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Business Taxation

This outline examines the intricate landscape of corporate and small business taxation in the UK, particularly in the context of EU competition and regulations. It highlights the shifting of profits by large firms into low-tax jurisdictions and the implications of national laws on international transactions. The discussion reflects on tax competition among governments, the impact on incorporation decisions for small businesses, and the administrative challenges that arise. Potential solutions are proposed, emphasizing the need for a collaborative approach to tackle tax avoidance and revenue generation.

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Business Taxation

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  1. Business Taxation Alexander Klemm

  2. Outline • Large firms • Shift activity / capital • Shift paper profits • Small businesses • Incorporation

  3. The government’s forecasts

  4. Tax competition • Governments compete for • location of capital / activity • taxable profits • Firms react by • adjusting investment decisions • shifting profits into low tax jurisdictions

  5. The UK’s position in the EU Corporate income tax rate 2004, incl. local taxes

  6. The UK’s position in the EU Corporate income tax rate 2004, incl. local taxes

  7. The UK’s position in the EU Corporate income tax rate 2004, incl. local taxes

  8. European treaty law • Direct taxation largely left to member states • But: EU law prohibits discrimination • National laws covering international transaction often discriminatory • Why? More tax at stake

  9. European Court of Justice • EU treaty law on direct taxation not much changed since 1958 • But: more challenges at ECJ

  10. Example: transfer pricing • Most countries enforce arm’s length prices • Some only for international transactions • UK until April 2004 • Now also applied for domestic transactions • No benefit, virtually no effect on tax revenues • Administrative and compliance costs • Other example (finance leasing) covered in chapter

  11. Possible solutions • Apply generous national laws internationally • Restrict national laws  The latter more frequent

  12. Summary: International pressures • Tax competition • downward pressure on corporate tax rate • intensifying since EU enlargement • Conflict national / EU law • Increasingly difficult to prevent tax avoidance • Increasingly expensive to raise revenue • No simple solution • consider EU-wide measure • find revenues elsewhere

  13. Small business taxation • Choice of legal form • sole trader, partnership  income tax • Ltd. company, PLC  corporation tax  Conflicts if differences in tax systems • HM Treasury Discussion Paper • Tax should not drive choice of legal form • Difficult if capital and labour taxed differently • Recent policy • short-lived increase in tax benefit of corporate form

  14. Conclusions • Consultation welcome • Better before recent reforms • Beginning of a consultative process

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