“Tis impossible to be sure of anything but Death and Taxes” wrote playwright Christopher Bullock in 1716 (and Mark Twain nearly two centuries later). But Mr Bullock, and the many who have quoted him since, overlook the fortuity of multinationals such as Google - who have become subject to the latest media and public outcry over their paltry £130 million tax settlement for the 2005 - 2014 period.
300 years ago the only noteworthy multinational was the East India Company - which not only managed to collect taxes in some of their endeavours but whose tax exemption on tea helped cause a certain significant historical insurrection in Boston, Massachusetts. Presently there are around 300 major multinationals that benefit from a diversity of markets as well as the supplementary benefit of tax efficiency through transfer pricing et al. Of course there are many more tax efficient entities across the globe; even local towns are trying to get in on the ‘offshore’ action - just Google ‘Crickhowell’ in Wales. The public dissatisfaction over unequal and unrepresentative taxes is far from the levels seen leading up to 1776 but it is certainly on the rise. As such corporations may find it increasingly difficult to glean such sweetheart tax deals in the near future as politicians are increasingly pressured by an increasingly disgruntled public in addition to the ongoing fiscal strains.
A makeshift breakdown of the Google deal can be informative into just how much profit from multinationals could be at risk from a changing tax environment in the near future. Records show $35.5bn of UK sales (approx. £24bn at an average exchange rate) for the period and most estimates of Google’s net profit margin are around 30% (gross profit margin estimates range from 62-75%). This would generate a profit for the period of £7.2bn. Taking an average UK corporation tax of 25% (having fallen from 30% to 28% in 2008 then to 21% by 2014) the expected tax liability, on £7.2bn profit, would be around £1.8bn. This is in contrast to the actual figure of around £200m (£130m from the deal plus around £70 of other tax payments and provisions).
Transitioning from an effective tax rate of less than 3% (or at least in the region of 3-7% assuming an even more conservative profit estimate) to the current rate of 20% would of course reduce net profits by around 17%. This extreme is unlikely, but it’s impossible to guess just how close to the middle the middle-ground will turn out to be.
So Christopher Bullock may end up being right after all, that even for multinationals taxes are a certainty. Whether we’ll still be alive to see it happen is, as Bullock’s quote reminds us, far from certain. In the meantime those here in the UK have just a few days until the (online self-assessment) deadline for 2014/15 tax returns. For those not needing to do that…