The Business World: When taxation adds up to a moving experience

Lorry drivers threatening to relocate abroad to escape high UK road duties are part of a growing trend of companies abandoning a traditional national base in search of more favourable trading climates

BUSINESS IS on the move and tax is in the driving seat. As anyone who tried to drive in central London on Monday will be aware, British lorry drivers are threatening to flag out their fleets to Belgium or Luxembourg. But that is just one example of a growing trend. Look elsewhere in Europe and you find: Swedish companies moving divisions to London; German industrialists switching investment to Eastern Europe; French companies crossing the Channel to Kent; and doubtless many more moves happening or being pondered elsewhere in Europe.

In one sense this is nothing new. Taxation has always been a major factor in plant location - that is why Ireland in particular has given such generous tax holidays to companies investing there, or why the Canary Wharf complex was built in the enterprise zone in London docklands. As for "flagging out", flags of convenience have dominated global shipping for a generation. But the growing integration of the European economic area and the advent of the euro have given a new twist to tax competition in Europe.

The British road hauliers happen to be at the wrong end of what is a cultural distinction within Europe, as well as an economic one. Ever since the 1950s it has been an aim of British tax policy to load "sin taxes" and since the 1980s it has been policy to cut tax on earning individuals. Road transport is deemed sinful in the UK, as are smoking and drinking. So diesel and lorry licences have by tradition been particularly highly taxed - as have cigarettes and booze. By contrast, on the Continent (though not in the Nordic countries) drinking and smoking, far from being frowned on, were celebrated, and France in particular sought to shift road transport from petrol to diesel to cut the volume of imported oil. So diesel was taxed at a much cheaper rate than petrol. Meanwhile the idea that driving should somehow be sinful would seem absurd in France, Germany or Italy.

So different tax structures developed. Until recently the scope for leakage of revenue, as a result of these different structures, was limited. It took a while for the smuggling rings to develop, bringing in cheap continental tobacco and drink, and it has taken a while for foreign hauliers to move into the UK market.

As for diesel fuel, while the UK Treasury has been worried for at least 10 years by the extent of revenue lost by foreign hauliers filling up abroad and returning empty, its conclusion was that the loss of revenue was tolerable. After all, no one was taking lorries across the Channel simply to fill up on the other side.

That was probably the right judgement. All economies have frictions, and tax authorities could rely on these. Differences in taxation had to be quite large for companies to decide that they must adjust the way they run their businesses. There are legal and other costs to relocation, and cultural barriers too. Besides, you don't know at what stage there will be a change of government at home and tax policy will be reversed. For new investment there is a clear either/or choice: do we put the plant in this country or that one? Upping and leaving is a much more complex decision.

In the past few years, however, the frictions have become less marked. Accordingly tax competition has increased dramatically, as power has shifted away from governments to the business sector. There are at least 10 reasons for this shift in power.

1. The increasing importance of cross-border mergers. Whenever such a merger takes place the new group chooses which country should be the formal headquarters. Taxation is an important factor in such a choice. Sweden has lost the headquarters of several companies.

2. Growth in cross-border investment in white-collar functions. When people think of foreign plants they usually think of foreign factories. Much new cross-border investment is, however, in white- collar activities - research and marketing for example. This is easier to relocate because, though core staff have to move, there is no need to move physical plant.

3. Growing importance of human capital vis-a-vis other forms of capital. If a company's most important resource lies in the brains of the key people, location has to fit their aims and objectives. Swedish companies in particular find they have to locate many divisions outside Sweden (typically in London) as foreign staff will not pay Swedish taxation. Electrolux recently did just this.

4. (Associated with 3.) The emergence of an international cadre of business talent that will move location very easily and freely.

5. Improved (and cheap) telecommunications, in particular e-mail and the Internet-related technologies, which enable white-collar functions to be located anywhere - not necessarily at head office - and still connect into the corporation's information network.

6. The growth of English as the standard business language of Europe. This reduces the cultural barriers to movement of executives between different countries. The more executives can shift around the more they will seek to base themselves in low-tax countries.

7. Improved price and tax information, and better quality of service from the international accounting and management consultants. Any company seeking to relocate, or simply rebalance its functions between different countries, will find a one-stop advice centre in these consultants, giving it the options and fixing the practical arrangements.

8. Improved physical communications within Europe. For Britain, France and Belgium, a key change is the Channel tunnel. For all Europe, cheaper air fares are encouraging corporate mobility.

9. The explosive growth of US business in Europe, bringing a more global, "can do" approach to dealing with government.

10. And finally, the advent of the euro. Why is the euro at the end? Because while it is a catalyst for change, all the above shifts would have taken place - indeed, are taking place - without it.

The big point here is that these forces (and doubtless any business executive would add a couple of his or her own) are creating a much more utilitarian attitude towards government. Governments have a choice: they can either woo business or they can cane it. But if they do the latter, they may not themselves survive, as "Red Oskar" found out. The lorry drivers blocking central London may not feel more powerful relative to government just now, but the more they exert their power by registering their vehicles offshore, the more they will feel that power. They may even come to enjoy it.

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