Research carried out by PwC showed that 63% of 1,344 CEOs surveyed said they do take tax into account when choosing where to locate.
The UK, for instance, has seen a number of companies electing to move (or move back) to the UK after recent tax changes enacted by the coalition government.
WPP, the advertising and public relations multinational headed by Sir Martin Sorrell, returned to the UK in 2012 after four years in Ireland. Sorrell told International Tax Review that tax considerations were the main driver influencing the 2008 decision to leave for Ireland, and the decision to return at the start of 2013.
“With the threat of punitive CFC rules being replaced by the certainty of the new regime, we decided that the parent company should return to the UK,” Sorrell said.
Publishing company UBM is another to have made similar moves, while the proposed $35.1 billion mega-merger of advertising agencies Omnicom and Publicis Groupe could fall apart if tax hurdles are not overcome. The deal is currently being delayed because it is awaiting approval on a number of issues, notably the intention of the newly-merged company to become tax resident in the UK.
Omnicom chief executive John Wren has said that a failure to establish tax residency in the UK could derail the deal entirely. He said it “could affect the likelihood of satisfaction of the conditions to closing of our deal”.
And, most recently, Starbucks last week announced its plan to move the company’s European headquarters from Amsterdam to London. Tax is clearly a factor in that move, too, but in this instance because Starbucks wanted to be seen to be paying more tax in the UK, rather than using location to mitigate company tax costs. The company statement announcing the move contained specific reference to paying more tax in the UK as a result of the move (though the group’s worldwide tax bill may not increase) after it came in for criticism from politicians and the public over the low levels of corporation tax it has paid in the UK since opening stores in the country.
These relocations come at a time when the UK government is actively trying to promote the country as a business location. A series of tax measures have contributed to this, including CFC reform, the introduction of a patent box regime, and successive cuts to the corporate tax rate, which will reach 20% by 2015.
But Mary Monfries, head of tax policy and global tax reputation leader at PwC, says that tax considerations are not limited to rates and liabilities, but also take into account the stability of a tax regime, among other factors.
“Decisions on business location are influenced by many things, including customer demand, resources and skills, and political stability,” she said. “Tax is undoubtedly an important part of the decision mix. When considering tax systems, it’s not just the tax costs, but the stability of the regime and compliance burden that matters.”
Mobility factor
The impact a tax system has on location decisions varies depending on sector. This is linked to mobility; for more mobile businesses, the tax system is a greater influence. The PwC study found that 70% of CEOs surveyed from the asset management sector say tax policy is a key factor in deciding where to locate their business, while the figure for CEOs from the mining sector (where business location is necessarily tied to the location of resources) is 57%.
Monfries said the increasing tax burden – from either a cost or compliance point of view – has precipitated a rise in the impact tax systems have on business decisions. One only has to look at the trends of tax competition and the corporate tax rate race to the bottom currently occurring, characterised by substantial rate cuts in, for example, the UK (five percentage points in four years) and the continued clamour for similar measures to be taken in Australia, the US and Japan, among others.
And the fact the tax contribution from UK businesses has gone up as the rate has gone down indicates the level such policies impact taxpayer decisions. With the UK deficit in 2013-2014 also being trimmed further than expected – largely due to a rise in tax revenue – this reinforces the effectiveness of the policy, though it should be noted that the main driver of higher tax revenues was stamp duty, which saw revenues rise 44.5% on last year.
