Paying Taxes

We all have to pay taxes, unfortunately, and those of us who try not to are normally likely to find that the consequences can be brutal. However, there is plenty of publicity given to multinational companies who appear to be paying nothing like their share of the burden. What’s going on?

If I buy a cup of coffee in a local independent café, some of what I pay will presumably end up in the coffers of HM Revenue & Customs. If I buy the same cup in the local branch of a multinational, and all the parameters are the same, then I would expect that exactly the same amount of tax will be collected by the Revenue. If that doesn’t happen, then I am entitled to ask what it is that Her Majesty’s Commissioners of Revenue and Customs are paid a salary for?

This is the argument for taxation at the point of supply. However the rules of the European Union allow a company based in a country with a lower rate of corporation tax, such as the Irish Republic, to sell goods here, and then to report the profit back in Ireland. We will shortly be leaving the European Union, so it will be interesting to see how things develop.

It is also possible for a multinational firm to invent a “royalty” which is payable to its headquarters in some offshore island which is considered to be a tax haven, so that reported profits are shifted in the direction of that haven. The law in the UK has recently caught up with this one, and such royalties may be disregarded from now on. Another device is for a foreign manufacturer to charge its British subsidiary an artificially high price. This is known as transfer pricing and has been anticipated by UK tax law for a while now. 

We can also have the combined package of low corporation tax, and the tax authorities turning a blind eye to the export of “royalties” in the direction of a tax haven. This is also likely to be dealt with soon.

I have to declare an interest here. I may want to see my software to other accountants in the future. I certainly wouldn’t appreciate a foreign competitor on a lower tax rate than me. My software was developed in Carlisle, and in fairness the profits from using it should be taxed as if resident in Carlisle always. I am entitled to exploit my knowledge of the UK tax system to minimise my tax bill, but I won’t go offshore.