What is the relationship between corporate taxation and the formation of international business? How do international corporations differ from domestic ones? These are just some of the questions that arise when one starts delving into the subject of corporate taxation in the UK. The importance of corporate taxation cannot be understated as it plays a crucial role in ensuring that the funds provided by governments for the provision of public services are collected properly and rebated to the citizens.
However, the extent to which corporate taxation impacts the functioning of the economy is much less than one would imagine. For instance, the recent Panama Papers scandal has resulted in many people being questioned about their tax affairs in Ireland and the UK. Panama itself does not have very high corporate taxation rates. On the contrary, many countries throughout Latin America have been able to reduce their tax rates to more than 10 percent. Panama’s government did not itself come out with this policy but was accused by groups of lawyers and tax experts to provide a haven for tax dodgers.
Lack of Corporate Taxation
The most important issue that arises from the Panama Papers affair is the lack of corporate taxation that has replaced many of the other tax systems around the world. Some of the developed countries such as the UK have traditionally provided corporate taxation. The main reason behind this has been that the UK receives a greater volume of its capital as a result of its tax system. Thus, it has always been seen as an attractive destination for corporate investment. There are many reasons why a corporation may choose to base its activities in a different country including the fact that it may be more conducive for raising money or may have access to a better banking system.
The past few years, however, things have changed in the UK. Many large international companies have decided to establish their own bases here in the UK instead of concentrating their resources in a country where corporate tax rates are far lower. In addition, the UK government realized that it needed to change some tax policies to attract foreign investment. This has led to a reduction in corporate tax rates across the board.
While changes in tax rates are welcomed by many businesses, they have been accompanied by the realization that corporate tax havens provide much more than just low tax rates. In order to qualify for a tax haven, a company has to follow all of the rules and regulations. These laws and regulations, however, are not applicable to regular citizens. Citizens of countries such as the UK do not have to pay inheritance tax or income tax on their assets. Also, the beneficiaries of a will enjoy these benefits but those of a nonresident parents. However, there are still a number of other advantages of choosing a country like the UK when it comes to business tax planning.
One of the main advantages of using corporate tax havens to minimize tax payments is that they have an informal agreement with the IRS regarding the sharing of tax liabilities. Many multinational companies are able to save up to 40 percent in tax by adopting this strategy. Other countries around the world are looking to adopt this strategy as well. Therefore, a UK company could be extremely beneficial if it plans to expand into another country.
The second main advantage that a company can enjoy is that it is able to shield its assets from the ex-gratia tax liability of an individual shareholder. If an individual shareholder leaves a corporation without handing over his rights to the company, then he can be subjected to tax liability on the transferred assets. For a large corporation, this could translate into a huge tax bill. By transferring its assets to a corporation that is resident in the UK, a company will be able to avoid paying this kind of tax. Furthermore, tax havens offer extensive legal assistance to corporations that need help with their tax obligations.
Apart from the UK, countries such as Ireland, Bermuda, and Jersey have become popular destinations for corporate headquarters because of their low tax rates. They have fewer problems with the ex-gratia tax liability, which makes them attractive for companies. In the case of Ireland, this works in favor of the residents of the country since the corporate tax in Ireland is considerably lower than the corporate tax of the US. Moreover, there are no capital gains tax or inheritance tax in the case of Jersey and Bermuda. These countries also allow double taxation with regard to dividends paid to an individual shareholder.