Corporation Tax

[Undesired Walrus]

Our PM is on TV saying that he wants Corporation Tax to be at 24% at the end of this parliament so that people like CAT set up shop here in Britain, seeing the low tax rate.

I can see how this is appealing. More corporations, more jobs for the people.

Is it as simple as that, or can people like Caterpillar be tempted over to certain countries even if they do have high rates of corporation tax?

[CriticalThanking]

They can be tempted for many reasons. Or rather, for one reason that shows up many ways: money. It is very common here for cities to compete for corporations by granting tax waivers for some period of time. There has to be some reason for a company to move: cheaper/available labor, cheaper infrastructure (offices, mfg plants), less costly impact mitigation (no need for expensive sound remediation out in the country, fewer legal fights from nearby residents getting polluted on).

Ingersoll-Rand (http://www.afscme.org/press/6938.cfm) went overseas with people begging/pressuring them to return. Stanley Tools, a quintissential American firm tried moving offshore but they reversed their decision under pressure.

CT

[blutoski]

Our PM is on TV saying that he wants Corporation Tax to be at 24% at the end of this parliament so that people like CAT set up shop here in Britain, seeing the low tax rate.

I can see how this is appealing. More corporations, more jobs for the people.

Is it as simple as that, or can people like Caterpillar be tempted over to certain countries even if they do have high rates of corporation tax?

It happens, but it's rare. It's more than just moving the HQ. Income tax is usually paid in the country it's generated, so the local subsidiary would have to cede sales to the new country in addition to operations.

An example is NewsCorp, which moved HQ from Austalia to USA, but there wasn't any real change in overall taxes, since the Australian corporation still had the same income.

The exception is businesses that don't really have concrete operations. For example, cruise liners. Bahamas is a very popular home port for corporate tax reasons.

Actually, my wife is from St. Vincent and the Grenadines, and they're trying to get some traction as a new corporate tax haven. Pirates of the Caribbean was filmed there, and my understanding is that all those operations were established as a local corporation in order to avoid US taxation.

Moving operations to a lower taxed country is usually a situation of "you get what you pay for". In SVG, the roads are not maintained, there are no public schools so the population is largely illiterate, aloof health services and police, so you will have to pay for these out of what would be profits in a more advanced country. Electrical power, gas, and phone is unreliable. Short term-savings in taxes may precipitate greater long-term losses in revenues.

It's reasonable to be concerned about being a country pitching price in a 'race to the bottom'

[Jaggy Bunnet]

Our PM is on TV saying that he wants Corporation Tax to be at 24% at the end of this parliament so that people like CAT set up shop here in Britain, seeing the low tax rate.

I can see how this is appealing. More corporations, more jobs for the people.

Is it as simple as that, or can people like Caterpillar be tempted over to certain countries even if they do have high rates of corporation tax?

Short answer, yes it is a factor. I have worked with a number of companies looking to choose a location for new facilities / offices who as part of the decision making process wanted to understand how much tax they would pay (not just corporation tax of course). It wasn't the only factor, but it could make the difference.

The UK has a number of advantages in attracting investment (language, legal system, flight links etc) but also a number of disadvantages (wage costs, transport links, fuel costs, etc). Going back a few years, tax was probably in the disadvantage column (obviously simplifying somewhat as depends on the nature of the business) - no exemption for income of foreign subsidiaries, no participation exemption, credit rather than exemption system. Changes started under the last government and continued under this one are making it much more attractive (patent box, CFC changes, dividend exemption, branch taxation).

So while cutting the headline rate helps, it is more likely that the other changes will have a bigger impact. UK used to have a rate a lot lower than continental Europe, but gap has narrowed as other countries have cut rates.

Having said all that, I suspect it is more of an issue for a service business than a manufacturing one where other factors (labour costs, suitably qualified staff, access to markets etc) will tend to outweigh it.

[Jaggy Bunnet]

It happens, but it's rare. It's more than just moving the HQ. Income tax is usually paid in the country it's generated, so the local subsidiary would have to cede sales to the new country in addition to operations.

An example is NewsCorp, which moved HQ from Austalia to USA, but there wasn't any real change in overall taxes, since the Australian corporation still had the same income.

Not always - one of the big problems with the UK system was that it taxed profits earned overseas (either under the CFC rules or when profits repatriated). This makes it a very unattractive place to have your head office and directly led to several companies leaving for other jurisidictions for tax reasons.

Shire Pharmaceuticals, WPP (advertising) and UBM (publishing) all moved to Ireland.

[blutoski]

Not always - one of the big problems with the UK system was that it taxed profits earned overseas (either under the CFC rules or when profits repatriated). This makes it a very unattractive place to have your head office and directly led to several companies leaving for other jurisidictions for tax reasons.

True, some countries double-tax, but it's becoming rare.

Correct me if I'm wrong, but wasn't the UK overseas double-taxation scrapped in 2009?

[Trakar]

Our PM is on TV saying that he wants Corporation Tax to be at 24% at the end of this parliament so that people like CAT set up shop here in Britain, seeing the low tax rate.

I can see how this is appealing. More corporations, more jobs for the people.

Is it as simple as that, or can people like Caterpillar be tempted over to certain countries even if they do have high rates of corporation tax?

To my business considerations, the base tax rate isn't as important as the effective tax rate. There are also a host of other factors (availability and price of labor, local/regional demand for my product, costs of rent/purchase, regulation/licensing, transportation hub access, etc.,) which depend upon the product and location considered. Over all taxation rate might catch my attention, but for instance, here in the US, there are fairly high tax rates, and yet, we have a lot of corporations earning record profits and paying zero net taxes, so it isn't the baseline corporate tax rate that matters so much as the effective tax rate I'm going to be stuck with after applying all my allowable deductions and offsets.

[Jaggy Bunnet]

True, some countries double-tax, but it's becoming rare.

Correct me if I'm wrong, but wasn't the UK overseas double-taxation scrapped in 2009?

Partially - certain dividends and gains are now exempt but the rules are complex. Branch taxation still needs sorted out (in process) and the CFC rules will be changed this year to deal with some of the worst problems with a full revamp scheduled for 2012.