Labour propose unitary taxation; Tories back business rate cuts

The first full week of election campaigning since Parliament was dissolved has seen Labour back a new tax on multinationals and the Conservatives propose cuts to business rates for small firms. Ahead of the manifestos – most of which are expected next week – here is our round up of tax and related developments so far.

The Conservatives

PM Boris Johnson launched the Conservative Party’s election campaign by saying: ‘Let’s get Brexit done and get on with our project of sensible moderate but tax cutting one nation conservatism, spreading opportunity and hope across the whole UK and let’s unleash the potential of this country”

The Conservatives today pledged to reduce business rates for small firms in a bid to help ‘left-behind’ towns, if they win the General Election. The party said that it would increase the business rate discount available to smaller firms from 33 per cent to 50 per cent in 2020/21. This would be an effective £280 million tax cut which would help small businesses on the High Street in particular, the party claims. It is also planning to introduce a new £1,000 business rates relief scheme for pubs, which it says amounts to an £18 million tax cut next year. The party would also extend discounts on business rates to smaller cinemas and music venues. The changes to business rates would only apply to England. The Conservatives also pledged to give community groups up to nine months - up from the current six - to buy buildings listed as ‘assets of community value’. More here.

The Conservatives this week claimed that every taxpayer in the UK will have an additional bill of £2,400 per year under Labour. However this faced criticism from fact checkers. Website Full Fact concluded that the figure was ‘largely meaningless’ as the calculation included a number of policies that Labour has not so far said will be in its manifesto, and one which it has ruled out. The Conservatives also claimed that the introduction of the four-day week that was proposed by Labour at its September conference will increase staff costs at the NHS by £6.1 billion a year.

Labour Party

Shadow Chancellor John McDonnell announced today that a Labour government would nationalise part of BT as part of a policy to give every home and business in the UK free full-fibre broadband by 2030. The party says the plan “will be paid for through Labour’s Green Transformation fund and taxing multinational corporations such as Amazon, Facebook and Google”.

According to media reports Labour has not yet completed the final details of how the tax would work, saying it would be based ‘percentage wise’ on global profits and UK sales, raising potentially as much as £6 billion. In a BBC interview, McDonnell said it will be on multinationals, particularly those that ‘gain their incomes from the internet, the Apples, the Googles and the Amazons of this world, and in that way we will pay for the day to day costs [of supplying free broadband].’

A note on Labour’s website indicates that the policy would not be limited to internet companies, stating –

“Full-fibre has low maintenance costs once rolled out, which can be estimated at around £230 million a year, which will be more than covered by a system [of] unitary taxation of multinationals, which involves treating multinational companies as single entities, and taxing UK-based* multinationals on the share of their global profits that reflects their UK share of their global sales, employment and assets.”

(* NB. The reference to ‘UK-based multinationals’ seems odd here. Possibly the wording should either be “…taxing non-UK-based multinationals on…” or “…taxing multinationals with a UK presence / customer base on…”)

The Shadow Chancellor told the BBC he has already discussed the tax publically, which suggests it will be along the lines of a recent report by Public Services International (PSI), an international trade union federation that calls for the introduction of formulary apportionment for taxation of multinational companies, which was enthusiastically welcomed by Labour. (See below for a recap)

Labour remain committed to introducing a 50p tax rate on earnings over £125,000 to pay for new investment in infrastructure and the NHS, McDonnell also confirmed this week. Promising to only raise taxes for the top five per cent of earners, McDonnell said Labour would retain its tax plans from the 2017 general election manifesto almost unchanged, including reducing the threshold for the 45p tax rate to £80,000.

In other Labour developments:

Labour repeated that they will scrap universal credit, end the five-week wait and abolish the benefit cap and the two-child limit;
John McDonnell pledged that services returned to public ownership by Labour will be counted among the UK’s government assets that are targeted under new fiscal rules that the party will introduce;
McDonnell also said he would break up the Treasury and create a new devolved entity for spending in the North;
Media reports suggest the party will not include a proposal to abolish private schools in its manifesto but will propose withdrawing their charitable status and tax exemptions.

The Liberal Democrats

Lib Dem Leader Jo Swinson kicked off her election tour of the UK with a speech in London, saying a Liberal Democrat government will provide working parents with free, high-quality childcare from when their child is 9 months old until their first day at school. The party will fund 35 free hours a week, 48 weeks a year for every child aged two till four and children with parents who are back in work from 9 months.

In a speech today Lib Dem Treasury spokesperson Sir Ed Davey announced that in government the party would jump-start an economy-wide programme to tackle the climate emergency. Across a five year parliament, they would spend and invest an extra £100 billion of public finance on climate action and environmental preservation. This would come from the ‘£50 billion [a year] Remain bonus’ that the UK would get from not leaving the EU. (NB. Fact checkers Full Fact have said a £50 billion “remain bonus” figure is a reasonable estimate but highly uncertain.) Davey also said that he would impose fiscal rules that are “tougher” than those proposed by both the Conservatives and the Labour Party. He told the Today programme this morning: “We’re actually supporting a new fiscal rule today that the Resolution Foundation have proposed, and it’s basically using all of the government’s balance sheet, and saying as long as you’re improving the balance sheet, so your assets are growing faster than your liabilities, you’ve got sustainable approaches to managing debt and investment.”

In other Lib Dem announcements:

  • The party would give every adult £10,000 to spend on education and training throughout their lives in what it calls a ‘skills wallet’;
  • The party repeated its pledge of a cash injection for the NHS funded by a one pence rise in all rates of income tax;
  • The party opposed Conservative plans to introduce an immigration surcharge for EU workers after Brexit.

Other parties

The Green Party would appoint a Carbon Chancellor to 11 Downing Street to ensure the climate emergency is placed at the heart of government. The Carbon Chancellor will head up a new Department for the Green New Deal, will allocate the £100 billion a year Green New Deal Fund and issue an annual carbon budget to direct the decarbonisation of the economy. The Treasury will become a new Department for Economic Transformation working alongside the new Department for the Green New Deal. The party will stand 500 parliamentary candidates in the General Election. It will launch its manifesto next week, pledging to tackle the Climate Emergency and eliminate poverty within a decade.

The SNP have said little about tax so far. First Minister Nicola Sturgeon called for a ‘net zero fund’ to be established by the next Prime Minister which would reserve the £8.5 billion of revenues expected from the North Sea for green projects. The SNP leader said at least £1 billion of this sum should be used to help areas heavily reliant on the oil and gas industry. A recent article on the party’s website says the SNP government is spending £115 million a year to protect Scotland from the ‘bedroom tax’, and introducing numerous new benefits designed to help families and give children the best start in life.

The Brexit Party has already announced a series of policies aimed at regional regeneration on its website, supporting key sectors of the economy and targeted investments in the young, the High Street and families. The policies include reducing business rates to zero for high street retailers and leisure operators outside the M25 – funded via a small online sales tax, and abolishing Inheritance Tax. The party this week announced it would not stand candidates in seats held by the Conservatives.

Public Services International report - Taxing multinationals: a new approach – a recap

The PSI report (see Labour update, above), published 27/10/19, proposes:

1) a unitary enterprise principle should be adopted, to replace the inappropriate fiction that affiliates of a multinational corporate group are independent of each other;
2) the allocation of income and taxes would be based on the fundamental factors that generate profits: labour, capital and sales. This would provide a balance between operational factors (employees, physical assets and users where appropriate) and sales to third-parties (without which profits cannot be realised);
3) tax administrations would pragmatically develop standardised allocation keys and weightings, based on closer analysis of different industries and sectors and commonly-used business models, working cooperatively and in consultation with representative business groups. These keys and weightings would apply as a rebuttable presumption, to allow some flexibility, with a right of appeal to ensure transparency and fairness
4) the allocation keys and methods for their quantification must be objectively measurable and location-specific, using only physical factors reflecting the actual assets, activities, and sales in the countries concerned.

The PSI study suggests an increase of 13.8 per cent in tax paid to the UK if a 2-factor formula (labour and sales) were used, based on data from US multinationals with over $750 million turnover. This would mean roughly £3 billion extra tax from these large US MNEs alone. Since US MNEs account for some 22 per cent of the UK’s total stock of foreign direct investment, PSI extrapolate that around £14 billion additional revenue could be obtained from all MNEs.

 

More conservatively, assuming only that the UK operations of all non-US multinationals are about the same size as those of US multinationals, the projected additional revenues would be around £6bn, an increase of around 10% in total UK corporate tax revenues. Revenues could be even higher under a Labour Government, given the Labour Party’s proposal to increase corporation tax, note PSI, adding that all of these revenue estimates make no allowance for behavioural response.

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