What would a World Tax look like?
If we do 'Levelling Up' right, we can reinvigorate our least well-off regions and lift people out of poverty.
The Government might be limiting the effectiveness of their own Levelling Up agenda and nobody’s talking about it. I don’t want them to not succeed in this effort, because improving the lives of the most disadvantaged in the UK is a morally righteous cause.
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By this point we’re all pretty familiar with that agenda: remedying economic imbalances between regions of the UK. Imbalances exacerbated by chronic underfunding, poor transport links, and limited job opportunities, resulting in scores of young workers heading South in a labour market gold rush. In theory, the right reforms could help my native Hull realise some of the gains amassed by Oxford.
So let us proceed under the assumption that there is some merit to Levelling Up. What would it look like? Freeports and investment zones are a favourite of the Prime Minister, and their aim is to encourage firms to start businesses in UK regions that could use the investment and jobs. And how are they encouraged? By offering various tax breaks and cost-cutting freebies.
But there’s an elephant in the room which could limit the extent to which the Government can offer these incentives. The OECD and their Global Minimum Corporate Tax would impose a minimum rate of taxation (set at 15%) on the revenues of international corporations. Over 140 countries have signed up to this already. This new tax regime consists of two key pillars.
Pillar One applies to the “biggest and most profitable multinational corporations and reallocates part of their profit to the countries where they sell their products and provide their services, where their consumers are.” As per the OECD, this is done to ensure companies do not earn considerable profits in countries with more favourable tax rates. God forbid.
Pillar Two of the 2021 OECD global tax deal, brokered in part by the Prime Minister when he was Chancellor of the Exchequer (remember that?), will impose that global minimum corporate tax rate of 15% in the winter of 2023 to crack down on tax havens. But could ‘cracking down’ actually mean that, counterintuitively, these tax havens receive more tax, not less?
In a new report for the Adam Smith Institute, Dr. Tyler Goodspeed argues that the UK’s rush to implement the OECD proposals will undermine the Levelling Up agenda. Not only will freeports, investment zones, and their associated incentives be in the firing line, but also tax credits and accelerated cost recovery for investment in intellectual property, which makes up over a third of UK investment.
What good can come from our newfound Brexit freedoms if as soon as we leave the EU we outsource key elements of our tax policy to another member-institution? Signing away our financial independence with a rushed tax treaty is a far cry from regaining our sovereignty. So why are moving forward with this?
The Treasury wants the money now, but there are costs to early implementation; necessary alignment with yet-to-be-finalised OECD guidance means companies will face a double whammy of adjusting their businesses to new rules twice and the Treasury will have to do the same with its internal systems.
It’s not just transition costs; in the interim, British businesses will be hamstrung in comparison to foreign firms, subject to a web of complexity that those abroad don’t yet face. Our world-leading financial services sector — particularly the insurance and reinsurance market — will be hit particularly hard by poorly-designed rules.
Implementing the global minimum tax is also unlikely to raise substantial revenue — low-tax jurisdictions could continue to compete for out-of-scope firms by lowering their corporate tax rates while hoovering up top-up taxes applied to in-scope enterprises, effectively denying that revenue to HMRC. All this means that the UK’s early implementation of the Global Minimum Corporate Tax rules is fraught with risk and delivers limited benefits.
Policymakers should proceed carefully, scrutinising current proposals to limit their potential economic damage. Let’s take a breath and apply some proper scrutiny, before the UK derails its flagship Levelling Up agenda on OECD orders. Shifting revenues from HMRC to tax havens, making us less competitive on the world stage. If we do Levelling Up right, we can reinvigorate our least well-off regions and lift people out of poverty.
(Click here for the original article).