A taxing problem

This month, it was pharmaceutical firm AstraZeneca’s turn to come under media scrutiny for the amount of corporation tax it pays in the UK. While not quite on the same scale as the accusations levelled at technology giants Apple, Google and Amazon, the company has been lambasted for making use of a legal and government-sanctioned tax planning regime.

I can’t claim to be any kind of expert in the intricate workings of international taxation systems. However, cases such as this raise conflicting issues. On the one hand, it seems hypocritical to expect a company to constantly improve efficiency across its operations, but then censure it for applying that same diligence to its tax affairs, as long as it stays within the law. 

On the other hand, just because something is legal, doesn’t mean it’s right to do it. The same logic that applies to new psychotropic ‘legal highs’ should apply here – is what you’re doing only legal because the authorities haven’t yet made it illegal? Likewise, the argument that ‘we’re only doing it because everyone else is, and if we didn’t we couldn’t compete’ doesn’t really wash.

But claiming that these companies aren’t ‘paying their way’ ignores the significant contribution they make to the public coffers simply by employing people and making products. According to the Institute for Fiscal Studies’ 2014 survey of the UK tax system, by far the largest sources of government revenue are income tax, national insurance contributions, and value added tax (VAT). Between them, these three make up nearly 60% of the treasury’s income. Corporation tax is, admittedly, the next biggest earner in the list, but contributes only 6% to the total.

This suggests that, while there is some value in closing loopholes and cracking down on the more aggressive schemes used to avoid corporation tax, strategies that promote job creation and manufacturing would yield greater revenues overall. Countries like Ireland have successfully used low tax rates to attract companies – satisfying themselves with a smaller slice of a bigger tax pie. While that has resulted in significant investment in the country, it has also allowed companies to reap the benefits with minimal commitment beyond a small office. The US approach of high taxes and legally blocking firms from relocating via ‘inversion’ takeovers, while effective, also seems like a rather blunt instrument. A more delicate combination of carrot and stick is necessary.

Phillip Broadwith, Business editor