The UK government has not estimated the potential impact on developing countries of imminent reforms to the controlled foreign companies (CFC) rules, despite a warning that a ‘huge increase in tax avoidance’ could cost countries that are dependent on development aid up to £4bn. HM Treasury told Tax Journal that helping to build capacity was the key issue, and that ‘through the UK corporate tax system’ was not the best way to help developing countries protect their tax base.
The IMF, the OECD, the UN and the World Bank said in a recent submission to a G20 development working group that the G20 countries’ lead role in the debate on international tax system created ‘an obligation on them to ensure its smooth functioning’.
‘In that context,’ they said in Supporting the Development of More Effective Tax Systems, ‘it would be appropriate for G-20 countries to undertake “spillover analyses” of any proposed changes to their tax systems that may have a significant impact on the fiscal circumstances of developing countries.
‘Trade agreements are an obvious example — tariffs remain a key source of revenue in many developing countries. But there can be important effects from other G20 tax policies too, including in their international tax regimes (in moving, for instance, from residence to territorial systems),’ they argued.
Such analyses might point to remedial measures to be incorporated into reform and ‘should be published for the international community to reflect upon — at a minimum, to enable developing countries to respond with parallel changes to their own systems if that would be helpful in protecting their revenue bases’. Ideally, the report said, a ‘baseline analysis’ would be undertaken immediately.
The stated aim of the UK government’s CFC reform is to move towards a more territorial corporate tax system while protecting the UK tax base by targeting ‘artificially diverted UK profits’.
ActionAid, the anti-poverty group, called last March for a full assessment of the impact of the reform on developing countries.
Martin Hearson, the group’s tax policy analyst, said then: ‘Relaxing these anti-avoidance rules will give British companies the green light to avoid tax in developing countries. It will open up the floodgates to tax dodging that could cost the world’s poorest countries up to £4bn – that’s equivalent to almost half of the UK’s annual aid budget. This is money that developing countries should be using to become less dependent upon aid.’
Martin Hearson, ActionAid
David Gauke confirmed last month that representations had been received from NGOs but said: ‘The government have not produced an assessment of the effect on developing countries of the proposed changes to the CFC rules as these rules are designed to prevent artificial diversion of UK profits.’
ActionAid said in response to Budget 2011 that the CFC rules were ‘designed to prevent companies using tax havens to dodge their tax bills, for example where brand royalty payments are being used to shift profits from high to low-tax jurisdictions’.
It added: ‘[The rules] work by forcing UK companies to pay full UK tax on certain subsidiaries even though they may be based in tax havens. This is an effective deterrent to multinational companies shifting profits into tax havens, as well as a money-spinner for the Treasury. ActionAid says that by removing this deterrent, the new rules could lead to a huge increase in tax avoidance in developing countries.’
Gauke said in the Commons written answer on 19 January: ‘The government work through a variety of channels to deliver high quality capacity building in developing country tax administrations to ensure that these countries are in a position to collect the tax they are owed.’
In the House of Lords the Commercial Secretary, Lord Sassoon, answered in similar terms a question tabled by the Bishop of Derby, who asked what assessment had been made ‘in the light of the recommendation by the IMF, the OECD, the UN and the World Bank to undertake an assessment of the impact of domestic tax reform on developing countries’.
Hearson told Tax Journal today: ‘The IMF, OECD, World Bank and UN all agree with us that reforms such as those to the CFC regime may have an impact on developing countries, and that the principle of policy coherence requires at the very least an assessment of that impact.
‘The government points to the capacity building work it supports in developing countries, and we welcome that. But it’s precisely to ensure that this investment represents value for money that we are calling for a development impact assessment.
HM Treasury
‘The Tax Information and Impact Note published alongside the draft Finance Bill legislation in December made no mention of a potential impact on developing countries. We hope that this omission will be rectified in the final version published to accompany the Budget.’
The Treasury was unable to say today whether a development impact assessment would be produced at Budget 2012.
But a Treasury spokesperson told Tax Journal: ‘The UK is committed to helping developing countries to reduce tax avoidance and protect their own tax base, but through our corporate tax system is not the best way to do this. The key issue is building capacity in developing countries, an area where the UK can and does make a significant contribution.
‘We have been working to increase the participation of developing countries in the [OECD’s] Global Forum on Tax Transparency and Information Exchange, the key international body for tackling tax evasion and avoidance.’
In a joint submission to the Treasury last September, Christian Aid and ActionAid said: ‘The consultation document states that an aim of the CFC reform is to encourage more businesses to be headquartered in the UK ... There is an implicit obligation in seeking this aim to ensure a global environment where all countries in which UK-based MNCs operate, and particularly the developing countries in which they are major foreign investors, are able effectively to enforce their tax laws.
‘As well as creating a system that is fair to businesses, we also need to create a system that is fair to the authorities of all the countries in which UK based companies operate, to give them the chance to benefit from the presence of MNCs, as the UK benefits from the presence of the headquarters.’
The UK government has not estimated the potential impact on developing countries of imminent reforms to the controlled foreign companies (CFC) rules, despite a warning that a ‘huge increase in tax avoidance’ could cost countries that are dependent on development aid up to £4bn. HM Treasury told Tax Journal that helping to build capacity was the key issue, and that ‘through the UK corporate tax system’ was not the best way to help developing countries protect their tax base.
The IMF, the OECD, the UN and the World Bank said in a recent submission to a G20 development working group that the G20 countries’ lead role in the debate on international tax system created ‘an obligation on them to ensure its smooth functioning’.
‘In that context,’ they said in Supporting the Development of More Effective Tax Systems, ‘it would be appropriate for G-20 countries to undertake “spillover analyses” of any proposed changes to their tax systems that may have a significant impact on the fiscal circumstances of developing countries.
‘Trade agreements are an obvious example — tariffs remain a key source of revenue in many developing countries. But there can be important effects from other G20 tax policies too, including in their international tax regimes (in moving, for instance, from residence to territorial systems),’ they argued.
Such analyses might point to remedial measures to be incorporated into reform and ‘should be published for the international community to reflect upon — at a minimum, to enable developing countries to respond with parallel changes to their own systems if that would be helpful in protecting their revenue bases’. Ideally, the report said, a ‘baseline analysis’ would be undertaken immediately.
The stated aim of the UK government’s CFC reform is to move towards a more territorial corporate tax system while protecting the UK tax base by targeting ‘artificially diverted UK profits’.
ActionAid, the anti-poverty group, called last March for a full assessment of the impact of the reform on developing countries.
Martin Hearson, the group’s tax policy analyst, said then: ‘Relaxing these anti-avoidance rules will give British companies the green light to avoid tax in developing countries. It will open up the floodgates to tax dodging that could cost the world’s poorest countries up to £4bn – that’s equivalent to almost half of the UK’s annual aid budget. This is money that developing countries should be using to become less dependent upon aid.’
Martin Hearson, ActionAid
David Gauke confirmed last month that representations had been received from NGOs but said: ‘The government have not produced an assessment of the effect on developing countries of the proposed changes to the CFC rules as these rules are designed to prevent artificial diversion of UK profits.’
ActionAid said in response to Budget 2011 that the CFC rules were ‘designed to prevent companies using tax havens to dodge their tax bills, for example where brand royalty payments are being used to shift profits from high to low-tax jurisdictions’.
It added: ‘[The rules] work by forcing UK companies to pay full UK tax on certain subsidiaries even though they may be based in tax havens. This is an effective deterrent to multinational companies shifting profits into tax havens, as well as a money-spinner for the Treasury. ActionAid says that by removing this deterrent, the new rules could lead to a huge increase in tax avoidance in developing countries.’
Gauke said in the Commons written answer on 19 January: ‘The government work through a variety of channels to deliver high quality capacity building in developing country tax administrations to ensure that these countries are in a position to collect the tax they are owed.’
In the House of Lords the Commercial Secretary, Lord Sassoon, answered in similar terms a question tabled by the Bishop of Derby, who asked what assessment had been made ‘in the light of the recommendation by the IMF, the OECD, the UN and the World Bank to undertake an assessment of the impact of domestic tax reform on developing countries’.
Hearson told Tax Journal today: ‘The IMF, OECD, World Bank and UN all agree with us that reforms such as those to the CFC regime may have an impact on developing countries, and that the principle of policy coherence requires at the very least an assessment of that impact.
‘The government points to the capacity building work it supports in developing countries, and we welcome that. But it’s precisely to ensure that this investment represents value for money that we are calling for a development impact assessment.
HM Treasury
‘The Tax Information and Impact Note published alongside the draft Finance Bill legislation in December made no mention of a potential impact on developing countries. We hope that this omission will be rectified in the final version published to accompany the Budget.’
The Treasury was unable to say today whether a development impact assessment would be produced at Budget 2012.
But a Treasury spokesperson told Tax Journal: ‘The UK is committed to helping developing countries to reduce tax avoidance and protect their own tax base, but through our corporate tax system is not the best way to do this. The key issue is building capacity in developing countries, an area where the UK can and does make a significant contribution.
‘We have been working to increase the participation of developing countries in the [OECD’s] Global Forum on Tax Transparency and Information Exchange, the key international body for tackling tax evasion and avoidance.’
In a joint submission to the Treasury last September, Christian Aid and ActionAid said: ‘The consultation document states that an aim of the CFC reform is to encourage more businesses to be headquartered in the UK ... There is an implicit obligation in seeking this aim to ensure a global environment where all countries in which UK-based MNCs operate, and particularly the developing countries in which they are major foreign investors, are able effectively to enforce their tax laws.
‘As well as creating a system that is fair to businesses, we also need to create a system that is fair to the authorities of all the countries in which UK based companies operate, to give them the chance to benefit from the presence of MNCs, as the UK benefits from the presence of the headquarters.’
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