As Chancellor of the Exchequer, Rishi Sunak agreed for the UK to join a global agreement imposing a minimum effective corporate tax rate (the average percentage of pre-tax income paid) of 15% with 137 other countries in 2021. In-scope multinationals will pay additional taxes if their effective tax rate falls below that rate, based on detailed rules agreed at the OECD.
The UK is now moving to implement this minimum tax early, before almost all of the other signatories to the agreement and before those OECD detailed rules are finalised.
The report argues that we should reject this agreement in principle. Higher corporate taxes in general are economically harmful, diminishing investment and thereby wages. Harmonisation will undermine the democratic accountability that should limit those economic and social harms.
Earlier ministers recognised this and David Gauke, former Treasury Minister, for example responded to a proposal for a minimum EU corporate tax rate in 2015 that:
Any form of EU minimum tax rates would undermine our sovereignty and we therefore would block it.
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Diminishing UK sovereignty could create practical obstacles to plans that senior MPs have promoted as central to their economic vision. This includes: cuts to the statutory rate of Corporation Tax proposed by the current chancellor and other candidates in recent Conservative leadership campaigns; tax reforms proposed to address structural problems with Corporation Tax; and reliefs to address specific needs — such as the recent super-deduction. There is a fundamental tension in leaving the EU in order to recover UK sovereignty and then giving sovereignty away in an area that Ministers of all parties defended it when the UK was an EU member state.
All of this would be true if the UK were moving to implement the minimum tax at the same pace as other countries, but the planned early implementation and the lack of an underpinning treaty framework means additional economic risks.
- Administrative costs will be higher because companies will need to adjust their systems repeatedly as other countries implement, responding to OECD processes that are still being finalised. The Government’s impact assessment is unrealistic to the point that its estimated total compliance costs could plausibly be exceeded by some individual firms.
- Excessive taxes due to the lack of an underpinning treaty, leading to inconsistent enforcement. This is alongside specific risks in the insurance sector, with a thus far incomplete process taking place to address the risk that legitimate reliefs and the normal flow of funds are not accounted for in calculations for the effective tax rate.
- Lost international competitiveness with: firms potentially facing double taxation and having to rely on whether the UK will enter a dispute with the US if — as currently appears likely — that country’s implementation is not completed; and – low-tax jurisdictions being able to lower their tax rate on out-of-scope companies while collecting the revenues the UK hopes to extract from in-scope companies.
All of that means revenue is likely to be overstated, with the economic impact and response from other countries undermining the revenue gains from moving ahead early. Policymakers have a range of options now, from a fundamental rethink on what is a departure from a longstanding commitment to UK tax sovereignty, to giving themselves more room for manoeuvre through urgent tactical changes to the UK implementation. Future governments could and should reassert UK sovereignty over tax policy.