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Taxing the multinationals: ‘Guess who wins’

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A leading Reuters editor told the BBC’s Newsnight earlier this week that only international co-operation will help prevent large multinationals using tax havens to undermine the tax base of national governments, after campaigners slammed a proposed exemption for profits of foreign branches of UK-resident companies. Some tax experts have questioned whether, as drafted, the reform will achieve the policy aim of increasing the UK’s tax competitiveness.

The Guardian columnist George Monbiot has claimed that the reform will be ‘the biggest and crudest corporate tax cut in living memory’. Newsnight asked whether the proposal, initiated by the Labour administration, was ‘waving the white flag of surrender at tax havens or making the UK more tax-competitive’.

Richard Brooks, the Private Eye journalist and a former tax inspector, told the programme that the G20 had said it would put an end to tax havens. ‘The UK government is now introducing the biggest single incentive ever for multinationals to put billions of pounds into tax havens,’ he claimed.

The UK Treasury has estimated the revenue loss at £100 million a year and, as the programme noted, it hopes the UK will gain a competitive edge in attracting multinationals and promoting growth. But critics say the UK should not try to compete with tax havens.

John Whiting, the CIOT’s Tax Policy Director, said there was a clear risk that ‘we give up a little bit of money’ from multinationals. ‘That said, it’s clearly a calculated risk – let’s not forget the companies that haven’t come here in recent years – [designed] to tempt them into the UK.’

Newsnight’s Jeremy Paxman put it to Richard Murphy, the anti-avoidance campaigner and an adviser to the Tax Justice Network, that the proposed reform was a fact of life. ‘This is a very significant choice by this government to help major corporations to move profits to tax havens,’ Murphy argued. He said the Treasury estimate excluded ‘behavioural response’.

But Chrystia Freeland, Global Editor-at-Large at Reuters, suggested that the potential revenue loss was not great and that campaigners were aiming at the wrong target. ‘You need to aim at consumption and personal income tax, because you want businesses to grow,’ she said.

Freeland said it was difficult for national governments to protect their tax base because there are 'lots of jurisdictions' where taxes are lower than in the UK or the US. 'What do you do? You want to have business activity in your country.'

Paxman asked Freeland whether there was any chance of a global agreement. ‘Taxes and governments operate nationally and companies operate internationally, and you can guess who wins in that kind of system,’ Freeland said. ‘I think it’s dangerous for countries to try to fight that current alone.’ Murphy said the time had come to create a level playing field. ‘Big business is getting all the benefit here, and small business is going to be losing out in the UK,’ he said.

A Tax Justice Network briefing paper suggested in 2005 that there was a ‘clear need’ for a world tax authority to ‘monitor the impacts of fiscal policies on trade and investment patterns, and to protect national tax policies from harmful practices’. The United Nations was, the TJN said at the time, the most appropriate body to take on such an authority’s functions.

Bill Dodwell, Chairman of the CIOT’s International Taxes Sub-Committee, told Tax Journal today that the gain from the foreign branch reform ‘is hoped to come from the employment of people in the UK, which of itself promotes economic growth, together with the taxes paid through that’.

He had noted that Monbiot’s article had ‘stirred up a great deal of debate’. Writing on the CIOT's media and politics blog last week, Dodwell said the cost of the proposal would be ‘modest’. The Treasury’s estimate was ‘0.2% of total corporate tax’.

Dodwell said companies would not be able simply to divert all their profits to tax havens. ‘This was a pretty obvious point – and so the Treasury has designed detailed anti-avoidance rules to make sure this doesn’t happen. Other EU countries will also have an interest in making sure their profits don’t vanish. The existing UK transfer pricing rules will also help monitor attempts to siphon off profits.’

The purpose of the new exemption is to encourage insurers to ‘base a super-company in the UK rather than elsewhere in Europe’ when the Solvency II changes to the regulation of insurance companies take effect in 2012, he said.

The ICAEW Tax Faculty has suggested that some of the provisions are in breach of the EC Treaty or contravene EU rules on state aid. The CIOT said it does not believe that the proposals will achieve the policy aim of increasing the UK’s tax competitiveness. The proposal that no relief is given for foreign branch losses results in an exemption which is ‘of virtually no use to the businesses it is supposed to help’, it claimed.

‘We would prefer to see a regime which provides an exemption together with loss relief and a clawback, with the loss relief clawback limited to the value of UK relief claimed,’ the CIOT added.