What do the tax rates UK companies pay tell us about the need for global tax reform?

Tax

Amidst stories of companies avoiding tax (for example, Mauritius Leaks recently), and apparently endless international discussions about how to deal with this phenomenon, it can be difficult to understand whether multinational companies are paying more or less tax these days than in the past. Despite efforts at the global level (for example, the ‘BEPS project’) and at the national level, including here in the UK (for example, the Diverted Profits Tax) there is evidence that the amount of tax paid by large MNCs is actually lower than it was before the financial crisis (FT graph). Meanwhile, recent research by the economist Gabriel Zucman has estimated that up to 40% of MNC profits could be in tax havens, significantly reducing the amount of corporate tax such companies pay. 

Our research 

We wanted to get a more detailed understanding of the tax payment trends of large UK companies. Therefore, we looked at the 25 biggest companies listed on the FTSE 100, and analysed how much corporate tax they paid each year to governments. We looked at the ‘cash tax’ because we’re particularly interested in the amounts of corporate tax – levied on profits – that companies pay, since governments can then use this revenue to pay for schools and hospitals amongst other public services we all rely on. Although companies pay an array of taxes, we focused on corporate tax for 3 reasons: 

  • corporate income tax is one of the most progressive taxes – it should be paid in proportion to a company’s profits; 
  • developing countries rely on corporate tax for a larger share of government revenues. Many of the companies we analysed have significant operations in developing countries – so where real corporate tax rates are lower than expected, those governments too have less money to invest in public services than they might expect. 
  • corporate tax is the subject of prolonged international negotiations, partly because there needs to be rules about how and where companies are taxed in different countries; and partly because companies can ‘game’ such rules, potentially reducing their corporate tax liabilities. 

Despite its importance, headline corporate tax rates have fallen in recent years across most countries: 

Our findings 

Our research found that many  companies we looked at paid corporate tax well below headline rates. For example, half the companies (13) paid corporate tax significantly below (five percentage points or more) the OECD average statutory rate during at least one of the five-year periods we researched. In some cases, the rates companies paid appear to be even lower or continue beyond one five-year period. This suggests that companies can use reliefs or other incentives to reduce the amount of tax they pay to governments. It may also suggest that by using corporate tax havens, they can lower their tax payments.  

At the same time, we found that half (13) companies paid a higher rate of corporate tax in the most recent period than in the early years we researched, despite the official tax rate in many countries falling during the intervening years. Therefore, the pattern of individual companies’ tax payments did not mirror the trend in the corporate tax rates set by governments. In addition, the variation between companies – including those in the same sector with apparently similar characteristics – was significant across years.  

Implications of the findings 

Together these findings suggest that identifying possible tax avoidance requires more detailed data. We relied on the total profits and tax payments statistics that companies provide. But when companies publish data on a country by country basis, it is easier to identify warning signs of possible tax avoidance. So far some financial companies and extractives companies are required to publish data in this kind of detail, and some companies are voluntarily doing so. Oxfam and partners have long advocated for governments to mandate a standardised version of tax transparency to aid broader understanding of corporate tax practices. 

The variance of actual corporate tax paid between companies and over time points to the need for governments to consider ways to ensure more consistent corporate tax payments. One option being discussed in the current OECD process is for a global minimum effective tax rate. Properly designed and implemented, this could make the use of corporate tax havens (offering low or zero rates) much less attractive for companies. Instead, another government could simply ensure the minimum level of tax would be paid anyway.  

We welcome the UK government’s record on promoting greater transparency of companies’ tax payments and practices. We hope that the government can work with others – in the OECD process and beyond – to ensure that our international tax rules lead to companies paying their fair share. The ‘race to the bottom’ on tax rates and incentives has led to corporate tax payments making up a lower proportion of government revenues in many countries. It is particularly important for developing countries – which rely more on corporate tax – that the rules are fair, governments cooperate rather than destructively compete, and that everyone can see the right amount of tax is being paid.  

Author
Oliver Pearce

Oliver Pearce

Oliver is the Tax Policy Manager at Oxfam. He has worked in development for 10 years, starting at Christian Aid where he began as a Policy Analyst researching issues from climate change to governance. He joined Oxfam in February 2016 as Policy Manager for tax and inequalities issues. He also serves on the board of the European Network for Debt and Development (Eurodad) and on the Steering Group for the Independent Commission for the Reform of International Corporate Tax (ICRICT).