Sean O'Grady: If corporates ship out, burden falls on families and small firms

The truth about corporation tax is that someone, somewhere will undercut you. No matter how radical a tax-cutter George Osborne wants to be, he will never match, say, the Maldives, where taxation is about as unheard of as snow. Indeed, such is the state of the public finances, Mr Osborne would be hard-pushed to even better some rates found among the advanced economies of the Organisation for Economic Cooperation and Development.

In his emergency Budget, the Chancellor said he would take the headline rate of corporation tax from 28 per cent to 24 per cent over the next four years, which will probably leave Britain still vulnerable to the attractions of Switzerland and Ireland (if a corporate move to the Indian Ocean is regarded as too adventurous). Add in the ultra-low personal taxation found in, say, the Channel Islands, and their euphemistically termed "light touch" approach to corporate governance, and it is a bit of a shock not that the likes of Wolseley, WPP or Shire have moved offshore, but that so many of their peers remain.

In the US, 60 per cent of the Fortune 500 are incorporated in tiny Delaware, America's home-grown haven (corporation tax rate: nil). So far, British firms do not have the same option of internal exile (though some in Scotland want a tartan version of the Delaware racket).

In any case, UK corporation tax depends on where the money is made; the more that is derived from abroad (or can be plausibly portrayed as such), and the greater the proportion of those funds that are generated in low- tax regimes, the more sense it makes to relocate. A firm must demonstrate that it is truly resident or is controlled and managed abroad. An exception to this is the trick whereby a patent for a drug or software is packed off to a low-tax territory and the profits derived from that invention flow to the haven. The last government's answer to this was the homely sounding "patents box", in effect a surrender to this practice in the hope of protecting some revenues. Overall, moving offshore is a great deal of hassle for managers and directors, and much depends on which tax arrangements suit their shareholders. Simple it is not.

The upshot of the international "race to the bottom" is a further narrowing of the tax base, and, to borrow a fashionable phrase, an ever-more intense squeeze on the middle classes. If corporates and the very rich can simply move tax liabilities offshore, and if the poor do not anyhow have the means to pay more tax, the burden of funding public services and reducing the budget deficit will fall progressively more heavily on families and small businesses trapped on these shores.

HMRC wants to see a simple "territorial" approach (ie only tax here what you make here), and the OECD has successfully curbed "harmful tax practices" – but it is difficult to envisage these moves resulting in some sort of floor for corporation tax rates. Taxes, it seems, will continue to be for little people, and not big companies.