Multinational Corporations That Operate in the UK Should Pay More Taxes in the UK - Essay Example

Reflective essay on debate of Westminster BKEY401 -Professional Competences ID number Word count: 1387 The seminar leader name Introduction The importance of multinational corporations in the modern global business setting cannot be ignored. MNCs play a critical role in the process of economic globalization, and this is beneficial to the host country and the global economy in general (Shah, et al, 2012, p. 28). There are a number of factors which must be considered before a multinational set up in a given country. Taxation is one of such factors, and this greatly affects the activities of the multinational firm in a given country. This essay focuses on the concept of taxation for multinational corporations in the United Kingdom. There have been debates on whether or not the multinationals that operate in the United Kingdom should pay more taxes. Throughout the paper, arguments will be put forward to support the idea that these MNCs should not pay more taxes as this would hurt the UK economy. Based on the Honey and Mumford learning styles theory, evidence will put forward to support this stance. Discussion The United Kingdom, just like many other countries, is exploring ways of attracting foreign direct investment. One of the ways this can be achieved is through the reduction of corporation tax rate for the MNCs. Evidence from other countries suggests that having a competitive tax regime is important in attracting foreign investments to a given country. Daniela Pîrvu and Martina Eckardt (n.d) note that multinational corporations want to establish in regions or countries where they will yield higher after tax profits. This means that when such corporations are heavily taxed, their after profits reduce, and this discourages foreign investments. For instance, between 2003 and 2006, Bulgaria and Romania attracted average foreign direct investments of 15% and 8%, with income tax rates of about 15 % and 16% respectively. On the other hand, Slovakia’s foreign direct investment volumes average 6% within the same period, at a tax rate of 17.5% (United Nations Conference on Trade and Development (UNCTD), 2008 p. 346). High taxes increase the capital use costs and reduce the ability of the company to make further investments since the profits are reduced (Desai, et al, 2006, p. 18). Clearly, when a country imposes high tax rate for multinationals, it becomes unattractive to foreign investments. This in turn reduces overall GDP earnings, and this slows the growth of the economy. There is evidence to show that multinational corporations are willing to invest in the United Kingdom as a result of competitive tax rates. In the UK, a number of tax reforms gave been undertaken with the aim of reducing these taxes. In 2010, the Corporate Tax Road Map was published, which clearly showed the approach the UK will take towards tax reforms. One of the principals in this reform is a lower corporate tax rate (HM Governement, 2013, p. 3). As a result of these changes, a number of multinationals have already announced that they will return to the UK or expand their activities. In addition, some are willing to relocate their headquarters to the UK (Deloitte, 2012, p. 1). Some of the major beneficiaries of these tax reforms include the TV production, animation and gaming industries. Thereof, when such industries are boosted, job opportunities are created, and the general economy grows. In world where employment chances are becoming scarce, enhancing the presence of multinational corporations in a country is one way of fighting this problem. This has a direct benefit to the local industries and population. Increasing the tax rates for multinationals that operate in the UK will water down the steady gains that are being made. When corporations are charged high tax rates, the government of that country is likely to lose in the long run. According to Jack Mintz (2008), the companies end up using financial structures and the concept of transfer pricing to move their profits to countries that charge lower tax rates. The multinational corporations employ a variety of strategies to move income from high tax to low tax regions. These strategies may include the distortion of the firm’s debt-equity structure and strategic location of overhead costs and assets (Janský & Prats, 2013 p. 5). As Mintz notes, this is one element that has hurt the US economy due to the high corporate tax rates. The United Kingdom will thus lose revenue in the event that these multinationals are highly taxed, and this will affect the overall earnings of the country. It should be noted that with the current advancements in technology, such corporations can still continue to operate in the United Kingdom and yet allow for the profits to be shifted to countries that charge lower tax rates. Tax rate cuts thus play an important role in increasing the overall tax revenue collected by the government. The argument that the multinational corporations in the United Kingdom should be highly taxed thus does not hold water since the intended heavy tax revenues will not be realized after at all. Multinational corporations play an active role in research and development, which helps to boost innovation in a country. Multinationals either set up independent research and development facilities or partner with local institutions such as universities and colleges. The skills acquired are used in the development of new products and services, and this further helps to grow the economy. Imposing high tax rates on such corporations reduces the amount of investments that are out in the R&D activities, and this negatively affects the host nation. For instance, the US-ICT is an example of an American company dedicated to the manufacture of systems for computation and communication (Lam, 2003 p. 12). This company has a research facility in Bristol, UK. This illustrates how such firms make important investments in the host country that are aimed at benefiting the larger population. Such R & D investments help to boost the skills of the population and help to produce individuals with a variety of skills. When such firms pay heavy taxes, they are less likely to make such investments in the host country. In addition, high taxation of multinational encourages the movement of experts from the host country to other countries where taxes are low. This is because the research facilities are located in these low tax regions, and therefore individuals are likely to move to these regions in order to get the necessary training. Furthermore, when multinationals shift to other countries, they are likely to move with the local experts into the new regions, and this has a negative effect on the local industries. Finally, there is evidence to show that high tax rates for multinational corporations may lead to the marginalization of the companies relative to their competitors in foreign markets (Barrett, 2009, p. 18). This has two major effects. First, these multinational corporations may be forced to sell their products and services at a very high price compared to their competitors in other regions. This will then increase the cost of living in the affected country. In addition, considering that some of the products manufactured by the multinationals are used by local companies, the increase in prices might force the local companies to increase the prices for their products and services as well. This makes them uncompetitive in the global market. Secondly, the marginalized MNCs might be forced out of business, and employees lose jobs. This negatively affects the local economy. Conclusion The main aim of this paper was to highlight the negative impacts associated imposing high tax rate on multinational corporations in the United Kingdom. Evidence from the UK and other countries has been used to support this argument. It is clear that making such multinationals pay high taxes will reduce foreign direct investment in the UK, and this will negatively affect the economy. Evidence has been presented to illustrate how low tax rates are attracting foreign direct investments. In addition, high tax rates for multinationals army affect the government collection of revenues, since the affected companies transfer their prices to those countries that charge lower tax rates. Finally, charging high tax rates marginalizes multinationals against their competitors in other regions. It should however be noted that a part from taxes, there are other factors that affect the success of multinationals. And these include security and political stability. These factors need to be considered as well in order to promote the success of multinational corporations in the UK. References Barrett, W.C. 2009. ‘Tax Policy Should Encourage U.S. Investment and Growth.’ Tax Analysts, pp. 16-18. Retrieved on 29 Nov. 2103 http://www.taxanalysts.com/www/freefiles.nsf/Files/BARRETT-5.pdf/$file/BARRETT- 5.pdf Deloitte, 2012. ‘At home in the UK: A new look at the role of the UK in your business.’ Pp. 1-5. Retrieved on 29 Nov. 2103 from http://www.deloitte.com/assets/Dcom- UnitedKingdom/Local%20Assets/Documents/Services/Tax/Tax-At-home-in- UK%20rt8.pdf Desai, M.A., Foley, F., & Hines, J. 2006. ‘Research Spotlight: Taxation and Multinational Activity: New Evidence, New Interpretations.’ Survey of Current Business, pp.16-22. Retrieved on 29 Nov. 2103 from http://www.bea.gov/scb/pdf/2006/02february/0206_mnc.pdf HM Government, 2013. ‘ A Guide to UK Taxation.’ Pp. 1-24. Retrieved on 29 Nov. 2103 from https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/183408/A _guide_to_UK_taxation.pdf Janský, P., & Prats, A. 2013. ‘Multinational Corporations and the Profit-Shifting Lure of Tax Havens.’ Christian Aid Occasional Paper Number 9, pp. 1-13 Lam, A 2003.‘Organizational Learning in Multinationals: R&D Networks of Japanese and U.S. MNEs in the U.K.’ Danish Research Unit for Industrial Dynamics (DRUID). Working Paper No 03-03, PP. 1-26 Mintz, J. 2008.‘Cutting the Effective Corporate Tax Rate.’ CATO Institute Tax & Budget Bulletin. Retrieved on 29 Nov. 2103 from http://www.cato.org/sites/cato.org/files/pubs/pdf/tbb_1008-50.pdf Pîrvu,D., & Eckardt, M. (n.d). ‘The Competitiveness through Taxes in the Central and Eastern European Countries.’ Scientific Bulletin – Economic Sciences, 8 (14). Shah, F. A. et al. 2012. ‘A Critical Review of Multinational Companies, Their Structures and Strategies and Their Link with International Human Resource Management.’ IOSR Journal of Business and Management (IOSRJBM), 3(5), Pp. 28-37 United Nations Conference on Trade and Development (UNCTD), 2008. ‘UNCTD Handbook of Statistics.’ Pp. 1-512. Read More