Tuesday, 27 February 2018

Faux Lib shill gloriously missing the point.

From City AM:

DEBATE: Should tech firms be taxed on revenues, rather than profit?

Sir Vince Cable:

These large, mainly technology focused firms have been cheerfully manipulating where their profit is booked to pay minimal tax in the UK for many, many years now.

The Treasury is looking at a new tax that would be levied on these firms’ revenue, rather than profit, which is an extremely robust step – but probably one that is necessary in the current environment. A revenue-based system of taxing these firms could be used, in the short term, as a rough proxy for their economic activity and act as a strong disincentive to tax dodging in our country.

However, this is something of a stop-gap measure. In the long run, we need a proper international agreement to create a more suitable taxation arrangement that properly captures the amount of tax firms should be paying and where they should be paying it.

Note how he is being quite nuanced about it, and I have to agree.

In their published worldwide group accounts this small handful of multinationals are reasonably honest about how much profit they make in total (to keep the stock markets happy). What they can fudge to the n-th degree (and there is no scientifically right or wrong answer) is where those profits are earned. Assuming that corporation tax is a less bad tax, the only rough and ready way to work out in which country they earn their profits is to assume that profit is a certain fraction of turnover. All you need to do is multiply turnover (advertising revenues) from any country by that fraction, then multiply that by your corporation tax rate.

Countries with national and local/state profit taxes (USA, Germany) apply this method in real life and it 'works'. It is not, strictly speaking, a tax on turnover like VAT, it is a way of apportioning net profits between different geographic areas.

So if one group has a worldwide profit margin of 10%, turnover in your country of £1 billion and your country's corporation tax rate is 20%, the assumed profits are £100 million and the corporation tax thereon is £20 million (effective rate 2% of turnover). Perhaps another group has a worldwide profit margin of 30%... then the effective rate is 6% of turnover, and so on. Amazon is still in the loss-leading phase, so the effective rate of tax on turnover would be something like 0.1%.

Here comes the shill who addresses the wrong question and makes two fundamental mistakes:

Russ Shaw, founder of Tech London Advocates and Global Tech Advocates, says NO.

There is no doubt that the biggest multinational tech firms have a responsibility to contribute a fair and adequate level of tax to support the UK’s public sector. Britain’s infrastructure is a pillar of the tech ecosystem which has helped these businesses to flourish.

But officials have to recognise the positive contribution tech giants make to the thriving technology sector and critically in supporting the UK’s startups and scaleups. Just last week, Microsoft announced that it will be investing £14m and opening a new startup accelerator in the heart of east London.

In recent years, investments in tech have reached record levels, and employment in the industry has expanded rapidly. It is therefore an imperative that we ensure the UK remains an attractive destination for large investment. We must protect the digital economy by signposting the UK as being open for business and ensure that our tax policies encourage growth at a time where other European cities are gaining in appeal.

We cannot threaten prosperity by deterring world-leading tech firms.

1. These big companies are like machines that hoover up money from around the world. Clearly, they would prefer to pay the lowest amount of tax possible (same as any sane person), but as long as the overall rate is less than 100% of (unearned) profits, they are happy to hoover. They couldn't care less how the tax is calculated, they couldn't care less whether it is a "fair and adequate level of tax to support the UK's public sector" or not. Who's to say whether Vince's proposed way of working out the corporation tax bill is "fair and adequate"? The government just wants to pluck feathers with the minimum of hissing.

2. Having hoovered up the money and paid some tax, these groups have to decide what to do with it. Pay massive salaries? Pay dividends? Invest in start-up businesses? That's their decision. Having special rules that apply to a handful of multi-nationals has no bearing on whether it's a good idea for them to invest in start-ups in the UK (to whom those rules would clearly not apply) or not.


Lola said...

Hey. I have an idea. Let's scrap CT.

Physiocrat said...

All the profits made by these high tech firms end up in land values somewhere eg

Commercial locations where these firms own or rent their premises.
Desirable locations for warehouses, server farms etc.
Residential locations where high tech firms cluster.

The rights to that land value belong to the governments in which these facilities are situated.

Some of the profits may be derived from IP rights sold too cheaply, but that does not matter since they end up in land values.

Corporation Tax is like trying to collect smoke in a fishing net. Scrap it.

Lola said...

P. In any event companies do not 'pay' corporation tax (or any other tax come to that). They collect tax. The only tax that makes any sense is LVT or other user charges - e.g. fuel duty.

Mark Wadsworth said...

L, would be nice but the main focus of my ire is VAT and NIC.

Ph, CT can be and is collected. It is not as damaging as VAT or NIC, those have to go first.

L, the owners of the company bear the tax. And actually 'company' means the owners as a group, so strictly speaking, the company does pay the tax.

Lola said...

MW. I saw some research that reckoned that the incidence of CT fell on some combination of owners, employees and customers. It reckoned about 2/3rds employee. I'll try and find it. I think that what they are getting at is that an 'owner' wants to make X% return on capital. The tax doesn't come out of the X% it is added to it - which seems logical as that's what competition would do and is rather what Cable and Co. are arguing about, that paying less CT means lower prices ('unfair' competition in his false view). That is also supported by financial economic research into equity returns (divi plus capital gain/loss) which are consistent over time whatever the CT rate is.
I have not applied any thought to how IT works for Partnerships and sole traders.

Dinero said...

Owners who bought shares in the secondary market will pay less for the shares as the price is already discounted by the effect of CT on returns to owners, and so their ROC is the same. So it is not as simple to say "the owners". Maybe its the original owners or the nearest you can say is that CT moves profits from the private sector to the Treasury.

Lola said...

D. That's the point I think I am making. CT takes 'gross' profits to the treasury.

Lola said...

Serendipity strikes again! Timmy:-


Mark Wadsworth said...

L, it's only faux Libs who refer to that. In the real world, corp tax is largely borne by shareholders.

Din, good point.

L, Tim has also missed the point. He dies not understand what Vince cable or I explained. This is not a turnover tax. S company that makes zero worldwide profit would have an effective rate of 0%. Please try to follow my worked examples.

Lola said...

MW. I did follow your worked example. :-)

I am more than happy to accept - if you say so - that CT is mostly paid by shareholders - i.e. people not 'company's' (and yes I do know that the people are the company, hence 'company'.)

I think that this is very relevant to the argument. 'Giant Global Corporations' are anonymised in order to make the tax taken from them seem victimless or redistributive. But CT is a tax on shareholders (aka owners) and often these are pension funds, i.e. an other class of 'people'.

Mark Wadsworth said...

L, I'm all in favour of taxing rents. There are some large corporations which largely create wealth and some largely collect rent. The companies at whom this tax is aimed are largely rent collectors, not proper businesses.

I do not care if pension funds hold shares in such companies. They will also hold shares in companies which would benefit from VAT cuts, so it's not an issue, it all cancels out.