We all love a debate about corporation tax – or at least about corporate tax policy.

But debates and arguments about theory, concepts and policy can be aided by a practical understanding of the mechanics of computation. Two examples should operate to help elaborate on this point: Business Rates and the Diverted Profits Tax.

First things first, corporate “profits” are an artificial construct. Unlike real receipts or payments, one cannot “see” taxable corporate profits – they are a computation; a result of the deduction of allowable expenditure (note: not all expenses incurred in deriving a profit are deductible – many items of capital expenditure will not qualify for full expensing) from receipts derived from sources which are taxable (note: not all sources are taxable, such as gambling winnings in the UK); where the receipts and payments may themselves be artificial (consider attribution on the basis of market value; or cost-splitting arrangements which must be conducted at arm’s length). The relationship with accounting meanwhile cannot be ignored in that, depending on the jurisdiction, deference may be given ultimately to an accountant’s computation of the figure for profits (as in the UK). But accounting standards similarly are not free of value judgments!

Understanding that profits are a computation concerning the relationship between receipts and payments (real and hypothetical, and influenced by political choices about what to recognise) unmasks the fact that there are other possible ways of taxing corporations. Some propose that in the case of a multinational enterprise which is formed of a group of companies, profits could be diviied up between States on the basis of a formula. Others more radically suggest taxing corporations on a cash-flow basis – tax the sales minus certain deductions for certain expenses.

Aside from the potential for reform however, the computational nature of profits highlights that corporations may already be taxed on bases which are not “corporate profits” and, most intriguingly, these taxes may reduce the taxable corporate profits.

Such taxes should cause some pause for thought given their implications for the allocation of corporate profits – they sneak under the radar and can be significant in terms of quantum.

Business Rates in England provide a good example. These are charged on businesses which carry on activity in non-residential property. Others may query pedantically whether Business Rates are a tax – given that they are not labelled a tax and the benefit to operate in a locale is granted in return – but it is levied by central government, it is payable in cash, it is compulsory and the rates are out of all proportion to the benefit granted. Moreover, HMRC includes it in its breakdown of the contribution of different taxes to the Exchequer.

Business Rates for the year 2019/20 raised £29bil. For comparison, Corporation Tax raised £50bil. This comparison reveals that, relative to corporation tax policy, too little intellectual energy has been spent on business rates. More importantly however, the two figures are not unrelated. This is because the payment of Business Rates reduces corporate profits (it is an allowable expense) so the figure for Corporation Tax would be higher if Business Rates were not charged. Given the impact on corporate profits, Business Rates will necessarily reduce the quantum of dividends that could be paid to companies resident in other jurisdictions. In this way, Business Rates impact the source/residence distinction that operates at the international level.

The Diverted Profits Tax in the UK operates in a similar way – for those caught by it, the “tax” is deductible against corporate profits. However, this is only useful for those companies that pay corporation tax in the UK (i.e. resident companies or those with a permanent establishment). Thus, the tax in the way in which it operates discriminates between domestic and foreign companies, and that is before one even needs to consider, as Mason and Parada do, the manner in which the thresholds for being caught by DSTs operates, the types of activities caught and the intention behind DSTs (which combine to render DSTs discriminatory).

Consider in turn also how Business Rates are calculated. They rely upon a valuation of the property – and that valuation is undertaken by the Valuation Office Agency (VOA), an agency within HMRC. So what if the VOA undervalues a property? In that case, a taxpayer gets an advantage over competitors. Presumably this is something that ought to have concerned the European Commission (whilst the UK was a Member of the European Union) by virtue of this advantage amounting to State aid. Presumably too it should be a concern under the new “subsidy” regime in the Trade and Cooperation Agreement between the UK and the EU.

The lessons that can be taken away from examining computation in respect of these examples? First, Corporation Tax and Business Rates do not operate independently and thus the headline figure for Corporation Tax receipts would be higher in the absence of Business Rates. Secondly, Business Rates, though a tax in England, does impact other countries. Thirdly, “unseen” taxes like Business Rates can be a means of providing subsidies to taxpayers and this ought to be watched by relevant oversight bodies. Fourth, the manner in which the UK DST operates serves to further the argument that it is discriminatory.

Thus, if we care about corporation tax, we should care also about computation.