The Great Corporate Business Tax Conundrum

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Corporate business tax has recently become one of the most controversial political footballs in the world. In most developed countries, popular pressure is mounting on governments to impose higher and higher taxes on big business in the belief that this sector of the economy is not pulling its weight in the struggle to balance fiscal budgets. At the same time, these governments are struggling to underbid each other when it comes to setting corporate business tax rates because they are desperate to attract new overseas investment and to stop companies from moving to a foreign country where the tax burden is lower.

Tax rate by Corporate profits

Tax rate by Corporate profits

The easiest solution to this relentless tug-of-war is for governments to agree that they are all going to charge the same. This might work within an economic cluster like the European Union but there are always going to be tax havens like the Caymans and the British Virgin Islands which companies can use to shelter the bulk of their profits from tax. A huge global giant like Vodafone can quite easily arrange its affairs so that it makes less taxable profit in high tax countries and channels most of its profits to low tax areas.

One cannot help but conclude that Western governments are caught between a rock and hard place. They need to cosy up to big business in order to keep jobs and whatever corporate taxes they manage to get hold of. On the other hand, voters do not like to see large corporations failing to pay an acceptable level of tax on the profits to which they have contributed.

Corporate tax rates by country

Corporate tax rates by country

One solution to this on-going conundrum is to introduce a sales or turnover tax on revenues derived in each domestic market. Let’s take a classic example like Sir Phillip Green’s Arcadia group which owns retail chains like Topshop and BHS. At present, most of the corporate profits earned by this group in the UK appear to be largely sheltered from tax by virtue of the fact that Sir Phillip and his wife live in Monaco. If the government introduced a sales tax of, say, 2%, then it would receive £2 million on every £100 million of goods sold in the group’s shops regardless of any corporation tax liability.

The beauty of such a system is that, like VAT, it is impossible to for large companies to avoid. If sales fall in a recession, then their tax bill would fall proportionately. The only real argument against such a turnover tax is that, unlike corporation tax, it would still be payable if a company was making a loss.

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