Paying a fair share of tax – so-called ‘Windfall Taxes’

There has been much recent debate about whether oil companies who are making record profits should pay a windfall tax.

The arguments for the tax appear to be: 1. The energy companies or oil producers can afford it because they are making lots of money; 2. These are extraordinary times when those profits have been increased because of the huge rise in energy prices; 3. The government needs some money to subsidise energy bills for your normal/average consumer who is struggling to make ends meet; 4. It is fair for those who can afford it, to be pay more tax.

The arguments against a windfall tax are also equally as numerous: 1. Taxpayers deserve certainty over what taxes they should pay and a settled, clear, transparent and consistent tax system; 2. If the government wanted companies to pay more tax if they made more money they should have initiated a banded system of taxation – similar to the personal tax system– so that higher taxes apply to higher profits.  The government did not so it is unfair for them to introduce this retrospectively; 3.Government should not make up the tax system as it goes along.

We have been here before haven’t we?  It is not long ago that heated debates surrounded the enormous profits made by Amazon, Starbucks and other largely US multi-nationals.

The UK signed many double tax treaties (DTTs) including one with the US to encourage investment and give certainty on tax matters to international investors.  Article 4 of the US/UK DTT states very clearly that an US company may warehouse and distribute goods in the UK without creating a Permanent Establishment (PE) and therefore without creating a taxable base in the UK.  It works visa versa also so that same term would apply to an UK company or individual investing in the US but it just so happens that most of the major international/multi-national companies earning huge profits in the world today happen to be American.  Now, because Amazon is selling lots of goods to UK persons, it has been suggested that they should pay more tax in the UK even though the DTT specifically states they should not be taxable in the UK under these circumstances.

In those cases, there is a different moral argument because Amazon is booking all its profits in Luxembourg and utilising the Luxembourg/UK treaty which has similar provisions.  The UK is calling foul.  But it should be noted that by booking the profits in Luxembourg it is the US who are losing out on tax and not the UK.  If Luxembourg was taken out of the equation, the US would get more tax but the UK would not so it is really up to the US to initiate legislation which captures the profits of the subsidiaries of its multi-national corporation and charges them to tax in the US if it wants to.  They are fully aware of what is going on but presumably think that US companies gain a competitive advantage by being able to make profits in low tax jurisdictions and utilise them pre-tax.  Eventually those profits will come back to the US and be taxed but for now they can avoid tax and help the companies grow.  Is that unfair?  Possibly.

Surely corporations doing business with the UK are entitled to certainty on how they will be taxed and under what circumstances?  If the UK wanted to tax companies once they had reached a certain profitability and not before then legislation could be written in those terms.  It does not seem fair that we write international agreements and then immediately try and break them when it appears as though the US is getting more advantage from them then we are.

If the reverse situation had happened, i.e if UK companies operating in the US suddenly became massively profitable and the US decided to tax them despite an agreement that they wouldn’t I am sure the UK government would be vehemently protesting.

Howard Bilton is a Barrister called to the Bars of England/Wales & Gibraltar, visiting Professor at Texas A&M University and the Founder and Chairman of The Sovereign Group

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