To judge by the row over Barclays corporation tax payments many people in the Uk think British business gets off lightly. They argue that if only business was stopped from avoiding tax, the deficit could come down with no painful decisions.
Many have pointed out that Barclay’s low corporation tax charge for 2010 was the simple product of two tax rules. The first is, companies do not pay UK corporation tax on foreign profits earned abroad where those profits are taxed by those overseas jurisdictions. The second is, if a company lost a lot in a prior period it can offset recent profits against those losses. Remember, the taxman does not give tax back when a company moves into loss. Profits Tax is a one way bet for the taxman.
A recent piece of work from the University of Calgary, reported by the Cato Institute in the USA, brings us up to date with levels of corporate tax. Chen and Mintz, who did the study, asked how much tax does a company have to pay on new investment in each country. It is the best question to ask when trying to decide who is going to attract most new investment and jobs. The UK (along with the US) does not come out well from this comparison.
Effective tax rate on new investment:
New Zealand 17.6%
Hong Kong 4.0%
These figures are worrying. If the UK wishes to keep all its successful financial and business services industry, it needs to note that the main competitors for this business, Hong Kong, Singapore and Switzerland, all have much lower rates of tax. If it wishes to keep its successful recruitment of Head quarters operations for multinationals, it should worry that the Netherlands is now much more attractive as well as Switzerland and the Asian centres. If it wishes to grow its manufacturing base in accordance with Uk government policy, the fact that Chinese tax rates are so much lower, and even German rates usefully below should also give pause for thought.
All those badly informed critics of Barclays need to know that no government, Labour or Coalition , is going to try to tax the overseas profits of UK headquartered businesses. That would be double taxation and lead to an exodus of many companies. Nor is any likely government going to disallow the carry forward of losses to offset tax. This is not unacceptable tax avoidance. It is just one of the norms of international tax regimes. We have to live in the world and make our living in it. Other jurisdictions offer these advantages. They add to them lower rates.