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'Fundamental review' needed of corporate tax system, say peers

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The House of Lords Select Committee on Economic Affairs has published its report, Tackling corporate tax avoidance in a global economy: is a new approach needed?, following the inquiry by the select committee – which ran from March to mid-June – in response to public and political concern about corporate tax avoidance.

According to the report: ‘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 [which] damages the economy and undermines trust in the tax system’.

The report supports the case for fundamental reform of the international corporate tax framework being pursued in the OECD. However, the committee says ‘it is not clear that the OECD reforms will be effective or whether they can be achieved within the proposed two year timescale’. The report therefore calls for HM Treasury to undertake ‘a fundamental review’ of the UK’s corporate tax regime, and give consideration to ‘other approaches to the taxation of multinational companies’ profits, such as a destination-based cash flow tax’.

A review is also needed of ‘the differential treatment of debt and equity’, the report found, because ‘the present system can encourage multinational companies to take on excessive debt in the UK, including by borrowing money from an overseas subsidiary, to reduce their tax liability’.

The report also calls for the Treasury to consider:

  • a new system of regulation for tax advisers with the threat of removing advisers’ right to practise if they breach a regulatory code of conduct by promoting ‘blatantly contrived’ tax avoidance schemes’;
  • better parliamentary oversight of HMRC, in view of concerns that HMRC may not be assertive enough in its negotiations. In order to strengthen oversight while protecting tax confidentiality, the committee calls on both Houses of Parliament to establish a joint committee of MPs and peers which can take testimony from HMRC in private. Like the Intelligence and Security Committee, the body could provide parliamentary scrutiny while maintaining secrecy;
  • a new requirement for firms with large operations in the UK to publish a summary of their corporation tax returns; and
  • better resourcing of HMRC to deal more effectively with multinationals and their tax advisers. The report is critical of the practice of HMRC employing seconded staff from the big four accountancy firms.

Commenting on the report in a client briefing, George Bull, senior tax partner at Baker Tilly, said: 'It seems to us that UK initiatives which are consistent with the eventual outworking of the OECD BEPS plan may well be helpful. However, to the extent that the UK decides to go it alone in implementing tax changes which are inconsistent with the OECD approach, any short-term gains will be followed by long-term inconsistencies. Nevertheless, couched as they are in terms far more measured than those adopted by the Public Accounts Committee, these latest proposals deserve serious attention.'

‘The report makes some radical, but probably unworkable, proposals', Heather Self, partner at Pinsent Masons, explained.  'For example, moving to a destination-based cash flow tax may result in more tax on UK sales, but would be impossible to implement in the short to medium term – and very difficult even in the long term.
'The suggestion that the Treasury should look again at the tax treatment of debt and equity is likely to dismay business', she added. 'As the CBI said in their evidence, the deductibility of interest is an important feature of the current system, and is part of a competitive package.’
Commenting on the report's recommendation that tax advisers should be regulated, John Dixon, EY's managing partner tax for UK & Ireland,said: 'The tax profession already adheres to a code of conduct, which was reviewed by HMRC. The code is based on the fundamental principles of integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. We would welcome discussions as to how this might be enhanced.'