Guest blog: Why Corporate Income Tax is the big, sexy beast of business tax

At the Fair Tax Foundation, we’re often asked why we focus on corporation tax, when this is just one of a number of taxes that business pays.

Corporation tax is it at the centre of our work and our Fair Tax Mark accreditation standards.

It is the big, sexy beast of business tax. No other tax borne or collected by business comes close to having such an impact. Which isn’t to say that other taxes are unimportant. They are really important. But corporate income tax is in a class of its own for the five reasons set out below.

1. Corporate tax avoidance is a clear and present significant problem

The current international tax rules still allow large multinationals to earn significant income in a jurisdiction without paying corporate income tax there. Some 40% of multinational profits are artificially shifted to tax havens annually, leading to a US$250bn reduction in corporate income tax revenue. Within this, the UK was found to suffer a staggering US$110bn of profit shifting, leading to an estimated US$21bn reduction in corporation tax revenues – which equates to £17bn of missing tax, or 32% of what is collected.¹

Commitments and disclosures on responsible tax conduct have improved recently, but still significantly lag behind reporting on other sustainability issues. For example, only a third of multinationals have commitments or policies on tax transparency in place, compared to 87% for climate change and 98% for health and safety. A miniscule 3% have a named position responsible for tax policy at board level.

2. Corporation tax is a crucial source of revenue to governments across the world

While average headline rates of corporation tax have been decreasing globally over the past two decades, it remains a substantial source of tax revenue, particularly in developing countries.

In some countries in Africa and Asia and Pacific, corporate tax revenues make up more than one-quarter of total tax revenues. Corporation tax was recently found to make up almost a third of all taxes paid globally by the largest companies headquartered in Europe.

Arguably, the global race to the bottom is over. Numerous governments (including Germany, Japan, South Korea, Switzerland and the UK) are now well on the way with implementing the OECD’s BEPS 2.0 Inclusive Framework proposals, including the introduction of a global minimum tax for business.

3. Corporation tax is a progressive tax and has a major impact on a country’s tax morale

Beyond revenue generation, corporation tax plays a critical role in preventing wealth concentration and ensuring a fair distribution of the tax burden among individuals and businesses. It acts as a backstop to personal income tax, limiting the scope for tax avoidance by individuals who might otherwise incorporate to escape personal income tax.

Corporation tax has a progressive nature, with richer households bearing a greater share of the tax burden. This is important because people are more willing to pay taxes when their tax system is viewed as being generally progressive.  Where there is perceived tax inequity, individuals and businesses are less likely to act morally, and more likely to respond to taxation through noncompliance.

4. Corporate tax dodging reduces national productivity

Aggressive tax avoidance and evasion distort national economies, hindering fair competition for businesses domestically and internationally. Some tax-evading corporations enjoy implicit subsidies, allowing them to thrive despite low productivity, reducing market share for compliant businesses. There is a significant productivity gap between tax-compliant and non-compliant firms, impacting economy-wide productivity and growth.

At the same time, keeping tax rates at a fair and reasonable level is crucial to the development of a thriving, diverse private sector and the formalisation of business. Corporation tax reliefs can also be used to incentivise investment in public goods, such as renewable energy.

5. Corporation tax is a ‘red flag’ issue for many investors

An increasing number of institutional investors and asset managers are now urging that multinationals should embrace responsible tax conduct and tax transparency as a core element of their ‘ESG’ credentials. This includes the world’s largest sovereign wealth fund, seven of Denmark’s biggest pension funds , the UK’s default auto enrolment pension scheme, the US’s largest public pension fund and many others.

Investors are also increasingly viewing corporation tax avoidance as a ‘red flag’ for an overly aggressive attitude to compliance in general and poor corporate governance. Tax transparency has even recently been the subject of an increasing number of investor resolutions (witness the Annual General Meetings of Amazon, Cisco and Microsoft in 2022).

Investors have been front and centre of calls for new corporation tax disclosure rules. Witness the advances in the European Union and Australia, where public country-by-country reporting (pCbCR) will soon be mandatory for large multinationals with significant operations there. In the United States, analogous changes have recently been agreed.

Corporation tax matters, and progressive businesses recognise this and are proud to contribute their fair share. It has a unique ability to support public service, economic growth and reduce inequality. Long may it thrive.

Read our full paper, ‘Why corporation tax matters so much’, for more detail, facts and figures.

1. Figures drawn from The Missing Profits of Nations, by Thomas Tørsløv, Ludvig Wier and Gabriel Zucman.

The views expressed in guest blogs are those of the writer and are not necessarily shared by CIOT.