Titans must pay their taxes too

TAXATION has to be fair and be seen to be fair. As it stands, the way the UK taxes the online business world is neither. The Chancellor, Philip Hammond, has hinted that he will bring in tax changes in his Budget on October 29 to create a more level playing field for online retailers and their high street counterparts.

He should go further. This is not just a matter for retailers. It concerns the entire high-tech world, for its giants have exploited the loopholes created by competing national taxation systems to artificially slash their tax bills, as we show on Page 97, with taxi-app Uber routing revenues through a Dutch division and Airbnb paying zero UK corporation tax. This cannot be right.

The principles of good taxation are very simple. Headline rates of tax should be as low as possible and there should be as few loopholes as possible.

The US company tax system, now being reformed by Donald Trump, broke both those rules. The headline corporate tax rate was 35 per cent but a series of exceptions, including the fact that overseas earnings could be held abroad without paying any US tax at all, meant that the average effective rate for large companies was around 19 per cent. That has now been changed. The headline rate was cut to 22 per cent and companies have been forced to repatriate their earnings.

Here, the Chancellor’s problem is not so easily solved. The UK already has low corporation tax, currently 19 per cent and falling to 18 per cent in 2020. And the problem is not so much British companies parking profits abroad, but foreign companies (actually, US ones) using the European Union’s tax rules to shift profits of business done in Britain to other EU jurisdictions.

It would be silly to pretend that this will be swift or easy to fix, but a start can be made.

Take online retailing, which now accounts for some 18 per cent of sales excluding fuel, the highest of any major economy in the world. The rates on those huge distribution centres you see near motorways are going to be lower than the rates on high street stores, but need they be so much lower?

Speaking to Sky News last month, Mr Hammond said: ‘We want to make sure that the high street remains resilient and that we also make sure that taxation is fair between businesses doing business the traditional way and those doing business online.’

So let’s get on with it. Stopping the high-tech companies shifting their profits around will be harder. For the past decade, the OECD and the Group of 20 nations have sought to nudge countries to simplify their company tax rules so that multinationals can no longer do this. The EU has made a bit of progress, with its competition commissioner Margrethe Vestager taking Ireland to court for €13 billion in unpaid back taxes at Apple, and for Luxembourg giving what she says were illegal tax benefits to Amazon. The Apple money is sitting in a trust account and Ireland is appealing against that decision. Luxembourg also claims that its tax treatment of Amazon is completely fair.

And there’s the rub. One country’s tax incentive is another country’s tax loophole. You really cannot blame companies for responding to genuine incentives from national governments.

But you can challenge them for creating artificial and contrived tax structures specifically designed to avoid tax, and for lying about where they really make their money.

At a personal level, the UK has successfully stopped some of the more abusive schemes, including those used by sports stars and other celebrities. It now needs to do the same for the titans of the online world.

They must be forced to come clean about how much they make and where. Then, they should be forced to pay their fair share.

Jean-Baptiste Colbert, finance minister of Louis XIV of France, famously observed: ‘The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.’

Right now, we are getting hardly any feathers from the US tech giants – and the rest of us are right to hiss about it.

Principles of good taxation are low headline rates... and few loopholes