February 19, 2013 10:27 pm

Need for realism in corporate tax reform

From Mr Chas Roy-Chowdhury.

Sir, George Osborne and his French and German counterparts’ initiative to move towards a reformed global corporate tax regime (Letters, February 16) certainly makes sense from a global economy perspective, and they are right that the current international corporation tax system is outdated.

While their ultimate aim is a new world order for transfer pricing and income shifting, the theory is a lot easier to articulate than the practice. There are two major flaws with this plan. The first is it won’t work without the US coming firmly on board, which is not going to happen with its rate of corporate income tax the highest in the developed world and its tax-deferral regime helping mitigate this.

Just as important, the Bric countries and others have their own view of what a new tax world order should look like, and it is not just about shuffling the deckchairs among the highly developed economies.

The UK itself has been playing its part in helping global businesses reduce their corporate tax liability. This seems to have gone unnoticed in the letter from the three finance ministers. We have the new controlled foreign company regime, we have the patent box which means corporate tax rates drop to 10 per cent and we are moving towards a mainstream corporation tax rate of 21 per cent. We need to be very careful that we do not end up with a new set of global rules that mean taxable income is lost from those jurisdictions, such as the UK, that are trying to create a competitive and streamlined system for international companies.

We need to be realistic about global reforms and not go for short-term fixes that will cause long-term problems and not move away from the arm’s-length principle nor greatly change double tax treaties, which have generally helped to create a fair and low compliance burden environment.

We do need to find an objective solution for digital business profits, but the answers we get may not be ones that the developed world necessarily would like to hear.

The OECD work in these areas is definitely very worthwhile, but this is a highly politicised agenda. We need to take care not to over-promise on what can be delivered and by when.

Chas Roy-Chowdhury, Head of Taxation, Association of Chartered Certified Accountants (ACCA)

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