of thetax system to gain a tax advantage that Parliament never intended. And alsocurrently, UK government is seeking to lower corporation tax. Tax Avoidance in UKTax avoidance isthe legal usage of the tax regime in a single territory to one’s own advantageto reduce the amount of tax that is payable by means that are within the law. Manymultinational companies are avoiding taxes by using different methods such asTransfer pricing, Country of residence, double taxation, Legal entities, andLegal vagueness, etc. According Britishtax authorities, multinational companies avoided paying corporate taxes in UKabout £5.
8bn by booking profits in overseas entities, a 50 per cent increaseover previous government forecasts in 2016. The following examples avoidedpaying taxes in UK:Netflix: British customerstypically pay £5.99 a month for Netflix, the latest UK filings show.It registered a 39 per cent fall in its UK tax bill to less than €300,000 in 2016, while its UKrevenues and profits almost split to €22mand €1m respectively. The company has more than 80 million subscribers but said it employs just 13staff in the UK.
A total of €2.78m (£2.5m) was spent on wages, salaries, socialsecurity and other pension costs, meaning each employee received an average of€214,000 (£193,000). Netflix UK classifies all its employees as involved inmarketing.
Netflix UK says all revenue earned in the UK is for the “provisionof marketing services”.The oil giant Shellis among the multinationals with an outpost in the canton from where itlicenses its trademarks around the world. According to A Sunday Time Analysis,Shell paid no UK corporation tax in 2014 or 2014/15 through it made globalprofits of £19.87bn. Shell said it was not paying UK corporation tax because oftax relief on £1.4bn of investments in the North Sea, and because of decliningproduction.
And also it made a loss in the UK in 2014 and Shell UK paidroyalties to SBI in Switzerland, but that this accounted for less than 2.5% ofSBI’s income. A spokesman said its overall global effective tax rate was about48% and it was transparent about the management of its tax affairs.Another company which paid little corporation tax is Thomas Cook, a travel agent. The travelagent paid a tax bill of £8million but it is just over 5 % of the £152 million operating profit it makes in the UK, where it has 719 HighStreet stores and 8,800 employees. And as a percentage of the firm’s £2.3billion sales in UK 2016 that corporation tax bill is tiny. The travel agentsays it is down to losses made in previous years.
It went back into profit in2015 after five years of red ink. Global corporations have been able to use elaborateavoidance mechanisms get out of paying their fair share of corporate tax. And itis not fair. Tax evasion is aimed at avoiding socialobligations. Tax avoidance can lead to the company being prone to accusationsof greed and selfishness, harm society and getting rid of public confidence. A”fair” tax payment in the countries in which they operate isconsidered socially responsible for the companies.
Taxes provide funds forpublic services, such as infrastructure, health, education and publicinvestment, which directly and indirectly benefit businesses. In other words, tax avoidance is a scourge on society that undermines publictrust and deprives the public services of the funds they desperately need.But in the case of multinationalcompanies that ultimately cannot bear the tax burden or other burdens. The taxburden paid by the corporation is constituted by the shareholders in the formof reduced dividends, by the employees in the form of reduced fees, by thecustomers in the form of increased prices or if the company has a lot of effectleverage on the market by suppliers in the form of reduced prices. The cause of the problem is the current international tax system which isout-of-date system and created almost one hundred years ago.
Over time,international companies have achieved more to transfer profits to tax areas: in2012, more than a quarter of these profits were transferred to avoid taxes.Meanwhile, the governmentrevenue’s share from corporation tax has fallen in countries such as the US andthe UK.Globalregulation needed to strict because some of the activities of MNEs are outsidethe reach of national law. MNEscan encourage governments in both home and host economies to reduce their socialand environmental standards and also Trade unions in developed countries resentthis behavior of MNEs.
Generally, the global community has not been able tocontrol MNE behaviors. Governmentsdon’t want to control MNEs, even though they may say they do becausemultinationals are too big and they might leave if the government rules are tooonerous. It is politically too complex to argue that companies pay more tax,but government and business should ensure that corporate tax contributions area demonstrably fair return to society.
Why UK Government seeking to lowercorporation tax?The United Kingdom hasannounced its intention to reduce corporate taxes to less than 15% and try toalleviate the impact of the country’s decision to leave the European Union andincrease the prospects for competitive tax cuts. The violation of the EU andthe uncertainty associated with it will hurt the companies and will damage theeconomy of the United Kingdom. Due to Brexit, the UK economy will have the mostinfluence, although there may be doubts that it will also have a significantimpact on the rest of the EU.The Sunday Time reported that the proposal to reduce taxes formultinational companies from 20% to 10% can be used if the EU Member Statesnegotiate the Free Trade Agreement with the UK or deny to access financial servicesof the UK on the EU market. If Brexit negotiations do not go as they expectation, UK governmentminsters could cut corporation tax by half. In April 2016,as the Treasury publication, the long-term economic impact of EU membership andthe options has been estimated to lower foreigndirect investment flows to the United Kingdom from 10% to 26% in the case of UKdeparture. FDI raisesnational productivity, also both output and wages. Multinational companies offer better technical and leading knowledge, whichdirectly increases production on their operations.
Multinationalcompanies bring in better technological and managerial know-how, which directlyraises output in their operations. FDI also stimulates domestic companies toimprove for example through stronger supply chains and tougher competition. Andalso, UK is the largest recipient of FDI in the EU, Brexit could reduce theattractiveness of the UK as a gateway to Europe, it could also lead to areduction in investment from the rest of the EU which is the biggest source ofFDI in the UK. It may become harder to attract corporate HQs. The EU was thesource of 4% of the stock of FDI in the UK in 2013.
This dependence has fallensomewhat in recent years, with the EU share down from 53% in 2009. UK has an FDIstock over £1 trillion, about half of which is from other members of the EU.Part of the UK’s attractiveness for foreign investors is that it brings easyaccess to the EU’s single market. After Brexit, higher trade costs with the EUwould be likely to depress FDI. Many large European corporates are heavilyinvested in the UK and the commercial logic for the investment could be affectby Brexit. UK already has one of the lowestcorporation tax rates in the EU but ministers believe a further cutcould help keep companies in the UK and attract new investment. On the otherhand, other EU states could fear losing business to the UK should Britain allowcompanies to keep more of the profits they create.The British Chamber of Commerce(BCC) has called on the government to maintain its current 19% rate, butinstead cut property taxes and other lump-sum payments demanded of economy.
Current, the UKcorporate tax rate is 19% and government plans to cut its corporate tax rate to17% over the next three years. The UK would lose morethan £20 billion or tax revenue each year which is a large amount and is onethird of the total deficit expected in the UK. And many businesses do not wanta cut.
Starbucks Executive Chairman Howard Schultz said about reducingcorporate tax rate to lower than it exits that it is not tax reform, it is atax cut and it is fool’s gold. Critics say that this is the onlyaccelerate a race to the bottom.Suren Thiru, head of economics andbusiness finance at the BCC stated that to create a competitive businessenvironment, the focus should be on reducing the burden of upfront businesscosts and taxes and that would helpstartups and companies struggling to make a profit more than a cut in tax ontheir income. According to the head of U.K. tax policy at Deloitte, BillDodwell, UK government can do “broad agreement” in the businesscommunity that providing targeted relief would be more beneficial than a lowercorporate tax rate.Although UK government is afraid of losing FDIinvestments after Brexit, cutting corporate tax to fall to 17 % by 2020 is notthe most effective and efficiency way for UK economic growth. The UK alsomaintain inward FDI flows by providing significant laws, especially labour lawas they have highly educated and skilful labours.
In addition, they can do effectiveand efficiency cross border relationships with other countries. IntroductionBritish PrimeMinister, Theresa May signed a letter to European Council President Donald Tuskinvoking Article 50 of the Lisbon Treaty formalising the United Kingdom’swithdrawal from the European Union on March, 2017. Then, UK would face theprospect of a “hard Brexit”. Members of the European Union have the same tradingpolicy and are represented by the EU in all international trade negotiations.The UK will become independent players with the freedom to seek its owncommercial transactions with the rest of the world following Brexit.
The UK canuse this freedom to seek new trade agreement deals with countries such asChina, India and the United States. But there would not be easy for UK to standas a single market after Brexit. Foreigndirect investment (FDI) comprises investments from outside a country to set up newestablishments, expand existing ones or purchase local companies. According togovernment body UK Trade & Investment, the UK has an estimated stock ofover £1 trillion of FDI, and only the United States and China have more. Abouthalf of this stock of FDI is from the European Union (EU).Foreign direct investment (FDI) means investments fromoutside a country to create new establishments, develop existing establishmentsor buy local businesses. According to the government agency Trade &Investment of UK, the United Kingdom has an estimated stock of more than 1billion pounds of FDI, and only the United States and China have more.
Approximately half of this stock of FDI comes from the European Union (EU).An importantreason for inward FDI to Britain is unfettered access to the EU Single Market,so reduced access will make the United Kingdom a less attractive destination.Randolph Bruno and others (2016) estimate a gravity model of FDI between 34OECD countries and find that Brexit would likely lead to a fall in FDI to theUnited Kingdom by over a fifth. Dhingra and others (2016) calculate that such afall would reduce GDP by about 3.4 percent. Quantifying the relationship between FDI and growth isextremely difficult so the exact number is subject to considerable uncertainty.But it suggests that falls in FDI would matter for living standards in the UK. Japanese inward investors have been asecond thought about the future investment in the UK depends on tariff-free and barrier-free trade with the EU that is asuncomplicated and predictable as possible.
A Japanese government memorandum hasexpressed concerns over the continued viability of Japanese investment in theUK in the event of a hard Brexit without access to the Single Market.Uncertaintyover Brexit could jeopardisefuture investment in the UK by Toyota and Nisscan. Nissan announced in Octoberthat it would build its next generation Qashqai sports utility vehicle and anew X-Trail model at its north of England facility but it has also commentedthat Nissan will review its decision after the form of Brexit is clearer. Andalso, Toyota announced plans to invest£240m in its plant in Derbyshire in March before the Brexit. Those that are household names (such as Nissan and Toyota) arelobbying hard to cut special deals with the government.From translationalcost theory point of view, there can be increased transaction costs in theUK economy. British automotive industry is particularly vulnerable to changes inforeign trade by Brexit. Car manufacturing firms will face 10% tariffs onBritish-manufactured cars to enter the EU.
They would also be difficult toimport as it would be increased translation costs and other goods sourced fromthe EU. According to Aliber’s Theorem (1970), corporationsinvest to the foreign countries which have lower currency rate than the hostcountry. Therefore, only high currency rated countries can come to invest inUK. Exchange can impact on FDI inflow as after the Brexit referendum votes werepublished, the financial markets showed a radical drop of British pound inrelation to other strong world currencies. During the year 2015, the exchangerate was above 1.35 GBP/EUR, in the first 6 months of 2016, before the Brexitreferendum, the rate was around 1.
30 GBP/EUR. Following the results of thevote, a major fall of the pound occurred, and the exchange rate since the votehas been around 1.15 GBP/EUR, resulting into more than 10% of depreciation ofthe British pound against the Euro. Figure1: GBP to EUP Exchange Rate(source: xe.com)According to OLI (Ownership, Location, andInternalisation) Paradigm, Brexit can hinder inward FDI to UK from foreign companies. The UK needed toconcern is about immigration issues. Immigrationhelps address skills shortages and the consequences of an aging population.
Free movement allows UK firms access to specialist skill that are increasinglyimportant to high-value added industries. If the UK adopts the Norwegian or Swiss model, UK muststill sign the freedom of employment. As other government models are chosen tocomply with EU immigration laws with a lack of content in the EU. Restrictionsagainst immigration can be unfair in London and affect thecompetitiveness of businesses located there. These Brexit-related trade effects are of specialconcern to Toyota and Nissan, whose British operations are deeply integrated inpan-European sourcing and distribution. Nissan has manufactured 500,000 cars per year in the UK,55% of sales is from export to the EU’s. Also, Toyota’s produces 180,000 carsannually in UK, 75 percent of which are exported to the EU. In addition toheightened tariffs on both ends of their European supply chains, thesetransnational car manufacturers would face increased logistical costs and borderdelays as the UK exits the duty-free EU zone.
Although UK haschampioned the single market but being outside of the EU would no longer be aneffective advocate of further liberalisation. UK critics often complain aboutEU regulatory excesses, but many regulations are intended to create the levelplaying field the single market requires which investors might concern either. Sincethe Brexit vote, foreign investors have continued to open headquarters in thecountry. Announcements from Boeing, GlaxoSmithKline, Google, Facebook, Apple,Jaguar Land Rover, Tata, and McDonald’s have all indicated that these companieswill continue to invest in the UK despite Brexit. Even though some companieswould continue their investments, there is still losing almost £10 billion ofannual inflows after Brexit. Therefore, UK government need to reduce this downward trend in inward FDI.
As the resource based approach, UK has already strong rule oflaw, flexible labor markets and a highly educated workforce, all of which makeit an attractive FDI location whether or not it is in the EU. Supporters of Brexitclaim the UK could attract more FDI outside the EU as it would be able tostrike even better deals over trade and investment.As a single market, there would bepossibility of greater barriers to trade with the rest of European countriesand the UK economy has benefited from migrant labor as an example: constructionsector has a high percentage of Eastern European workers. Without free movementof labor, there may be a greater unwillingness to invest in UK.
Hence the onlyway that the UK may seek to attract investment is through aggressive cutting ofcorporation tax. Largemultinationals, such as Apple, Google and Microsoft have sought to invest incountries with lower corporation tax rates. For example, Ireland has beensuccessful in attracting investment from Google and Microsoft. In fact it hasbeen controversial because Google has tried to funnel all profits throughIreland, despite having operations in all European countries.
Taxesare a big issue for multination companies as they are targeted by governmentsto pay taxes and are carefully monitored (IFS, 2007). Taxes are part of business and wherever thebusiness is run, the host country wants to participate. This is where the hostgovernment can intervene sooner through mediation and taxation policies and theprivatization of local businesses.
It is logical that governments would raisetaxes for foreigners to limit FDI flows (OECD, 2001). Buildingupon privatization of firms is a reasonable method in the quest for growth. Privatizationis the transferring of public services and assets to private firms, from whichbrings a change in the way they are managed. This privatization offers many incentivesto foreign companies that can act alone for their interests.
UNCTAD (2009)shows that privatization is the main incentive for foreign direct investment.It boots FDI inflows and allows companies to use human capital and corporatebrand, while developed countries have the highest human capital andtechnological progress. Therefore, UK can attract foreign investment throughreducing tax rate. However,reducing corporation tax too much can be negatively impact on the country sothe ministries should be careful about reducing tax percentage rate. And alsogovernment can also consider “broadagreement” in the business community which providing targeted relief wouldbe more beneficial than a lower corporate tax rate.