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Tax harmony no closer

Governments of the world’s leading economies have been discussing a global corporation tax rate in a bid to deter multinational companies from moving their operations to the ‘lowest bidder’ jurisdiction so they can pay less tax.

After months of reported informal talks during 2009, the issue was said to have been discussed privately at the G20 when it met in Pittsburgh, US, late 2009.

Jurisdictions, such as the UK, that have been resolutely against the idea in the past, are now prepared to talk about it, according to economic commentators. 

It’s because the UK, for example, collected £42.8 billion (USD 71 billion) in corporation tax in 2008-09, a fall from £46.4 billion (USD 77 billion) the previous tax year – and the government believes that it has been drained of corporation tax in part by the accounting and banking policies of some offshore firms.

However, if G20 leaders did talk in earnest about it, no formal consensus evolved – probably because the UK corporation tax rate of 28% ranks eighth in the Organisation of Economic Development listing of 30 countries (known as the ‘club of rich nations’).

So unless others increase their rates, the UK rate would have to fall, and every 1% off would mean a drop of £600 million in collected tax in the first year, and £1 billion in the second year. And any attempt to cut the rate would be expensive at a time when UK government debt is ballooning. 

Discussions on harmonising corporation tax have been complemented by talks on measures to bring the ‘lowest bidder’, smaller nations to heel – intended to stop them cutting their tax rates in order to poach ‘big players’. 

Penalties mooted include scrapping tax treaties, applying sanctions and charging extra taxes to companies who seek to avoid paying their country’s full rate of corporation tax.

The moves follow the departure of several major corporations who have shifted their operations base from the UK to places with cheaper, more stable tax rates: what’s been dubbed by detractors as a 'race to the bottom'. But, to date, corporation tax harmony is no closer.

The G20 would have had enormous clout on the issue because it accounts for 90% of world economic output. However, in the past, even attempts to harmonise the basis on which European Union members calculate corporation tax, let alone harmonise the actual rate, have floundered. 

So it was little surprise that no announcement on the subject followed the G20 in late 2009.

But it’s an issue that will not go away. A poll by the Association of British Insurers shows that more than 60% of its members – top executives in the UK’s insurance firms – would consider leaving the country to get a better corporation tax rate.