Corporate tax avoidance by multinational companies damages the economy and undermines trust in the tax system, a committee of peers has concluded.
The Economic Affairs Select Committee said it was “not clear” that reforms proposed by the OECD would be sufficient to end the practice of shuffling money through different jurisdictions in a bid to cut tax bills within a planned two-year period.
SUMMARY
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The UK faces a serious problem of avoidance of corporation tax, due in part to the complexity of the tax regime in the UK, but mainly because the international tax system gives multinational companies opportunities to shift profits between countries in ways that reduce their liabilities in the UK. This damages the economy and undermines trust in the tax system.
Under the present international framework of corporate taxation, companies operating globally can make their taxable profits arise in low- rate jurisdictions, such as Ireland and Luxembourg, even when their customers are in the UK or elsewhere. The amount of corporation tax a company pays in any one country, such as the UK, can be determined by how aggressively the company seeks to shift its profits to other lower-taxed countries. The effect is to make corporation tax payments in a given country largely voluntary for multinational companies. Starbucks’ volunteering of extra payments in the UK after bad publicity is an example.
The UK and the G8 support the Organisation for Economic Cooperation and Development (OECD)’s Action Plan to tackle base erosion, published on 19 July 2013. It sets out a two-year programme to address the most egregious forms of tax avoidance. But it is not yet clear how effective the proposed solutions will be or whether they can be achieved within the timescale. In the meantime, the UK faces the prospect of losing much-needed revenue through avoidance of corporation tax. There are also distortions in the market place: there is no level playing field between , say, a UK-based retailer which has to pay corporation tax in this country and a global rival selling here but paying corporation tax somewhere else at a lower rate.
Public concern about avoidance of corporation tax by multinationals, some of them British-based, has been heightened by a steady stream of stories in the media about companies paying little or no corporation tax in this country despite obviously doing good business here. Examples cited include the foreign-owned Google (investigated by the Public Accounts Committee of the House of Commons), Amazon and Starbucks, and the British-based Thames Water, Vodafone and Cadbury (before takeover by Kraft).
HMRC, the only public authority which sees tax returns, has not commented on these cases since bound by its duty of confidentiality to taxpayers. The only independent assessment of the performance of HMRC has been a review by the National Audit Office (NAO) of five settlements reached by HMRC. The NAO concluded that all five settlements were reasonable and successfully resolved multiple, long-outstanding tax issues. A recent court case shed some light on how a settlement was reached between HMRC and Goldman Sachs. Mr Justice Nicol said “it was not a glorious episode in the history of the Revenue.”
We decided to carry out a short inquiry to see how matters stood and to put forward proposals to help to reduce avoidance which the Government could adopt itself at the same time as it pursues agreement to reform the OECD framework governing where multinational companies pay corporation tax. We take the view that, since the Government devises, imposes and collects taxes, it is mainly for the Government to take measures against avoidance. But companies have a responsibility to pay their taxes. There are signs that some corporate taxpayers and their advisers realise that blatantly contrived avoidance is less and less acceptable to public opinion, to which the Government is accountable.
All our conclusions and recommendations are listed in Chapter 7. They are summarised below.
• We recommend that Parliament should establish a joint committee—made up of MPs and Peers—to exercise greater parliamentary oversight of HMRC and the settlements it reaches with multinationals. Like the Intelligence and Security Committee, the new Committee would examine confidential evidence in private.
• We recommend that the Treasury should urgently review the UK’s corporate taxation regime and report back within a year with proposed changes to be made at home and pursued internationally, especially through the OECD.
• On the international front, we recognise that the Treasury are already working for early implementation of the OECD’s Action Plan to tackle Base Erosion and Profit Shifting (BEPS). We recommend that the review should also consider other approaches to the taxation of multinational companies’ profits, such as a destination-based cash flow tax.
• In the UK, we recommend that the review should re-examine some fundamentals of the UK’s corporation tax regime, including differential tax treatment of debt and equity and the scope for introduction of an allowance for corporate equity.
• We recognise that the Treasury will already be working on policy initiatives against avoidance already announced by the Government, such as naming and shaming promoters of tax avoidance schemes, and self-certification of compliance with tax obligations by companies bidding for public contracts. We recommend that the review should also consider a series of anti-avoidance measures for the shorter term, such as:
(i) regulation of tax advisers;
(ii) measures to penalise users of failed tax avoidance schemes;
(iii) a requirement on companies with large operations in the UK to publish a proforma summary of their corporation tax returns, so as to bring about greater transparency.
• We also recommend that HMRC should be better resourced to deal effectively with the tax affairs of complex and well-resourced multinationals.
