Tax Plays A Huge Part In Multinational Decision-Making

Motorola’s decision to close its plant in Bathgate, Scotland, rather than its less productive plant at Flensburg, Germany, is, reportedly, in part because it hopes to exploit tax losses of up to £350 million in its German operation, which can be carried forward and offset against future profits.

This should come as no great surprise to anyone familiar with the international business scene. Large multinational corporations spend a very great deal of their time and energies planning to optimise their global tax situation, since minimising the annual tax take can have a significant effect on their post tax earnings, their dividends, their share price and, ultimately, their market capitalisation. After all, the rewards and reputations of the company’s top managers depend upon these.

And, not only do they retain world-leading firms of tax advisers, but invariably also, they employ internal teams of tax accountants whose entire responsibility is to deliver the lowest possible tax take. This involves a great deal of detailed work, registering in each and every jurisdiction for local sales or added value tax, payroll tax as well as corporation and capital gains tax.

And as things stand, with each nation state throughout the world jealous of its autonomous tax regime, there is plenty of opportunity for large businesses to so manage their affairs, and specifically through their group structure and transfer pricing arrangements, that their most profitable activities arise in countries with the lowest tax rates.

The entire issue of transfer pricing has been thrown up in the air with the advent of the global market. While, in the past, the supply chain which led to the manufacture, sale and distribution of goods was relatively easy to follow, the UK’s rules on transfer pricing were relatively relaxed, with the Revenue only occasionally stepping in to query or investigate pricing arrangements which appeared designed to minimise the taxation of profits.

Now, however, the global procurement marketplace makes precise identification of almost any supply chain on traded items much more complex. In addition, the UK tax authorities now require companies to sign off in advance that they have not offended the transfer pricing rules.

The persuasive powers of large international businesses should not, however, be under-estimated. When the government last year sought to introduce new UK tax rules in relation to double taxation relief, which would have increased the amounts of tax large companies would pay on their overseas earnings, the outcry from the big business lobby was deafening. The result was a partial climb down by the government and an undertaking that any changes would be introduced only over an extended period.

Contrast this with the way in which the government saw off the protests of individual IT and other service businesses in relation to the onerous IR35 regime, which significantly worsened their tax position. Although there was a well-organised body of service company contractors to deal with, the service companies themselves were small, and the government, and its agency the Inland Revenue, got their way, even though the contractors have now sought judicial review of the provisions.

A further interesting aspect of the global tax argument arises in relation to the increasing influence of the Internet. While, as we are often told, even small companies in remote locations of Scotland can now trade globally, it is rarely mentioned that any small undertaking doing business in an overseas location is also responsible for detailed tax form-filling, just like the substantially better resourced multinational company. It is not only tariff barriers, which constrain international trade.

Inward investment is another case in point which emphasises the importance of national tax regimes. While issues like infra structure and an educated workforce have a bearing on the investment decisions of multinational businesses, tax rates and the availability of grant funding are regarded as fundamental to the location decisions made by their boards of directors.

Is this, then, an argument in favour of nation sates coming together to forge common tax regimes in which all businesses know and understand each other’s tax practices? Well, ideally, yes, but as the deep-seated opposition in the UK to merging its taxation arrangements with the European Union demonstrates, nation states cherish the political and economic freedom which control over their taxes gives them. Even though the price to be paid handicaps international trade.