IT Essentials: Shifting the pendulum

The UK is uniquely positioned to address legal tax evasion

The UK lost out in £2 billion in taxes from Big Tech firms in 2021 alone - completely legally. But fixing the problem is no small task.

Countries have long competed to attract big business, hoping to benefit from higher employment, wages and taxes.

One of the ways they do so is, ironically, through the tax system, slashing rates and offering breaks for investment - the idea being that the higher revenues and other benefits companies bring to an economy will compensate for lower taxes.

The UK is certainly not immune, offering one of the lowest corporation tax rates of any major economy (there are other charges that make operating here more expensive, but we're focusing on one piece of the puzzle today).

The pendulum has swung firmly in businesses' favour for many years, and not without justification. The benefits of their investment are huge. Where it breaks down is when companies avoid paying their fair share.

Capitalism demands that private companies try to maximise their profits. Avoiding tax is one of the most popular ways of doing so - and it turns out that multinational firms are really, really good at it. That's great for them and their shareholders, but not for the countries where they operate. Big Tech underpaid an estimated £2 billion in 2021.

The UK is far from the only place where these firms do this. In the EU they headquarter themselves in Ireland or Luxembourg: countries with notoriously low corporate tax rates. Elsewhere they use tax havens like Bermuda or Puerto Rico to offshore their profits.

Last year Microsoft was found to be using a web of shell companies to avoid taxes - announcing tax liabilities of just $15 (yes, one-five) in Singapore in 2020, on dividend profits of $23.82 billion. In the USA, the IRS is now chasing the company for an estimated $29 billion in back taxes

Most tax avoidance schemes like this are legal, due to loopholes that corporate lawyers can lever wide open, but it's far from a victimless 'crime'. The public sector in particular - remember, that set of creaky, monolithic behemoths that keep vital public services running? - is deprived of much-needed funds.

The status quo is beginning to shift, as countries around the world start to cooperate to crack down on tax evasion. The OECD - which includes Ireland and Luxembourg - will institute a minimum 15% tax on corporate profits from next year.

However, that only covers a small number of countries around the world. If anything, firms will be more incentivised to seek out tax havens.

To truly move the pendulum, international cooperation is needed on a massive scale. This is somewhere the UK, with its mature financial services sector, really can take the lead. We deeply hope the government realises this soon.