CORPORATE TAXES (2)

In an earlier post, I argued that there were good economic and administrative reasons for not taxing companies on their profits, but instead waiting until those profits were paid out in some form or another (wages, dividends etc) and then taxing the - now richer - recipient. There would be a timing difference, but nothing else; and there would be a lot less haggle and bureaucracy.

Politicians have of course not listened to this idea (which, I might add, is not mine, but one that I would support). Instead, in various countries, they have started to point accusing fingers at companies that pay little or no corporate tax. In America, many companies do not remit profits back to the home country, since there is a tax shelter for profits earned abroad. In the U.K., companies such as Google, Amazon and Starbucks have been pilloried for holding their European intellectual property in a low-tax environment such as Luxemburg, and then charging hefty licence fees to their U.K. subsidiaries, so that the latter have no profits and so pay no tax. Never mind that in both cases, companies are merely responding rationally to tax laws passed by said politicians. Indeed, since company directors have a fiduciary duty to promote the interests of their shareholders, it would be wrong for them not to arrange their affairs in this way. Still, logic and responsibility never stopped a politician from banging a drum.

But what is perhaps surprising is that Danish politicians have now decided to get in on the act. Yesterday the tax authorities published details of the tax paid by all companies in 2011, their taxable income, whether they had offset that income with losses from previous years, and whether the company is taxed as part of a group. Not surprisingly, it emerged that a number of large companies paid no Danish corporate tax at all last year. The list includes Arla Foods, Rockwool, Vestas and Dong Energy. Others, such as Carlsberg and Danfoss, paid nowhere near the official tax rate on profits of 25%.

I have serious reservations about this wheeze. The first is that it is a clear breach of the standard principle - in all countries - that relations between a taxpayer and the tax authorities remain confidential. Ministers say that they believe that openness will lead to companies' paying more tax. But since the authorities already have all of the relevant information to hand, that extra tax can only come from public pressure making companies change their behaviour.

And here comes my second objection. As a qualified accountant, I know that there are a number of reasons why companies don't pay corporate taxes. The first, and most obvious, is that they make operating losses; either a loss in the relevant year, or losses in previous years that they have not yet fully recovered. The second is that they have made major investments, for which they get such large tax deductions that their operating profits are turned into taxable losses. Hopefully, the investments will eventually lead to extra profits in the future, that will then be taxed. But an interested citizen will find it difficult to see that from the raw data, particularly since it only covers one year, namely 2011.

My third objection is that how much a company pays in corporate tax says absolutely nothing about its general contribution to society, either in the narrow sense of paying taxes, or in the wider sense of economic and/or social benefit. Consider, for instance, a company that makes kr.100 million a year in profit, but decides, because its owner is a quirky philanthropist, to distribute all of those profits to the workers in the form of year-end bonuses. Its corporate tax contribution is now zero; but the amount of tax going to the Government rises, because wages are taxed at much more than 25% (an argument for my thesis above). So concentrating on just the corporate aspect is misleading. Or what about a trading company that has huge sales (thereby making lots of VAT payments to the Government), but which makes a modest profit (because margins on those sales are wafer-thin)? The same would be true.

Politicians often go after particular people or groups in order to deflect attention from other things where they can be held responsible. I think this is the case here. Denmark is in the middle of tough times, because of silly economic decisions taken by the powers-that-be, and it helps to change the mood music. The not-so-subtle underlying message, of course, is that if only Danish companies paid more corporate tax, then times wouldn't be so tough for Danish citizens. But that is nonsense, and the politicians know it. Shame on them.

Walter Blotscher