The Institute for Public Policy Research (IPPR) has urged the UK to adopt US proposals for a new global minimum corporation tax rate of 21 percent, arguing that it could close an unfair loophole and “raise vital revenue” for public services.
The recommendations were made in a report published ahead of the 2021 G7 summit in June. The UK is expected to pledge its support for the proposals during the meeting, joining the other six members of the G7 in doing so.
“There’s been a stealth injustice going on for decades now. Big, highly profitable corporations were able to shirk their obligations to society and pay much less tax,” says Carsten Jung, senior economist at the IPPR.
Large tech corporations have become notorious in recent years for leveraging this loophole, utilising a tax-avoidance tactic known as ‘profit-shifting’. The current system allows for revenues to be recorded on balance sheets in overseas territories with significantly lower corporation tax rates.
In a recent case, Amazon was found to have shifted €44bn of European sales income into Luxembourg, paying no corporation tax as a result.
Jung says the UK can “kill two birds with one stone” by backing the proposals, pointing out that the extra revenue can be funnelled into public services such as the NHS. According to the IPPR’s research, the new corporation tax rate would raise nearly £15bn in government revenue.
“Following this plan is one of the most cost-effective ways for the government to deliver on its national priorities,” says Jung. “This is the most low-hanging fruit they can go for.”
However, Biden’s proposals have not been devoid of criticisms and caveats, with a number of market participants warning of the complexities that may arise during implementation.
“It should not be underestimated how difficult obtaining international consensus is likely to be, and how many other elements of the proposals would have to be implemented to produce a cohesive system,” says Rishi Naidoo, corporate tax lawyer at Burges Salmon.
“Without global consensus and clarity of the rules, it ultimately remains to be seen how effective such a measure will be. In particular, there is likely to be sensitivity from smaller or emerging economies that are keen to use a low but stable tax rate to encourage international investment.”
In addition, there is a growing concern that the proposed rate of 21 percent may in fact be significantly reduced. Last week, the Biden administration revised its proposal, stating that a rate of “at least 15 percent” would be accepted.
The IPPR report argues that this reduced rate would forego almost half of the potential tax revenue, and would not “end the race to the bottom on tax”.
“This may be a political move to achieve universal buy-in across OECD countries,” says Tony Healy, partner at UK accounting firm Azets. “Most countries will voice open support for the plan, but behind the scenes, there will be some that are less enthusiastic, fearing this will diminish their attractiveness to the large corporations being targeted.”
Claims have also emerged that Biden’s proposals will pose a fundamental challenge to UK sovereignty, suggesting that this would represent a ceding of tax laws to the US.
Jung denounces these claims, noting that the current system already enables a lack of sovereignty to a far greater extent.
“We basically dismiss this. The current setup compromises our sovereignty because global corporations can pick and choose which tax they want to pay.
“This will increase the ability for the UK to tax corporations in the way it wants. It increases sovereignty rather than reducing it.”
It has also been argued that the introduction of a global minimum corporation tax rate will inject a much-needed degree of balance into the UK tax system, allowing HMRC to collect significant extra revenue from those who have previously evaded the responsibility, and potentially easing the strain on individual taxpayers and domestic corporations.
“I utterly welcome this change,” says Darren Fell, CEO of UK accounting firm Crunch. The UK has historically “gone after” the common taxpayer in order to supplement the avoidance from global firms, he argues.
“This is exactly what’s needed to curb the government’s obsession with going after people and small businesses for tax revenue.
“I honestly believe that HMRC’s thinking is old-fashioned. The world has changed now, and we should be ready to embrace brand new ways of taxing – but it has to start with the lowest hanging fruit.”