Friday, 10 April 2015

The Non-dom "tax loophole"...

... is only a "loophole" to the extent that it can only be used by a very small and randomly selected group of people.

In the spirit of fairness - and many countries do this - why not exempt truly foreign source income from UK income tax altogether? It is called the 'territorial principle' or 'taxation at source'.

We now have this rule for UK resident companies. By and large and as long as there is no skulduggery involved, they are not charged to tax on dividends from foreign subsidiaries or profits and gains from foreign branches. And neither do they get tax relief for overseas losses.

So in theory, everybody could have his own non-dom tax loophole by setting up a UK company which accumulates all the foreign income, if and when he wants some cash, he pays himself a dividend, with an effective UK tax rate of 25% or 30.6%.

Either way, we ought to be pleased if people bring in money from abroad and spend it here, it's all good.

The really big tax leakage is when people (primarily corporate groups) do not pay tax on their UK-source income by siphoning it off abroad, and there are various tried and tested methods of combatting this such as applying withholding tax to payments out, transfer pricing rules, tightening up on the grey area between 'representative office' (not taxable) and 'permanent establishment' (taxable) and the new-fangled 'diverted profits tax'.

UPDATE: Kj, who is usually one step ahead of me, adds the other obvious counter-measure: "A protectionist but simple enough solution would be to just disallow deductions for purchases from a foreign entity, making it in effect a x% VAT on imports only."


Instead of chasing Google for the tax on income from the UK, just make payments to Google (or any business operating from a tax haven which has a UK presence) a disallowable expense (the same as fines or entertaining) from the point of a UK business which paid it. The net additional receipts are pretty much the same as getting Google to pay the tax and there is no form filling involved.


Kj said...

Yes to territorial taxation, if such is to be taxed ofcourse. Not allowing pre-tax distributions to a foreign entity shouldn't be a problem. Just abolish deductibility of interest payments to foreign entities and/or treat it as witholding tax with credits to the receiving country if there is a double-tax agreement with the contry. The real tricky stuff, for which no blanket rule can be made, is transfer pricing. Any simplification ideas for that?

Kj said...

A protectionist but simple enough solution would be to just disallow deductions for purchases from a foreign entity, making it in effect a x% VAT on imports only.

Mark Wadsworth said...

Kj, you are a genius. I have updated the post.

Curtis said...

People claim that foreign income should be taxed because you benefit from services in the place where you live.

I think many people have "casual" income from overseas which they don't bother to declare, particularly if they are not on self-assessment. Of course if we had proper land taxes then this would be irrelevant.

Mark Wadsworth said...

C, they can argue what they like, I'm talking about practicalities. LVT is the most practical solution of all, of course.