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By Jason Piper, tax and business law manager, ACCA

Among the themes covered in the ongoing debates around BEPS and international tax, there’s been a strand of discussion around “tax competition” – the practice by governments of attempting to make their jurisdiction look more attractive than others by reducing the tax burden on businesses.

The argument runs that by encouraging a move away from taxation of business, tax havens and rich countries are imperilling developing countries who need tax revenues.

But if making your tax system “competitive” costs you money, why would anyone bother? Perhaps because the indirect consequence is that you make more out of the VAT, PAYE and simple GDP effects of inward investment than you lose by reducing the tax due on any profits that the company may book in your jurisdiction.

For that to work though, you need a number of conditions to be true. In particular, you need to have effective collection mechanisms for VAT, and a secure taxpaying base of employees. You need to be comfortable that you have the economic capacity to service the increased production and demand for the GDP growth to have value.

For most developed countries that is very much the case. They typically collect 30-40% of GDP in taxes, and less than 10% of that comes from corporation tax – so 3-4% of GDP is collected as corporation taxes. But in developing countries, the level of GDP collected as tax falls to 10-20%, while the proportion of overall taxes attributable to corporation tax rises to nearer 20%. So we’re still looking at around 2-4% of GDP collected as corporation tax.

And that means that the economics of “tax competition” doesn’t work for a developing country; it would need to have twice the GDP impact per pound of corporate profit untaxed to get in the same level of VAT or employee income tax as recompense – yet proportionally the amount of tax that developing countries should typically be able to extract from the international businesses who might invest in them should be far higher. The reason that big business goes to developing countries is typically natural resources – and those resources are not typically mobile. If business wants them, there’s only the one jurisdiction they’ll be coming from, so the local government should have business in a firm grip when it comes to extracting tax revenues.

And there’s another twist. Remember those percentages of GDP collected as tax? Well, it’s generally reckoned that a nation needs to devote around 15% of its GDP to government in order for government to be stable. Or in other words, if you as a business are looking at investing into a market where less than 15% of GDP gets collected as tax, then you’ve got more to worry about than just business rates and form filling; there’s a good chance that the whole infrastructure will be unstable. Whether that’s political instability, or a lack of roads on which to transport your produce, there’s going to be additional risk factors to play into your analysis of whether the investment is sound.

And therein lies the challenge for a business decision maker. In a developed country, with a high level of maintained infrastructure and political stability, corporate tax is a pure cost to be managed down. The net marginal benefits accruing from payment are nil, while the government may even be prepared to forego those taxes in order to attract your business; official resistance to corporate tax minimisation is likely to be low.

In a developing country, taxes paid to central government may have a very real benefit to business, for the simple reason that without them the whole investment may become worthless in very short order. Tax is not so much a deduction from profits as a cost of sales; it’s an essential element in allowing those profits to be earned in the first place.

To be fair, this probably isn’t something that big business needs to be told. They know full well that however valuable the resource in a mine might be on paper, it’s worthless if they can’t safely extract and process it. Political stability is a key element of their risk analysis. If the people at the top of multinationals weren’t smart enough to have worked this stuff out for themselves, they wouldn’t be there.

But there’s a lot of other people who haven’t spent a lifetime making difficult decisions based on complex yet incomplete information. And if they end up running tax administrations, then there’s a risk that they might consider tax holidays for big business to be a good way forward to attract international investment – when in fact, it may be the very last thing they need, and the very last thing that a rational business would ask for. What’s sauce for the goose may not be sauce for the gander, or indeed the value burger of your choice. When it comes to domestic tax policies in respect of international investment, it most definitely is horses for courses.


By Jason Piper, technical officer, ACCA

To people of a certain age, programmable digital computers were The Future, promising 3 day working weeks, the end of manual labour and untold leisure time. For another generation, they are all about social interaction, and keeping in touch with all your friends and contacts from the comfort of your own sofa.

But for one group of people, computers are the cause of misery, delays, frustration and expense, the cause of longer working hours and a replacement for human interaction. Those people of course are tax agents, taxpayers and in fact anyone who has any dealings with HMRC. Over the past few years, HMRC has pushed technology as the solution to all its woes, and the replacement for all (well, a sizeable chunk) of its staff. And has the computer really improved things?

Case study 1: Penalties. In October 2008, the Revenue computer sent out a penalty notice to a taxpayer, in the name of Mike Christensen. Unfortunately, Mike Christensen had retired that August, and so the penalty was invalid and had to be withdrawn. But because no-one had told (ok, reprogrammed) the computer, it had issued several months worth of invalid penalties – and Mike Christensen was the Area Director, so it had probably issued thousands of invalid demands to taxpayers in that time. Verdict: an embarrassing error, though many of the actual penalties had probably been rightfully assessed and could have been reissued.

Case Study 2: CIS refusals. Up until a couple of months ago, HMRC routinely refused building companies the benefit of “Gross Payment Status” in the Construction Industry Scheme for three technical failures in tax compliance – and the letters were sent out automatically by the computer. However, the tax tribunals pointed out that the legislation required HMRC to exercise some discretion, and that meant human intervention into the process. To their credit, the CIS team instantly dropped all their ongoing disputed cases where the computer had issued refusal letters (around 50, an indication of how dissatisfied businesses were with the computer’s decisions), and revised the process so that judgement is now exercised by an HMRC officer. Verdict: A failure to fully appreciate the terms of the underlying legislation, but a prompt and reasonable response by HMRC.

Case Study 3: Debt Collection. Described by one MP as “scaring old ladies and pensioners”*, one of the computer’s finest moments came when it started sending threatening letters out to taxpayers, warning them of impending bailiffs and auctions of their goods to settle tax debts. Not only were the letters short on contact details for the taxpayers to respond, they were also light on the details of the tax debt. For the very good reason that in many cases, there wasn’t one. Verdict: No excuse. A basic programming error left the machine responding incorrectly to nil submissions. We can and should demand better of a publicly funded body.

So what’s the overall conclusion? No doubt computers have a (huge) role to play in administering tax in the UK – I haven’t listed the tax code debacle under NPS (National Insurance and PAYE Services System) above, for the reason that I still believe NPS is a Good Thing; the coding issues arose from HMRC failures in project planning and communication. But taxpayers (and their agents) are all, ultimately, human. We need human contact, and the good sense that humans can bring to the mind numbing complexity that is the UK tax system. Maybe we can’t go back to a Dixon of Dock Green style policing of our tax system, but we need to stop the headlong rush into the Big Brother ‘steel plate in the wall’ dystopia. Digital by default is fine as a communication channel, with humans at each end, but must not become a digital abyss into which taxpayers time, money and efforts are poured with no guiding mind to make sure that things run sensibly. Administrative efficiency is only useful so long as it is also effective, and computers cannot measure that, only properly trained Revenue officers.

*Taken from uncorrected committee evidence