A simple proposal to help the Treasury

Over the last few weeks we have heard a good deal about the tiny amounts of corporation tax being paid in the UK by companies like Starbucks, Amazon and Google. Executives from all three were grilled by the Public Accounts Committee last month; others are sure to follow.

The problem, in a nutshell, is this. Overseas subsidiaries of global companies, incorporated in countries with lower tax rates, can charge royalties to fellow subsidiaries in the UK, or supply goods with a mark up, in order to channel profits between the two subsidiaries and therefore between countries. The effect is to reduce the profits of the part of the business based in Britain, and therefore the tax payable here.

All of this is perfectly legal – but at a time when the public finances need all the help they can get, I have a simple proposal that, if it works, may benefit the Treasury.

The suggestion is to levy a withholding tax of, say, 25% on royalties paid from the UK to an overseas recipient. This could be extended to all management and professional fees paid overseas. It could even apply to the purchase of goods where the payment is received by an overseas affiliate. In cases where there is a double tax treaty with the UK, I believe such a withholding tax would be a tax credit in the overseas company.

ConservativeHome readers are a diverse and talented bunch. Could those with expertise in this area cast any further light on the practicalities, hurdles, or legal issues that could stand in the way of such an idea being adopted? Let’s help the Treasury!!

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