Nick Blundell

Written by: Nick Blundell

Nick Blundell

Partner

Fixing the international tax system

While the OECD’s work on a digital services tax continues, some feel this is a sticking plaster for more deep-rooted problems within the corporate tax system. In the last week two powerful voices have published their views on the advantages of more fundamental reforms.

Economist Martin Wolf advocates the benefits of a destination-based cash flow tax, where ‘taxes are no longer levied on the profits earned where operations are based. Instead, they are levied on profits earned where products are sold’ and there is ‘full deductibility of investment’.

Christine Lagarde of the IMF on the other hand seems more focused around redressing the issue of the effect of profit-shifting away from low-income countries. Suggesting the creation of a both a minimum tax scheme and a system which would fully tax routine profits in the country they are generated, with any income above that being shared amongst the other countries involved.

There is a reported $200bn a year lost by low-income countries from companies shifting profits to low-tax jurisdictions. 

But is it really the job of the tax system to support these countries when every country has its own demands and economies to look after? 

Either way, the need for a multilateral agreement on the allocation of the profits within this method could be preventative.

Wolf encourages a post-Brexit UK to take up his recommendations. But with the amount of uncertainty businesses are already facing, surely this isn’t the right time for such change which could introduce more uncertainty – on both individual tax liabilities and the economy?

It can sometimes feel like the entire tax system is being designed to tackle a handful of multinationals. With more than half of the UK corporate tax take coming from the top 1 per cent of companies these issues do need to be addressed, but where would these changes leave SMEs?

The tax system is complex enough. At least DST, CIR and the like have de minimis levels which mean that most SMEs aren’t caught by their complexities and additional compliance requirements. Nevertheless we remain concerned that future developments in taxing international business might have a dramatic impact on SMEs by involving them in extra red tape.

If the global corporate tax system was being designed from scratch, there may be some merit in these ideas, but it’s hard to imagine a world without competitive tax systems, so perhaps we won’t be seeing such seismic changes anytime soon.

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