The TUC report Corporate tax reform and competitiveness, written by chartered accountant Richard Murphy, warns recent tax reforms and ongoing reductions in the headline corporation tax rate will reduce tax revenues without significant benefit to ordinary taxpayers.
More than 90% of UK businesses pay the small business rate of 20% while the effective corporate tax rate for large companies is currently estimated by PwC to be 23.2%, far lower than the Organisation for Economic Co-operation and Development (OECD) average of 26.5%.
Previous TUC research estimated the effective corporate tax rate is lower than 23.2% and has been falling by 0.5 percentage points a year for the last decade. It is likely that many multinational corporations are now paying a lower rate of corporation tax than UK small businesses, says the TUC.
The study suggests at a time of constrained public finances, the economic benefits are not significant enough to justify tax cuts of the scale that the Government has embarked upon, particularly given the UK's already low corporate tax rates.
The report highlights recent changes to tax policy that have encouraged further tax avoidance and the channelling of profits away from the UK.
The last Government agreed that in exchange for tougher Controlled Foreign Company (CFC) rules, from April 2009 any dividends paid by foreign subsidiaries to UK parent companies would not be subject to UK tax.
But, according to the TUC, while the tougher CFC rules have not yet made it into law, the new rules on dividend payments have weakened the UK tax base by encouraging companies to move profits out of the UK.
With corporate tax receipts expected to fall as a proportion of the total tax take from April 2012, and the estimated 15,000 job losses across HMRC making it even harder to monitor the flow of profits from the various subsidiaries of multinational companies, growing tax avoidance could undermine the government's deficit reduction targets and put further pressure on spending cuts, the TUC warns.
TUC general secretary Brendan Barber said: "The Government has been seduced by employer calls for more corporate tax cuts. But while everyone wants to pay less tax, from multinational corporations to ordinary taxpayers, the argument that simply cutting corporation tax will fuel jobs and growth does not stand up to scrutiny.
"UK corporate tax rates are already extremely competitive. And while some people, including the Chancellor, have talked about emulating the Irish economy's aggressive low tax policies, its current woes suggest this is not a sustainable economic model.
"Big business has been steadily cutting its effective tax rate every year for the last decade, even though headline rates were fixed for much of this period. Despite pledging to crack down on tax avoidance, recent reforms and huge job losses at HMRC mean that tax dodging opportunities are now greater than ever.
"The more that big businesses and the super rich avoid paying their fair share, the more ordinary taxpayers will have to pick up the tab though tax rises and reduced public services.
"The Government must stand up for hard-pressed workers and enforce a fairer tax regime and a fairer and more sustainable approach to securing economic growth."
