A strong case can be made that the new corporation tax, proposed in the latest G7 submit will hinder British competitiveness. However, whether we will ever see the proposal come to fruition is another matter; as it still requires approval and adoption from the G20, EU member states and notably has to pass through both the US Houses of Congress.
The world is in a desperate need of tax reform but the agreement signed on the 6th June by the Chancellor of the Exchequer creates more problems than it solves. It will almost universally be hailed as a triumph but in reality, it is on balance a flawed deal that could hamper Britain’s long-term ability to compete on the world stage. One also has to ask if fully implemented by the G7 will it cartelize the global economy at a time when electorates post Brexit want to take back control of their laws and their decision making?
The returns on capital which include profits and interest are currently taxed very differently from business to business and industry to industry with multinationals and smaller nationally based businesses also treated differently from each other. Some big tech firms don’t pay much tax because they make sure they report less taxable profits or are able to choose where to locate taxable activity. Companies in other sectors pay a lot more tax with corporate and capital structures often making a big difference. These inequities need tackling.
But the necessary changes must be done properly, without violating the sovereignty of nation states that choose to tax companies at lower rates than others. A proper solution, one that has long been advocated by flat tax theorists, would be to merge all taxes on capital including corporation tax on profits, taxes on dividends and interest and the rest into a new single levy on all cash flows as they leave corporate structures. Tax avoidance would be cut, everybody treated fairly, and the volume of paperwork reduced. However, this would require international agreement which would be unlikely.
Instead, it seems like we will end up with yet more accounting shenanigans as well as restrictions on national autonomy. Under the proposal there will be a global minimum rate of 15% and US Tech Giants will have to allocate some of their profits to overseas jurisdictions, allowing some to grab more tax receipts.
In the short term this might help our chancellor’s depleted coffers though this is not inevitable. Many firms in other sectors will celebrate, but it also closes the opportunity of the UK ever becoming a low tax jurisdiction, which is more likely to generate higher tax receipts.
What will happen when the pressure builds to increase the minimum to 20% or 25%? What was the point of Brexit again? It seems we left a European cartel to join a global one. Doesn’t that render the chancellor’s freeport’s proposals much less effective? Clearly, Northern Ireland couldn’t now become a corporation tax free zone in order to regenerate its economy for example.
Janet Yellen, Joe Biden’s Treasury Secretary, gave the game away when she said that “the deal would end the race to the bottom” in other words prevent countries from attracting capital and push up tax rates in the G7. I believe that it is right that US tech giants (among others) pay the same taxes as everyone else, but that doesn’t mean that every country in the world should adopt the leftist high tax agenda.
This agreement may be hailed by the commentariat as a wonderful deal and G7 nations may rub their hands at the expected additional tax revenue. However, for this agreement to be effective it will need to be implemented in the US by being passed by both Houses of Congress. This proposal may pass through the House of Representatives. However, the current administration has a very small majority in the House of Representatives so this cannot be guaranteed. Passing this legislation in the Senate however will be very difficult given the current balance of 50 seats for each party.
Passing this legislation through the Senate will require at least 60 votes and it will be difficult for 10 republican senators to vote for this measure. In addition, there will be significant pressure from US corporations to mitigate or prevent this legislation from passing into law.
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