Tax, the evil American corporation and my little bright idea

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Things are going to get a little serious around here, because today we are talking tax. Just in case tax is not your thing, I have included the American taxpayer diagram put together by the Guardian. So you tax-phobes have something pretty to look at while your head is in the sand.

The simple story* is that many big American corporations operating in the UK, such as those in the diagram above, are not paying enough tax. Actually some, like Starbucks are not paying any tax. This makes me furious.

I understand that by using transfer pricing and clever interpretations of tax legislation, paying this amount of tax is not illegal. I would bet money on the fact that these corporations have some very smart people with reams of paper backing up the fact that this is not illegal. However, it is ethically questionable.

If someone asked you what amount of tax Starbucks should be paying in the UK, I am fairly confident that your answer would not be zero percent. I should not be paying more tax in the UK than Starbucks.

So what is my solution I hear you ask (I can hear the sarcasm in your tone). I think the HMRC should have a period of Tax Amnesty. Essentially, it would be one year in which companies could restate their tax position (to a more conservative one) without any penalties being imposed or fear of legal recriminations.

The Government would gain a massive cash injection which could be used to prop up the public sector. The downside is that they would miss out on any revenue from penalties, as well as revenue from accepting a reasonable amnesty position rather than an ultra conservative one. But in the middle of a recession the short term cash burst is far more important than long term drawn out theoretical gains.

Companies would go for it on two fronts. Firstly they would be guilted into it after the shear amount of negative publicity – they would be able to market the fact they are stepping up and righting their tax wrongs. They would also get greater certainty, for example paying £50m now rather than potentially having to pay £100m next year (conservative tax amount plus penalties).

The Government would have to back this up by threatening an in depth review of all foreign (and domestic) corporate taxpayers after the Amnesty is finished. The hardest part of this scheme would be deciding what a reasonable tax position is. Given that the corporate tax rate is 24% in 2012, I would vote that anything higher than 18% of accounting profit (much like Facebook’s tax above) would be a reasonable rate.

If that was followed, the tax profit from the above companies alone would be £417m. That is an increase of £361m just by accepting a lesser short term gain. Crazy idea maybe, but the Government needs to think more creatively about tax in order to get companies to pay it.

* I was a tax consultant for one terrifying year, so I know this is a completely oversimplified story/solution. Thankfully I am a blogger now, which gives me licence to create crackpot theories and pass them off as an obvious truth – huzzah for personal progress.