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Taxing the immobile

Robert Peston | 16:26 UK time, Monday, 21 July 2008

The Treasury has ditched controversial proposals to raise additional tax from companies that locate intellectual property, such as drug or technology patents, in low-tax countries.

But it has simultaneously postponed plans to abolish the tax that companies pay on dividends they receive from their respective overseas operations.

The Treasury's decision to ditch the controversial tax reform is just the latest example of how difficult it is for any government to raise tax from big businesses, since in a globalised world they always have the option of relocating abroad.

That's why the burden of taxation is being shifted in many major economies to taxes that "stick" - notably taxes on consumption and on the income of individuals and small businesses, which find it relatively hard to relocate abroad.

But as the economy slows down, it is becoming harder and harder for the Treasury to increase taxes of any sort - which is why it is considering changing the fiscal rules, which restrict how much it can borrow to fund public services.

Many big companies are likely to welcome the Treasury's change of heart, which is set out in a letter sent in the last few minutes from Jane Kennedy, a Treasury minister, to the employers' lobby group, the CBI, and to the 100 Group (which represents the finance directors of the UK's biggest businesses).

A number of multinationals had warned that their tax bills would rise to unacceptable levels if the Treasury were to tax earnings generated abroad from patents and other forms of intellectual property.

Some threatened to move their headquarters overseas to escape the incremental tax.

A Treasury official said that the government had been surprised by quite how many companies feared they would pay additional tax.

Companies as diverse as the world-leading drinks group, Diageo, and the advertising giant, WPP, had been muttering about moving their domiciles out of the UK to lower-tax countries.

However, WPP's concerns were not about the taxation of intellectual property but about a related reform to rules concerning "Controlled Foreign Companies". It is unclear whether WPP's fears will be allayed.

The shadow chancellor, George Osborne, accused the Treasury of "another u-turn". Mr Osborne claimed that Alistair Darling had made seven u-turns in the year since he became chancellor.

However, the Treasury denied that there had been a U-turn. It said that a proposal had been put out for consultation and that it had responded to what business wanted.

The Treasury had been keen that the Exchequer should benefit from profits earned on patents and products developed in the UK, often with the help of UK government subsidies. It feared that some companies were developing valuable patents in the UK and then registering them offshore for tax purposes.

As a quid pro quo for levying this additional tax, it was offering to exempt from tax all cash repatriated to the UK in the form of dividends from overseas subsidiaries.

UPDATE 17:44: The Treasury hasn't allayed the fears of the likes of WPP and possibly also Diageo. Because the technical notes to the letter sent today by Ms Kennedy imply that Her Majesty's Revenue & Customs still wants to get its mits on earnings attributed to controlled foreign companies in tax havens such as Luxembourg and Leichtenstein.

So the Treasury can't yet be confident that the threatened exodus of British multinationals is off the agenda.

Comments

  • Comment number 1.

    Yet another change to the exceedingly complex rules. More money for Tax Consultants!

    I am still wondering how the last set of rules impacted upon the huge number of special investment vehicles that the banks set up for each and every trade that they did. Now we have to start again!

    One thing is sure that is the nobody - the revenue nor the companies will understand the full implications for quite some time.

    Will they ever take on board the idea of 'KISS' - Keep It Simple St....? More and more complex forms!

  • Comment number 2.

    As income becomes much more global in nature, the UK needs a rethink on the taxation of property. A straight-forward property tax charged annually as a percentage of value would be much more fair and effective than the current combination of council taxes and stamp duty. Council taxes are highly regressive and unfair to less wealthy individuals, and stamp duty discourages transactions in the property market, making the use of property much less efficient. Taxing property, perhaps using a higher rate for properties over a threshold of a something like a million pounds, would solve the whole problem of non-doms and other individuals who shelter their incomes from UK taxes yet enjoy the benefits of living in the UK (i.e. access to the legal system, culture and business climate). This would make a lot more sense than taxing small businesses which are facing enough difficulties as is.

  • Comment number 3.

    Companies don't like paying tax. Well, there is a revelation... The U-turns Darling keeps having to make to keep people happy are getting embarrassing now - it really shows the lack of foresight and understanding the treasury has of the real world, which is pretty frightening.

    And perhaps instead of subsidies, we should be making all R&D sourced in the UK as tax deductible? Corporate taxes would plummet, but the increased inward investment and job creation would surely account for that and more.

    Businesses should never be viewed as cash cows by governments, but instead as job creation cows.

  • Comment number 4.

    More chickens coming home to roost for Brown. Now that the economy is heading for hard times, the country needs a public sector which is lean, efficient and capable of reining in costs when it has to. Brown has poured money into the public sector and given us a bloated, lumbering mess, which was overspending even before the latest economic mess. The vast expansion of the public sector under Blair/Brown is going to bite us now that we are lumbered with paying for it while prices are skyrocketing and income is plummetting. So now we only have to wait for 8 weeks for an operation on the NHS. That's great, Gordon, but what about those of us who can no longer afford to buy food and fuel?

  • Comment number 5.

    I won't complain about Darling doing U-turns. He seems slowly to be bringing some much needed political direction to The Treasury.

    The 10p fiasco, the VED miscalculation, the 2p on fuel and now this suggests that government has gone too far in its lust for other peoples' money.

    There has to come a time when government in the UK accepts that companies and individuals left unattended make the economy function so that all can benefit.

    The tax burden must either be taken down by the state or the people will have to lay it down. I don't care how but the over-taxing has to end.

  • Comment number 6.

    Oh great, more for for tax those that can't afford to avoid it, again......

  • Comment number 7.

    Where have you been for the last 11 years, Mr Peston, and why have you not been commenting on the ever-increasing taxation, borrowing and waste of this New Labour 'government'?

    They have taxed just about as far as they can, which is why they are currently looking at retrospective taxes (in VED) or other countries' legitimate business profits. There is little else left to tax.

    Your inability to see this coming does you, as a supposed economic expert, and the BBC no credit at all.

    Stooges all.

  • Comment number 8.

    My understanding is that this particular problem began when Mrs Thatcher allowed Uk companies to move overseas........

    Many many years ago.

    And slowly but surely more and more Companies have cottoned on to what they can get away with.

    It's amazing how many PFI firms are based in offshore Tax Havens...............

    When the going gets tough the Rich emigrate!

  • Comment number 9.

    Why cannot this Government get it through its thick skull that stopping spending when you are in difficulty is a basic function that all individuals and companies do.

    There is waste of epic proportions in Quangos and consultants and still they spend, spend, spend. Money they havn't got and for which they will have to screw the country for yet again.

    When they have to resort to retrospective legislation to raise more money then we know we are in serious dictatorship territory, retrospective legislation in any area is immoral and unjust.

    In the recent past I was involved with the CITB (now a mish mash of agencies and hangers on) The waste was of gigantic proportions and the benefits dismal. Indeed, gigantic and dismal are serious understatments.

    That "Organisation" is not the only one, there are hundreds and more and the cost is wasted billions.
    Is it really too much to ask politicians to act with some care and responsibilty with the countries diminishing assets (and everyone elses)

    I only hope their own grandchildren ask them one day "Why" did you bankrupt Britain ?

    Grumpy BoB

  • Comment number 10.

    re #9 Grumpy Bob

    Yes I agree 100%. There could be swathes of cuts and it would hardly make a dent in services (although some people would lose their jobs). I've worked all over the place in all sectors of the economy and the waste I've seen in government depts and NHS (and also it has to be said in companies) is staggering. Very few people are able to spend like this in their private lives but give them a budget at work........I've also worked in organisations which if they were scrapped entirely no-one would notice. It is also well known that the best way to get on in an organisation is to empire-build and then a salary increase is obviously justified.

    No-one ever seems to look at what they do holistically or they are not allowed to. Just do your own job and don't look at the bigger picture. It's too frightening and anyway nobody can do anything about it. That way everyone makes their own decisions but nothing hangs together.

    No wonder we're in such a mess. Politicians seem to think they can issue edicts and somehow because they've said so it'll magically happen. Someone somewhere has to look at the nuts and bolts at all levels of an organisation and get a grip on it. This includes government itself which rarely if ever seems to be "joined up".

    I used to like that programme "Back to the Floor" where CEOs would work on the front line and get loads of suggestions for improvements to their business/service etc from the people actually doing the job. This rarely or ever happens in real organisations as business owners/CEOs/managers aren't brave enough or just don't care as long as they are alright with their fat cat salary packages.

  • Comment number 11.

    Grumpy Bob and Janchild would appear to me to be raising the right questions.

    When a family's income is reduced they have two options - borrow or cut their expenditure.

    Borrowing tends to lead to problems unless their is an upturn in circumstances before the weight of debt becomes to great.

    Tightening the family belt is not much fun but tends to lead to a more prudent attempt to manage reducing income.

    When a business faces declining revenues they can attempt to mask it by turning to debt to cover costs. Unless there is an upturn it leads to problems and ultimately insolvency. Prudent organisations address their cost base and reduce this to "survive the storm" whilst taking measures to assure revenue for the future. You only have to look at announcements from some of the global organisations now to see that prudent business leaders are trimming costs in preparation for difficult time.

    Why is it different for Government? Surely when there is a downturn the government needs to address underlying cost. If it increases borrowing as a means of funding then unless there is an upturn they will face the unpleasant reality of managing debt. Seeking to raise taxes on an ongoing basis is not sustainable.

    In the Western world we have an enviable standard of living (at the moment) compared with many countries in the developing world. If in the long term our standard of living is not sustainable then isn't time for someone to stand up and say so and start to manage the economy accordingly?

    Surely as companies seek to flatten organisations to minimise un-necessary costs and seek other means of reducing expenditure, whilst preserving essential core functions and families trim non-essential spending to allow them to continue, the government should do the same?

    There are clearly significant issues to manage here in terms of social obligations that must be met but I cannot believe that the government is unable to quickly address its underlying cost base and make changes. If it feels unable to do so, then maybe some of our business leaders, who have to make difficult decisions and "ride a storm" need a greater hand in making decisions. Alternatively a dose of common sense from some family leaders trimming their belts need to be given a stronger hand.

    Or is this something to do with Politics and not being prepared to actually address the problems we face in the future?

 

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