Corporate tax, revenues and avoidance
Helen Miller
© Institute for Fiscal Studies
1978-79
1980-81
1982-83
1984-85
1986-87
1988-89
1990-91
1992-93
1994-95
1996-97
1998-99
2000-01
2002-03
2004-05
2006-07
2008-09
2010-11
2012-13
2014-15
2016-17
£ billion (2011-12 prices)
60
12%
50
10%
40
8%
30
6%
20
4%
10
2%
0
0%
Real Corporation tax receipts (LHS)
© Institute for Fiscal Studies
Source: figure 10.1
Percentage
Corporate tax receipts
12%
50
10%
40
8%
30
6%
20
4%
10
2%
0
0%
Real Corporation tax receipts (LHS)
as share national income (RHS)
as share current receipts (RHS)
© Institute for Fiscal Studies
Source: figure 10.1
Percentage
60
1978-79
1980-81
1982-83
1984-85
1986-87
1988-89
1990-91
1992-93
1994-95
1996-97
1998-99
2000-01
2002-03
2004-05
2006-07
2008-09
2010-11
2012-13
2014-15
2016-17
£ billion (2011-12 prices)
Corporate tax receipts
12%
50
10%
40
8%
30
6%
20
4%
10
2%
0
0%
Real Corporation tax receipts (LHS)
as share national income (RHS)
as share current receipts (RHS)
© Institute for Fiscal Studies
Source: figure 10.1
Percentage
60
1978-79
1980-81
1982-83
1984-85
1986-87
1988-89
1990-91
1992-93
1994-95
1996-97
1998-99
2000-01
2002-03
2004-05
2006-07
2008-09
2010-11
2012-13
2014-15
2016-17
£ billion (2011-12 prices)
Corporate tax receipts
Q. What is the UK trying to tax?
• A: profits that are created in the UK
– can be distinct from profits that arise from the sale of products in the
UK
• with allowances and deductions that reduce taxable income
(capital allowances, R&D tax credits, loss carry forward)
• What is avoidance?
– HMRC: ‘bending the rules of the tax system to gain a tax advantage
that Parliament never intended. … It involves operating within the
letter but not the spirit of the law’
– commonly involves exploiting ‘loopholes’
– also opportunities to reduce UK taxable profits by shifting income to
a lower-tax jurisdiction
© Institute for Fiscal Studies
Q. Why is measuring UK profit difficult?
• Conceptual difficulties:
– multinational firms have highly integrated activities across multiple
countries - hard to assign profits; often no clear principled definition
– e.g. Dutch company creates and owns intellectual property that UK
company uses to make a sell product in UK
• royalty payment from UK to NL should reflect the value of the technology
• difficult to ascertain royalty when activities complementary
• Practical difficulties:
– firms may manipulate ‘UK profit’ to avoid tax
– broadly: increase deductions used in high tax country & profits
declared in (relatively) low tax jurisdiction
– e.g. locate IP in a low tax country (possibly separated from real
activity)
© Institute for Fiscal Studies
The system allocates profits via prices
• Arm’s length principle to set intra-group prices
– prices set as if transaction between unrelated parties
– but often no market price, and in some cases no conceptual price –
hard to accurately determine what the arm’s length price is (and
therefore where profits should be taxed)
• Transfer pricing rules to enforce arm’s length principle
– governments follow OECD standards
– firms required to provide documentation to support arm’s length
prices
• Some of problems inherent to the way profits are allocated
© Institute for Fiscal Studies
Not known how much is lost to avoidance
• Need to estimate how much tax ‘should’ have been paid
– requires distinguishing between commercial activities and avoidance
• HMRC: £4.1 bn corporate tax gap in 2011-12
– measure not geared towards capturing profit shifting
– therefore underestimates lost revenue
• Make assumptions about UK taxable profit and get much bigger
figures
– hard to account for deliberate elements of tax structure or genuine
commercial activities that reduce liability
© Institute for Fiscal Studies
A new tax system?
• Unitary approach: use a formula based on real activities to
allocate profits
• EU proposal: Common consolidated corporate tax base
– single set of rules define tax base; formula used to allocate profits to
countries; countries choose tax rate
• Remove opportunities to exploit different location of profits and
costs; location of profits related to real activities
• Still problems with profit shifting outside the EU
• Political difficulties
– some countries would lose revenues
© Institute for Fiscal Studies
Summary
• No decline in real revenues to date but by 2017-18 still below
2011-12 level & lowest level as share of all receipts since 1984-85
• Main rate cut from 28% in 2010 to 24% today, to 21% in 201415 (with some base broadening) and introduce 10% Patent Box
– create ‘most competitive corporate tax regime in G20’
• Lower UK burden reduces incentives to shift profits
– still losing revenue & Patent Box creates additional problematic boundary
– competitiveness a moving target
• Rules to prevent profit shifting
– some of the problems are inherent to how system allocates profits
© Institute for Fiscal Studies