Changes to UK tax law are attracting companies keen to slash their tax bills, but is it doing the economy any good?
The government’s recent decision not to pursue tax on income earned abroad has given it the international reputation of a tax haven, according to a Reuters report. US multinationals worth billions of dollars are relocating in their droves – moves that have been heralded as an opportunity to increase UK tax revenues and create jobs. But, in reality, these “relocations” tend to involve the shift of a few senior execs, a handful of new hires and little to no investment in UK operations, say critics.
Although the UK’s corporation tax is set at 20%, these ‘paper’ moves allow companies to funnel profits from countries where employees and customers live and work into more well-known tax havens and back again to pay shareholders, without having to pay any tax. This practice, banned in many other countries, has led many to think of Britain as merely an extension of havens such as Switzerland and the British Virgin Islands.
For companies making the move, the savings can be huge. Rowan, which transferred its legal and tax base to Britain in 2014, reports a drop in its effective tax rate from 34.6% to 3.3%. Financial benefits to the UK, on the other hand, are negligible – or worse. Ensco, which brought in revenues of $300m last year, only paid $200,000 in tax. Aon, which announced $2.9 billion in revenues in the first quarter of this year alone, enabling it to increase cash dividends to shareholders by 43%, actually claimed tax credits from HRMC in 2013.
The story was similar for Liberty Global, the world’s largest cable company, which reports revenues of $18.1 billion after buying out Virgin Media last year. Announcing revenue growth of 71% in the fourth quarter last year, CEO Mike Fries proudly described 2013 as a “watershed year” for the company. Sadly, this did not translate into tax revenues for the UK economy; the company reported a $121m loss and, like Aon, claimed tax credits. Companies like Delphi Automotive, meanwhile, are able to use their partnership status for tax exemption, whilst a large number of recent transfers have refused to discuss either their tax bills or whether they have created new jobs.
Despite the allure, re-registering a business in a tax haven can have publicity ramifications, with many companies coming under fire for their attitude to tax. This factor is thought to account for the enthusiasm of companies flocking to the comparative respectability of British shores. Although legal, however, many fear that courting these companies on tax bases will ultimately damage not only Britain’s economy but also its reputation.
“The UK has made a very clear policy decision to engage in tax competition for multinationals. It’s fair to say it’s rivalling Ireland,” said Stephen Shay, Professor of Law at Harvard University. “When I go to tax conferences now, I hear people talk about the UK as a tax haven.”
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