Tax: our choice

In the light of the revelations over Google and Starbucks’ tax avoidance, Paul McFlynn critiques the case for devolving corporation tax.

The debate surrounding corporation tax has become surprisingly mute in Northern Ireland in recent months. The consensus seems to be that all sides have made their arguments, studies have been produced and opinions heard. All that remains, it seems, is for Her Majesty’s Treasury in London to hand down their verdict to the Executive.

While not wishing to disturb this relative peace it is worth noting that, in stark contrast to Northern Ireland, corporation tax in the rest of the United Kingdom has become something of a live issue. Two recent reports have examined the fiscal future for both Scotland and Wales including corporation taxes. Far more prominent, however, is the issue of multi-national corporations operating in the UK paying little or no corporation tax.

Recent investigations have uncovered astonishing facts about the level of corporation tax paid by some of the largest corporations operating in the UK. To be clear, none of the corporations involved are alleged to have done anything illegal, nor have they contested any of the figures that have been reported. They have said that they pay all the corporation tax that is required of them.  This is technically correct.

Governments set the rules of the game with regard to corporation tax.  Corporations are then free to play the system to maximise their advantage. Companies like Starbucks have created a system of intra-company payments and a network of operations in low tax countries which has allowed them to pay no corporate tax in the UK last year, entirely legally.

When the facts about Starbucks and many other companies became known, there was quite expectedly outrage at what had taken place. In the case of Starbucks, small café owners in towns and cities all over the UK were dismayed. Suddenly, it became apparent that not everybody was playing by the same rules. Large corporations can afford to pool tax liabilities and shift these profits to find the most advantageous tax outcome; small firms and businesses can’t.

This kind of activity is nothing new; the more polite term for it is transfer pricing. Quite why the practice has suddenly gained massive public attention is unclear. Reductions in the rate of corporation tax in the UK will have little or no impact on this practice. For instance, it is not the 12.5 per cent corporation tax in the Republic of Ireland that allows companies like Google to pay a reported overseas effective tax rate of 2.4 per cent. It is the complex network of tax allowances and exemptions that allows Google to collect all European sales profits in Dublin and then shift them as royalties to Bermuda via a quick stop in the Netherlands to collect a few more deductions, also known as a ‘Dutch sandwich’.

Proponents of a cut in corporation tax in Northern Ireland say that it is needed to fully compete with the Republic of Ireland. Recent reports show that a 12.5 per cent corporation tax is the least Northern Ireland would have to do in to compete with the Republic of Ireland. In order to equalise our situation, Northern Ireland would have to offer the requisite tax exemptions and deductions to become another European conduit for escaping corporate profits.

It is clear that the current method of calculating corporate profits is being manipulated by large firms to their advantage whilst eroding the tax base of many economies and leaving the burden on small firms and ordinary income tax-payers. This situation is clearly unsustainable and already the lawmakers in the US and elsewhere have proposed a move to country-by-country reporting i.e. collecting corporate tax in countries based on sales, activity and employment levels.

What Northern Ireland needs to decide is whether to build long-term growth on investment in people and infrastructure or whether to join an endangered breed of tax haven enablers. We cannot voice revulsion at the actions of large corporations aggressively reducing their tax liabilities while at the same time pushing a corporate tax agenda that seeks to propagate this destructive process.

Paul MacFlynn is a Belfast-based economist with the Nevin Economic Research Institute, supported by several ICTU-affiliated unions.