Tax is a major issue for companies today and can affect competitiveness of the company. All companies would like to lower the tax bill; this creates more shareholder value which is the overall aim of companies. Internationally, corporate tax rates vary dramatically and companies are looking to move to ‘tax havens’ in order to reduce their tax outgoings.
Well known tax havens are Ireland and Switzerland. Within Switzerland the Canton of Zug has one of the lowest corporate tax rates in the country, today around 12-25%. Many companies have offices or headquarters there including Boots, Siemens, Zstrata, Tata AG and Johnson and Johnson. Ireland has a corporate tax rate of 12.5- 25%. These rates are significantly lower than the 28% paid in the UK and companies who operate from Switzerland or Ireland can make real savings on their tax bill.
There are 26 Cantons in Switzerland which make up the federal state and each canton has its own constitution, legislation, government and courts which is why tax rates can vary within Switzerland itself. Switzerland in general is seen as a tax haven for companies.
Some people would argue that it can be viewed as ‘un-fair’ that businesses move around to gain benefits from lower taxes. In some ways they would be right as everyone else has to pay income tax so why should companies get away with avoidance? Companies offer great benefits to the local communities they are based in. They move so that they can benefit from lower tax bills which creates more available funds for investments and growth, which achieves the long-term objective of maximising shareholder value.
Johnson and Johnson’s pharmaceutical and biotechnology sectors are primarily located within Europe, in particularly Ireland, Belgium and Switzerland. The facilities there can produce the products and they have R&D facilities. They then sell the products to relevant subsidiaries around the world. Through the method of transfer pricing they are able to retain a large amount of profits within Switzerland and Ireland where the tax rate is lower. The UK subsidiary can benefit through only paying tax once due to double taxations treaties with Ireland since 1998, Switzerland since 1977 and Belgium since 1987.
Through techniques like over invoicing, profits can accumulate in the lower tax regions. Johnson and Johnson report figures as a whole and by sector and as long as the figures remain in the correct sector it does not cause an issue to top managers or investors.
One disadvantage to having facilities in different countries is the affect currency variations have upon pricing. The Johnson and Johnson (J&J) plants in Europe all invoice out in GBP so the European based subsidiaries take the risk, rather than the UK subsidiaries purchasing the goods. The invoice is created on the day the goods leave the warehouse, so by the time payment is due, currency exchange rates can have changed dramatically especially with the current problems in the Euro Zone which is a form of transaction exposure.
Another type of currency exposure J&J have to deal with is translation exposure. This is due to all reports having to be produced in USD, as they are incorporated there and trade on the NYSE. Each subsidiary company hedges to protect against currency differences.
The savings companies’ makes in re-locating to countries with lower tax rates must more than compensate for the currency risks that occur through the currency variations. I therefore can see why people do oppose companies moving to gain tax breaks, but I can see why companies do it. They have more income which they can use for other projects or investments which could help the community in the longer term. Governments today are trying to reduce these ‘tax havens’ so companies cannot save large amounts by moving country. This may work for a while until they are able to find another area which offers low taxation rates.
(References – BBC News, Bloomberg, The Financial Times, Johnson and Johnson and Corporate Financial Management – Drury.)
Following the latest budget and the announcement that the corporation tax rate in the UK is set to be lowered, do you think this will encourage companies to remain in the UK or move back?
ReplyDeleteI think the move by the government to reduce corporation tax, is definitely going to add some benefit to the UK economy. The current rate was very high in comparison to other countries especially European countries leading to UK companies choosing to move operations abroad. In the last few weeks there has been a story about Amazon taking all payments from customers in the UK, through Luxembourg, so they do not have to pay UK taxes. If the reduction in tax rate can help to reduce instances like this, then it is definitely a move in the right direction for the UK government.
DeleteI think that while there are tax rates as low as 15% in other countries, the UK is going to struggle to be competitive even at 23%, and businesses may not wish to return. It may encourage companies to remain in the UK, but I don’t think companies who are used to paying less than 20% will move back to the UK when there is no guarantee the rate will remain at 23%. But personally, I do believe it was the right move for the government to make, to try and increase the competitiveness of the UK economy.