Large Corporates Really Are Contributing To The Pot, Advisor Says

by Jason Gorringe, Tax-News.com, London

27 February 2009

Regardless of whether one thinks that large corporations pay enough in income tax, new studies have shown that they in fact contribute substantially to government coffers in the UK and US, both through direct corporate tax contributions and by acting as the unofficial collector of a multitude of other taxes.

According to PricewaterhouseCooper's Total Tax Survey, carried out on behalf of The Hundred Group of Finance Directors, Britain’s largest companies paid GBP11.0bn, almost a quarter of the total UK government’s corporation tax take, in the year to March 31, 2008. For each GBP1 paid in corporation tax, these companies paid an additional GBP1.14 in other taxes and collected a further GBP3.88 of taxes on behalf of the government.

"The 2008 Total Tax Survey once again shows the extent to which our largest companies support UK public finances through the payment and the collection of taxes on behalf of the government," commented Ashley Almanza, Chairman of the Hundred Group of Finance Directors, representing the UK’s largest companies.

Almanza added: "In this economic climate the tax burden on large companies needs to be well understood. Taxation levels have an important impact on our ability to compete in a fiercely competitive global economy. The ideal is to encourage economic activity and thereby grow overall tax revenues. The predictability and competitiveness of our tax system is a prime concern for large UK businesses, as they typically make long-term investments. We welcome any assurance that there will not be significant changes to the tax system which would drive costs higher."

The UK’s largest companies paid and collected on behalf of the government an estimated GBP66.5bn in the year to March 31, 2008. This means that around half of the 'value' (eg UK turnover, UK profit before tax, net interest incurred in the UK, and the UK wages and salaries bill) distributed by these companies was paid to the state.

Other key findings include:

• Hundred Group members paid GBP11.0bn in corporation tax, GBP12.9bn in other taxes and collected GBP42.6bn of taxes on behalf of the government.
• After corporation tax (47%) the largest taxes were employers’ National Insurance contributions (20%) and local business rates (14%).
• For taxes collected the largest amounts were excise duties from fuel, alcohol and tobacco products (41%), employee National Insurance contributions and income tax deductions under PAYE (32%).
• The absolute level of total taxes paid by the Hundred Group fell 12.4% year-on-year, primarily reflecting a drop in corporate profitability and changes to the phasing of tax payments by energy companies.
• Per employee, employment taxes paid and collected increased to GBP19,729 in 2008. Employment taxes increased to GBP16.2bn, despite employee numbers for the Group falling 1%. This included a rise of 11.2% income tax under PAYE, 9.8% in employers’ National Insurance contributions and a 4.1% increase in employee National Insurance contributions.
• Tax departments spent most time on tax compliance (40%). Over half (54%) of the companies’ total compliance costs relate to corporation tax. For all taxes the cost of compliance on average is 1.57% of their taxes borne, effectively representing a surcharge of this amount on the taxes that companies bear.

"This data is valuable evidence in the debate on how to improve the competitiveness of the tax system," observed Susan Symons, tax partner, PricewaterhouseCoopers LLP.

"The drop in corporation tax paid by participants in this year’s survey highlights the sensitivity of corporation tax to competition and economic change. Next year's survey findings are likely to show the impact of the global economic downturn, with profits expected to drop in a number of sectors. Rising unemployment levels are also likely to lead to a drop in employment taxes and the level of stamp duties will fall as transaction volumes slow," she added.

A similar survey across the pond by PwC paints a similar picture. The 40 companies participating in the survey remitted USD94bn in taxes, of which USD28.5bn were federal and state corporate income taxes. These companies employed 1.6 million US workers and paid USD122bn in wages and salaries.

US corporations also serve as tax collectors for the government, collecting and remitting USD169 in sales, excise, withholding and other customer and employee taxes for every USD100 of corporate income tax payments.

“Although they are most visible, corporate income taxes are just one of a plethora of taxes borne by US companies. Beyond income taxes, businesses are liable for a host of other domestic levies imposed by federal, state and local governments, as well as substantial costs to comply with these tax obligations,” said Peter Merrill, a principal with the National Economics & Statistics group in PricewaterhouseCoopers’ Washington National Tax Services office.

The high total tax rate paid by US companies is partly due to the heavy reliance in the US on taxes borne by business as compared to taxes collected by business. The share of total taxes that are borne by business is higher in the US (49.1%) than in any other country surveyed.

Moreover, the United States is the only OECD country that does not have a value-added tax, and thus is more heavily reliant on taxes borne by business, such as income and property taxes.

The report reveals that US corporations also bear a heavy compliance burden, needing an average of 44 full-time staff to comply with federal, state and local tax payment obligations — more than three times the staff required in any of the other countries surveyed. This is, in part, due to the decentralized nature of the US tax system — US companies are potentially liable for more than 1,100 taxes imposed by the 50 states and the District of Columbia, as well as 89,000 local jurisdictions with local taxes too numerous to count. Although state and local taxes account for only 24.5% of US taxes borne and collected, companies spend 41.7% of their compliance budget on these taxes.

“The results of the Total Tax Contribution survey provide valuable insight into the amount of tax paid by many of America’s largest companies, and we hope the information will be a useful tool in framing future tax policy discussions,” said John Castellani, President of Business Roundtable, an association of chief executive officers of leading US companies.

Castellani went on to warn the new Obama administration, which is due to consider corporate tax reform that: “in today’s international economy, capital and innovation quickly flow to countries with welcoming economic policies."

"As a result, corporate tax rates have a huge impact on the ability of a country to attract investment and foster high-quality, well-paying jobs,” he concluded.

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