Starbucks and Tax in an Independent Scotland

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The debate on the topic of fair payment of corporate taxes which is currently raging in Westminster has a profound message for an independent Scotland.  How do we effectively tax trans-national corporations on their earnings?

What is to prevent a company based in the rest of the UK loading up their expenses on their Scottish operations and consequently paying little or no tax in Scotland.

Lord Ashcroft on his website ‘Lord Ashcroft Polls’ has set out the problem very succinctly and proposed a simple solution for the Chancellor:

“Over the last few weeks we have heard a good deal about the tiny amounts of corporation tax being paid in the UK by companies like Starbucks, Amazon and Google. Executives from all three were grilled by the Public Accounts Committee last month; others are sure to follow.

The problem, in a nutshell, is this. Overseas subsidiaries of global companies, incorporated in countries with lower tax rates, can charge royalties to fellow subsidiaries in the UK, or supply goods with a mark up, in order to channel profits between the two subsidiaries and therefore between countries. The effect is to reduce the profits of the part of the business based in Britain, and therefore the tax payable here.

All of this is perfectly legal – but at a time when the public finances need all the help they can get, I have a simple proposal that, if it works, may benefit the Treasury.

The suggestion is to levy a withholding tax of, say, 25% on royalties paid from the UK to an overseas recipient. This could be extended to all management and professional fees paid overseas. It could even apply to the purchase of goods where the payment is received by an overseas affiliate. In cases where there is a double tax treaty with the UK, I believe such a withholding tax would be a tax credit in the overseas company.”

We should take careful note of what Lord Ashcroft says, he is after all, an expert on overseas tax havens.

His solution is one that is adopted by many small countries to protect tax revenues from the manipulations of trans-nationals.  One variation is to allow a company to remit a maximum percentage of revenue, say 10% to cover head office and other corporate expenses, and then to apply withholding tax to any further transfers of revenue.

Another method trans-nationals use is to artificially price the cost of goods transferred between corporate entities in order to take the profit where the tax regime is most beneficial to the corporation.  This is much more difficult to police, but if over pricing of goods is going on then it should result in increased VAT payments, provided of course that the items are not VAT exempt or zero rated.

Lessons should be learned from the current debate and appropriate safeguards must be built into any future tax regime for an independent Scotland.