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MPs call for country-by-country reporting and urgent review of CFC reform

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The UK government should enact legislation requiring each UK-based multinational corporation to report its financial information on a country-by-country basis, MPs on the International Development Committee have recommended.

The government should also conduct or commission, as a matter of urgency, an analysis of the likely financial impact on developing countries of the revised controlled foreign companies (CFC) rules, the committee said in a report published today on the link between taxation and development. ‘Depending on the results of this analysis, the government should consider whether to drop its proposals,’ it suggested.

But the committee commended the Department for International Development (DFID) and HMRC for their provision of technical assistance to the tax authorities of developing countries. HMRC was, given its ‘unique expertise and its inherent understanding of the culture of revenue authorities’, an ‘extremely important source of technical assistance’.

The committee is chaired by Liberal Democrat MP Sir Malcolm Bruce, and has five Conservative and five Labour MPs.

Tax justice campaigners welcomed the report. ‘It’s fantastic to see there is a strong, cross-party consensus that collecting tax effectively is vital for poor countries to escape aid dependency and poverty,’ said Joseph Stead, Senior Economic Justice Adviser at Christian Aid.

Aid dependency

‘If developing countries are to escape from aid dependency, and from poverty more broadly, it is imperative that their revenue authorities are able to collect taxes effectively,’ the committee said.

‘The capacity of developing country governments to collect tax is not, of course, conditioned solely by the policies which they themselves adopt. On the contrary, global-level regulatory issues play a major role. Requiring tax authorities to exchange information automatically with their counterparts in other countries would constitute a strong deterrent against cross-border tax evasion, whilst requiring corporations to report their financial information on a country-by-country basis would enable irregularities to be more readily detected.’

The UK government should become a candidate for the Extractive Industries Transparency Initiative, which the UK itself founded in 2002, the committee added. The EITI was ‘an excellent tool for identifying corruption’.

Controlled foreign companies

ActionAid, the anti-poverty group, called 18 months ago for a full assessment of the impact of the CFC reform on developing countries. It argued that the reform would ‘open up the floodgates to tax dodging that could cost the world’s poorest countries up to £4bn’.

The International Development Committee observed that in a recent joint report by the IMF, OECD, UN and World Bank, it was argued that ‘where domestic policy reforms were likely to impact on revenue flows to developing countries, a “spillover analysis” should be conducted to ascertain the magnitude of such impacts’. No such analysis had been conducted for the CFC reform.

Lucia Fry, Head of Policy at ActionAid, said today: ‘Tax avoidance is now a major global concern, and the UK needs to take into account the impact of its own tax regime on the world’s poorest countries … All changes to the tax regime must now be scrutinised for their impact on poor countries.'

But a spokesman for HM Treasury said the UK’s CFC rules protected UK tax revenues and were ‘never designed' to protect other countries’ tax revenues. The reform would ‘encourage investment and drive growth’ in the UK.

He added: ‘It is not sustainable for developing countries to protect their revenue using our tax rules, a much better way is to build their capacity and capability to collect the tax that they are due.  We do this through DFID and HMRC, helping countries from Afghanistan to Zambia maintain sustainable domestic taxation systems.’

Country-by-country reporting

The committee said evidence it received had suggested that if country-by-country reporting were to be mandated, the extra costs for businesses would be ‘very modest’.

In written evidence submitted to the committee in February, the Chartered Institute of Taxation said: ‘While superficially appealing, our view is that country-by-country reporting would create a substantial additional administrative cost for business without producing any of the benefits that its supporters assume would arise. Requiring global companies to produce, and have audited, detailed profit and loss figures for every country in which they operate, would be expensive and time consuming (especially given that some jurisdictions do not oblige them to do so as a matter of course—and most do not require a company to separately identify social security contributions or irrecoverable VAT, for example).’

However, the committee urged DFID to stress, in its dealings with developing countries, the importance of making corporate accounts available to the public. It added: ‘The government should encourage the OECD and other standard-setting fora to require the filing of public statutory accounts in all jurisdictions. The Treasury should also press Crown Dependencies to meet these standards.’

UK government’s work

Many of DFID’s technical assistance projects had been extremely successful, the committee said. ‘As an example, DFID supported the Rwanda Revenue Authority over a 10-year period: supporting its foundation, and helping to organise its office building and management systems. Revenues collected increased six-fold during the period of DFID support. DFID tells us that the Authority "reached a point where it was collecting the full £24m value of DFID's support programme every three weeks”.’

The committee recommended that DFID ‘scale up’ this work. It noted other DFID-funded initiatives including support for the creation of the African Tax Administrators Forum (ATAF), an umbrella group of national revenue authorities from across Africa: ‘The creation of ATAF is rightly seen as a positive step, and we commend DFID for providing support.’

It added: ‘HMRC also supports projects to enhance the capacity of tax administrations in developing countries, delivering assistance on a bilateral basis and through multilateral forums … HMRC told us that it had sufficient capacity to increase its work in this area, if DFID provided the funding.’: ‘HMRC also supports projects to enhance the capacity of tax administrations in developing countries, delivering assistance on a bilateral basis and through multilateral forums … HMRC told us that it had sufficient capacity to increase its work in this area, if DFID provided the funding.’

Many organisations had stressed the importance of this work, including the CBI, RioTinto, Christian Aid, the International Centre for Taxation and Development and the Chair of the Business and Industry Advisory Committee to the OECD.

‘In some cases, [HMRC’s] assistance is even more successful than that provided by DFID, since HMRC understands the culture of revenue authorities, and is able to impart its own experience and understanding to its developing country counterparts,’ the committee concluded.

A UK government spokesman said: ‘The committee is right to praise British aid for helping poor countries to boost their tax systems and help them to pull themselves out of poverty by investing in schools, hospitals and infrastructure. We remain committed to helping developing countries access sustainable sources of revenue.  We will consider the detailed recommendations carefully and will produce a formal written response in due course.’