Global Britain: How should the UK approach reforms to international corporate taxation?

Opportunities and challenges of international corporate tax reform
Jenevieve Treadwell
December 21, 2021
Global Britain: How should the UK approach reforms to international corporate taxation?
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Global business has turned tax into just another trade. Along with unprecedented innovation and prosperity, the chance to divorce profits from products has made a market out of a duty. In an obscure cloud of connections fairness and responsibility are being offset as organisations negotiate around what were once clear obligations based on geography. The OECD agreement on international tax reform is an attempt to end this reverse auction. It is also an optimistic bet on voluntary multilateral agreements.

Tom Tugendhat MP Member of Parliament for Tonbridge and Malling

This is a summary report from an Onward roundtable held in partnership with the Joffe Trust

This September, as interest around the OECD’s Two Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy mounted, Onward held a private roundtable in partnership with Joffe Trust. The roundtable established the need for reform, with unanimous agreement that the current system is unable to cope with a more complex and global trade environment. Two particular elements of the current system were focused on by the group of participants.

Problems with the global tax system:

First, there was concern about the so-called ‘race to the bottom’ in international tax rates. There are vast disparities between the different corporate tax rates levelled by countries across the world – from 50% in Comoros to 0% in the British Virgin Islands. Overall the OECD’s median international corporate tax rate has halved in the last 30 years. Even for those who believe in lower taxation overall, this means that companies will often base their headquarters in favourable tax locations, while still generating income in other countries where the tax burden is more pressing.

This leads to the second problem: Base Erosion and Profit Shifting (BEPS). Currently, there are two main forms of international corporate taxation – source – and residence-based taxation. Source-based taxation taxes income where it arises, i.e. the country in which a product is built. Residence-based taxation taxes income where the individual or company is resident, i.e. where the product’s company is based.

This system appears increasingly unfeasible as product design, ownership, manufacture, assembly and sale are often dispersed across the globe. This allows many multinational enterprises (MNEs) to exploit the gaps that exist between different tax systems to pay less or no corporate tax, increasing the burden on individuals and undermining the Exchequer. The politics of this have become untenable, with highly profitable MNEs paying little to no tax, while individuals and smaller independent shops struggle and high streets disappear.

It is these systemic issues and their consequences that the OECD agreement is trying to resolve. The roundtable discussed how these challenges could best be tackled, discussing the appropriateness and feasibility of the OECD’s proposed two pillar reforms.

Opportunities and challenges:

The discussion focused on the benefits, limitations, threats and opportunities that these reforms presented. There was agreement that the international community should be commended for reaching an agreement, itself no mean feat in such a combative international environment. The participants also agreed that the package was an important and necessary step towards a more coherent international tax system, even though it is unlikely to be the financial boon to the UK that it initially appears.

Realism, it was argued, needs to begin with what the UK can expect from the OECD agreement. The group largely agreed that the financial benefit will be relatively limited. But they were also clear that creating a better international tax structure is in the interests of the UK. The benefits will firstly be found in the establishment of a more stable global structure that will better be able to deal with the challenges posed by a globalised economy.

The second benefit will be felt closer to home, as the public will feel their concerns and frustration over an unfair tax system were appropriately responded to. These wins may feel small in comparison to the grand aspirations laid out by others, but it was largely agreed that these reforms were just the beginning and if they are to pass they will lay the groundwork for future improvements.

Global-Britain

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