Corporate Tax Assignment in the UK and the US

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Table of Contents

Introduction
Current Data
United Kingdom vs. United States: 20-Year Comparison
Advantages and Disadvantages of US and UK Corporate Tax Systems
Effects of Tax Rate Changes
Conclusion
Reference List

Introduction

Corporate taxes refer to tariffs imposed on the income of companies. They are used as a form of legal obligation that businesses owe to governments of countries where they operate. It is important to understand that rules associated with corporate tax rates range from one country to another. A comparison of tax rates in different countries contributes to the understanding of tax rates’ history that influence economic growth and taxpayer behaviour. For this assessment, it was chosen to compare the UK and US corporate tax rates, how they have changed throughout the twenty-year period, and how these changes contributed to advantages and disadvantages in taxpayer behaviour. The paper includes such information as current data on corporate tax rates in the UK and the US, a 20-year comparison of rates in two countries, advantages and disadvantages of corporate tax systems, commentary on current developments, and a conclusion.

Current Data

United Kingdom

When discussing corporate income taxes to which companies-residents of the United Kingdom are subjected, it is essential first to mention that taxes are being imposed on the total income. Such income includes money that a business earns from all sources within a specific accounting period; also, taxes take into consideration all chargeable capital gains (EY 2017). On the other hand, companies that are not residents of the United Kingdom are subjected to corporate income taxes only in the case if they operate in the country by using permanent establishments (EY 2017). These establishments can take several forms: a fixed place of business in the UK that serves as a vehicle for companies to carry out their business or an agent that has been given authority to conduct trade in the county on behalf of a foreign company.

The main corporation tax rate in the United Kingdom for both large and small companies in 2016 was 20%; the decision to establish this figure was made in April 2015 (OECD, 2017). It was expected that the rate would decrease 1% to become 19% starting from April 2017 (EY 2017). The rate will subsequently drop to 18% in April 2020 (Spring budget 2017 2017). Companies that earn profits from the extraction of oil on the UK continental shelf (ring-fence profits) are required to pay a rate of 30%. Such companies have an option to claim the smaller profits rate (19%) but only under the condition that its profits for an accounting period are less than £300,000 (EY 2017). It can be concluded that the United Kingdom has been relatively loyal to corporations and has tried to provide fair conditions for businesses to pay corporate income taxes. However, such developments as Brexit are expected to change the tax environment in the country and lead to fluctuations in taxpayer behaviour. Importantly, it is essential to make sure that tax reductions do not hamper the national budget or lead to deficits. Additionally, issues with large corporations not paying taxes require further management.

United States

US businesses are required to pay corporate income taxes on the income they get from their worldwide operations; these also include the income of foreign branches regardless of their repatriation status. As a rule, US companies are not subjected to taxes imposed on foreign subsidiary’s earnings until it is sold or liquidated (EY 2017). International corporations are subjected to taxation in the US only in the case when their income is directly related to trade within the country or a specific income with US sources (Tax Foundation 2012). It is noteworthy that companies-residents of countries that have established income tax treaties with the US are only subjected to taxation “only to the extent the income is attributable to a permanent establishments in the United States and rates of tax on certain US-source income may be reduced or eliminated” (EY 2017, p. 1679). Taxable income of US companies that do not exceed the earnings of $335,000 falls in the range between 15% and 39% (EY 2017). Companies with an income between $335,000 and $10,000,000 are taxed 34% on their income (EY 2017). Furthermore, US corporations that earn more than $10,000,000 pay 35% in taxes, with earnings that exceed $15,000,000 but not exceed $18,333,333 pay an additional tax of 3% (EY 2017, p. 1680). To conclude, companies that earn more taxable income $18,333,333 pay a rate of 35% (EY 2017). As the United States is among countries with the highest tax rates, the established guidelines affect consumers’ and taxpayers’ behaviours.

United Kingdom vs. United States: 20-Year Comparison

Based on the OECD (2017) and (1999) data on corporate income taxes in the United Kingdom and the United States for the last twenty years, the following table was created:

Year	United Kingdom	United States
2017	19%	35%
2016	20%	35%
2015	20%	35%
2014	21%	35%
2013	23%	35%
2012	24%	35%
2011	26%	35%
2010	28%	35%
2009	28%	35%
2008	28%	35%
2007	30%	35%
2006	30%	35%
2005	30%	35%
2004	30%	35%
2003	30%	35%
2002	30%	35%
2001	30%	35%
2000	30%	35%
1999	30%	39.4%
1998	31%	39.4%
1997	31%	39.5%

As seen from the comparison table above, the United Kingdom has witnessed more fluctuations in corporate tax rates over the past two decades than the United States. Both countries showed to reduce corporate tax rates: from 31% in 1997 to 19% in 2017 for the UK and from 39.5% in 1997 to 35% in 2017 in the US. Based on these changes, taxpayers’ behaviours: while in the US, large corporations have tried to avoid paying a 35% rate through transferring their key operations to lower-tax-rate countries, the UK have managed to attract foreign companies through becoming a tax haven (Hong & Smart 2010).

For the United Kingdom, it is expected that corporate taxes will decrease in the future, which should not be considered as an alarming sign. For many businesses (especially smaller ones), corporate income taxes can harm incentives and have an adverse effect on the economic growth of the country and taxpayers’ behaviour. It is important to note that in OECD countries, corporate income taxes are high on the list of the most harmful and damaging; therefore, the UK’s decision to gradually reduce them can boost economic development (Djankov et al. 2010, p. 32). If taxes continue to decrease, companies-taxpayers are likely to experience the reduced return of shareholders, which also affects individuals with direct holdings (Miller 2017, para. 49). With regards to taxpayers’ behaviours, some large corporations avoid paying taxes due to the lack of attention paid to their diligence; instead, the government scrutinizes smaller businesses that show better behaviour in terms of diligently paying corporate taxes.

If to explain why the United States has had a relatively fixed corporate tax rate since 1997, it is essential to mention that the country imposed taxes on its citizens from the most of its existence. Also, the US has the highest corporate tax rate among other advanced economies; if to take into account all OECD nations, the country has the highest tax rate in the world. It can be explained by the fact that the United States has the highest tax rate because it is among the largest countries with a highly developed economy, which means that it costs companies more to transfer its business to another county from the US as opposed to transferring it from the UK, for example. The lack of institutional competition allows the government to impose higher taxes on companies and hold the rate on the same level since the risks of those companies leaving the country are low. Because of institutional competition, other OECD countries have dropped their corporate tax rates by 50% to attract foreign investment.

When speaking about changes or the lack of changes in tax rates, it is crucial to mention how they affect taxpayer behaviour. According to Inman (2014) from The Guardian, US companies are attracted to lower corporate tax rates that the UK and other countries can offer. Moreover, decades of tax competition between countries have led many of the original US companies to the leave the States; eBay operates from Luxembourg, Coca-Cola and McDonald’s have congregated in Switzerland while Google and Facebook “moved” to Ireland (Inman 2014, para. 6). According to the findings of Devereux, Lockwood, and Redoano (2008), countries engage in two-dimensional competition: over statutory rates profit and effective marginal tax rates. Therefore, high taxes that the United States currently imposes on its taxpayers leave corporations no choice but to transfer their businesses to lower-tax-rate countries.

Advantages and Disadvantages of US and UK Corporate Tax Systems

When it comes to the disadvantages of the corporate tax system in the United Kingdom, is crucial to mention that companies have difficulties when it comes to paying corporate taxes. According to the article in The Daily Mail prepared by Hawkes and Watkins (2013), it was revealed that almost one in four largest companies in Great Britain paid no taxes within one year. Among a hundred companies included in the FTSE, 47 did not provide reliable information for their tax payments in the UK; however, when 53 companies provided information on their tax payments, 12 stated that they paid no tax (Hawkes & Watkins 2013). Of these twelve, six organisations received a tax credit (Hawkes & Watkins 2013). Interestingly, the twelve companies that stated paying no taxes included such UK giants as Rolls-Royce, Experian, Vodafone, British American Tobacco, IMI, and more. This is a significant problem for the United Kingdom because the government has been accused of shaming small companies for not paying corporate taxes despite doing nothing productive to deal with large businesses such as Amazon or Starbucks. Such inequalities with regards to tax payments in the UK prevent the development of a unified system that should work efficiently.

A similar situation can be observed in the US, where the largest and most profitable businesses try to shelter their profits from tax payments. As found by Rojo, Anderson, and Klinger (2013) from the Institute for Policy Studies, giants such as FedEx, General Electric, Microsoft, Bank of America, and many others used loopholes in the tax law and employed corporate subsidies for reducing their bills. Such loopholes included the widening of offshore payments that cost the country around $90 billion each year, leading to cuts in governmental benefits such as Medicare and Social Security (Rojo, Anderson & Klinger 2013). Bartelsman and Beetsma (2003) also explored profit shifting of many OECD countries to account for the differences in tax rates, concluding that businesses tend to look for ways of reducing their tax payments by offshoring their profits to low-tax nations.

When confronted with the question of why they search for loopholes to avoid paying taxes, executives usually give a response that the 35% corporate tax rate is the highest in the world and thus makes their businesses not competitive in the international arena (Rojo, Anderson & Klinger 2013). Nevertheless, the evidence suggests that this statement is not true. Over the last sixty years, the US companies experienced a high level of profits while corporate taxes were on a low level. Furthermore, American stock markets have remained at high levels while CEOs of US corporations have been paid much more than other executives holding the same positions in foreign countries. Also, Rojo, Anderson, and Klinger (2013) stated that US companies pay higher taxes in foreign countries than they do at home.

The advantages and disadvantages of corporate tax rates in the United Kingdom and United States directly relate to taxpayers behaviours. It has been found that both UK and US corporations seek loopholes in corporate tax laws of both countries to pay lower rates or avoid paying them whatsoever. This can be explained by the lack of cooperation between governments and businesses with regards to the appropriate negotiation of tax rate rules for facilitating economic growth while ensuring that corporations are not set back by the high corporate tax rates.

Effects of Tax Rate Changes

United Kingdom

For the UK, the most recent developments in corporate tax changes relate to Brexit. As mentioned by Theresa May, the government is planning to lower corporate income tax rates to facilitate the retention of talent within the country and attract foreign companies to the country despite it leaving the European Union. However, experts suggested that a further tax decrease would not be enough for offsetting the pressure associated with Brexit. Decreased tax rates turned the country into a tax haven, to which even US companies have started transferring their operations to avoid paying high taxes. Nevertheless, the effects on the society have not been as positive. The unbalanced control of tax payments led to less wealthy individuals and businesses paying higher taxes than those with a high income, which points to a dramatic inequality in this sector. The government also lost more than it gained since large corporations avoided paying taxes, inherently damaging the budget and leading to financial losses.

United States

While the US has shown a steady corporate tax rate of 35% since the year 2000, the current President Donald Trump has made a statement about his intentions to reduce the rate to 15% (Browning 2017). It is important to mention that the implications of the 15%-plan will be complex. Under the President’s plan, individuals who earn a lot will be incentivised to become companies for taking advantage of lower tax rates. Also, the government does not have a solution for preventing this from occurring; experts have stated that the pass-through provision without additional precautions is likely to increase the governmental budget’s deficit by hundreds of billions of dollars (Browning 2017, para. 5). Societal behaviours are expected to change with the drop in corporate tax rates; as businesses will have to pay less, they can lower prices on some products to facilitate purchasing.

Conclusion

Based on the comparison of the US and UK corporate tax systems, it can be concluded that the two countries had different approaches toward imposing taxes on their companies. On the one hand, the UK has continuously been reducing the tax rate within the last twenty years and is planning to cut the rate even further. This can lead to the attraction of talent to the country to address economic and societal instabilities associated with Brexit. The United States, on the other hand, has been maintaining a steady corporate tax rate that is among the highest rates in the world. Despite this, the country managed to attract investors in the business sector and maintain high spending of the population.

Both countries are currently on the edge of major changes in corporate tax rates, which will subsequently affect behaviours of companies and their consumers. While it is considered that the reduction of tax rates is expected to attract foreign capital, the UK and the US risk undermining the budget and thus affecting societal stability. Further considerations regarding such drastic changes are needed to ensure that taxpayers will still make enough financial contributions to the budget.

Reference List

Bartelsman, E & Beetsma, R 2003. ‘Why pay more? Corporate tax avoidance through transfer pricing in OECD countries’, Journal of Public Economics, vol. 87, no. 9, pp. 2225-2252.

Browning, L 2017, Trump’s 15% corporate tax plan may just be his opening gambit. Web.

Devereux, M, Lockwood, B & Redoano, M 2008. ‘Do countries compete over corporate tax rates?’, Journal of Public Economics, vol. 92, no. 5, pp. 1210-1235.

Djankov, S, Ganser, T, McLiesh, C, Ramalho, R & Schleifer, A 2010, ‘The effect of corporate taxes on investment and entrepreneurship’, American Economic Journal: Macroeconomics, vol. 2, no. 3, pp. 31-64.

EY 2017, Worldwide corporate tax guide 2017. Web.

Hawkes, A & Watkins, S 2013, Revealed: one in four of the UK’s top companies pay no tax while we give them millions in credits. Web.

Hong, Q & Smart, M 2010, ‘In praise of tax havens: international tax planning and foreign direct investment’, European Economic Review, vol. 54, no. 1, pp. 82-95.

Inman, P 2014, Britain is a corporate tax haven – that’s why US firms are keen to uproot. Web.

Miller, H 2017, What’s been happening to corporation tax. Web.

OECD 1999, Historical Table II.1 – statutory corporate income tax rate, Web.

OECD 2017, Table II.1 – statutory corporate income tax rate. Web.

Rojo, J, Anderson, S & Klinger, S 2010, Corporate tax dodgers: 10 companies and their tax loopholes. Web.

Spring budget 2017.2017. Web.

Tax Foundation 2012, A global perspective on territorial taxation. Web.

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