An interesting observation about Ritchie's latest attack on corporate tax avoidance
Posted by Christie Malry on March 2, 2011 at 9:55 pm
From the recently published Oxford report on UK Corporation Tax, Ritchie draws the following:
Within each sector there is evidence that, as a proportion of trading profit, the tax liabilities of the largest 100 companies are generally lower than for other companies.
He then concludes the following:
In other words - there is compelling evidence of systematic tax avoidance, because large companies should be paying tax at 28% and are actually paying it at less than the 21% due by small companies but we must not, Oxford says (returning to its normal apologist style) draw any conclusions from this - a point on which I fundamentally disagree with Mike Devereux, as ever.
This is, dare I say it, in fact nothing of the sort. It's compelling evidence, if anything, of comprehensive, undiluted Ritchiebollocks. Companies pay tax based on their taxable profits, not their financial reporting profits. While the former is derived from the latter, there's simply no reason for the country's largest companies to have similar sorts of adjustments to smaller ones.
Of course, accounting sort of takes care of this via a concept known as 'deferred tax'. Where the way an item is treated for tax and accounting is the same, but the periods in which it is recognised are different, 'deferred tax' is recognised to make the overall tax charge mimic the accounting entries, even though the actual payments may take place in different periods. The Oxford report doesn't really make it clear which 'tax charge' they are using, but I'm presuming they've taken current + deferred tax.
But there's another big problem with Ritchie's claim. The Effective Tax Rate in the Oxford report is based on EBIT 1, earnings before interest and tax. However, interest is an allowable deduction for corporation tax. So to the extent that companies have net interest payable, it will depress their effective tax rate, because the interest won't have been deducted in EBIT but will be an allowable deduction for tax purposes. The report explains 2 why these data must be approached with caution. Of course, Ritchie doesn't think that these warnings apply to him, or he thinks that any discrepancies are ex ante evidence of tax avoidance.
This is pretty criminal stuff from Ritchie. Virtually every time he gets the chance, he tells us that Mike Devereux is a totally discredited academic. Yet here, because Devereux has provided some information with which he agrees, Ritchie has cherry-picked it to serve his own devices. Unfortunately, he's then chosen to compare apples (taxable profit) with pears (accounting profit), resulting in a nonsense analysis.
One does wonder how up to date Ritchie is with his CPD.
also, he compares the actual tax paid by a very selective group of big companies, with the theoretical tax paid by all small companies. we can compare the headline tax rate applicable to different sized companies, or we can compare the actual tax paid by different sized companies - we cannot mix and match.
"Michael Devereux, of the Oxford University Centre for Business Taxation, said there were a number of possible explanations for the finding that the largest companies paid lower rates of tax as a proportion of earnings before interest and tax than smaller companies except in publishing and the sector covering textiles, wood and paper.
These included big groups’ greater use of capital allowances and ability to offset losses against profits. He warned against drawing firm conclusions. “We do not have enough information.”
Well it would appear that Devereaux shares the same hypothesis as Murphy - and given that he also thinks that there isn't enough information to draw firm conclusions (although you seem ready to offer a few don't you!) perhaps you should agree that the matter warrants further attention - unless of course you believe that large companies should pay lower taxes than small ones. In law I think there would be enough evidence prima facie to warrant a case.
Ritchie is always kind enough to supply the evidence required to demonstrate that he's talking bollocks. I don't need Devereux's help for that.
As for your second point, I am reasonably content with smaller companies paying a lower rate of tax than larger ones. As they currently do.
Oh, you cry, but Devereux has found differently, has he not? No. Tax is charged on taxable profits, not accounting profits. While it might be fun to calculate ETR by dividing the current plus deferred tax charge by earnings before interest and tax, it doesn't tell you anything particularly useful, other than for larger companies the link between tax and financial reporting is more complicated. That's why we have form CT600, extra investigations for large and complex groups, etc.
Ritchie's analysis is about as relevant to tax avoidance as, in the immortal words of Sir David Tweedie, taking EBIT and divide it by the cube root of the number of miles to the moon and multiply it by your shoe size for all the sense it makes.