Sunday, January 31, 2016

Why pay tax you don't have to? If it's legal it's what transnational businesses do all the time.

Let's say I run a Transnational corporation which produces minerals in Harrovia. One of them is called "Slytherin" which costs me £4 a tonne to produce. In the UK Slythern has a value of £10 a tonne. It costs me £1 to transport. So my actual profit delivered in the UK is £5 a tonne. With Corporation tax at 20% I pay £1 in tax. But in Harrovia I have a long-standing tax holiday. The Harrovian Government wants me there. So my operations are tax free. Better to make a profit in Harrovia than the UK. So I assess the value of my Slytherin at £9 a tonne as it is loaded on the ship in Harrovia. When it is sold in the UK I make no profit (having paid my £1 a tonne transport cost). 

The above is a (very) simplistic example of how Corporations avoid Tax by manipulating transfer prices. Obviously the subject is very complex but the basic rule that it pays to make your money where the taxes are lowest applies to them all. This includes putting offices in lower tax jurisdictions - often quite nominally. Look at the brass plates outside buildings in Bermuda or the Channel Islands (etc.) ! 

To tackle this requires international cooperation. In my fictional example the UK would need an agreement with the Harrovian Government to change what happens. Why would the latter do this? It's in their interests to keep me in their country. And why would I voluntarily change my modus operandi and voluntarily pay tax I don't have to? What I do is legal. Period! 


Post a Comment

Subscribe to Post Comments [Atom]

<< Home