UK government urged to consider development impact of new tax rules

Commons select committee says greater heed must be paid to how relaxation of anti-tax haven laws will affect poor countries

The UK government should urgently analyse the impact of its new tax rules on developing countries, MPs on the House of Commons international development committee said on Thursday.

Depending on the results of the analysis, the government should consider whether to drop its proposals from its finance bill, a committee report, Tax in Developing Countries, said.

In the 2012 finance bill, the government proposed a relaxation of its anti-tax haven laws, or controlled foreign companies (CFC) rules. Designed to discourage UK-owned corporations from using tax havens, the rules have applied to British-owned companies operating either in the UK or overseas.

If a UK-owned company reports profits in a country with lower corporate taxes than the UK, the government is able to impose an extra tax charge on the company to “make up the difference”. Consequently, as things stand, profits moved from developing countries into tax havens still incur tax at UK rates.

Under the new rules, due to come into force in January, the UK will only impose this extra levy if the profits have been shifted from the UK. Profits moved from developing countries into tax havens will incur tax at the tax-haven rate, rather than the UK rate, so the incentive to shift profits will be significantly higher.

NGOs strongly oppose changes to the CFC rules. ActionAid estimates poor countries may lose up to £4bn in tax revenues. The Treasury does not accept the estimate, but has acknowledged there would be a cost to developing countries. “We do not know if this estimate is correct, but the government cannot legitimately refute the £4bn figure unless it is prepared to conduct its own analysis,” said Malcolm Bruce, chairman of the committee. “That is what we are urging it to do.”

The committee urged the Department for International Development (DfID) to take into account the development impact of tax and fiscal policy. It also said there should be an administrative or legislative requirement for the government to assess new primary and secondary UK tax legislation against its likely impact on poverty reduction and revenue-raising in developing countries.

The report highlights the importance of tax collection in developing countries, noting that tax revenues represent a significantly more predictable and sustainable source of revenue than aid. The committee looked at Zambia, which is heavily dependent on copper mining, as a case study. To test allegations that companies are not making their audited accounts available to the public, the committee suggested that DfID should request access to the accounts of some of Zambia’s main corporations.

The committee praised DfID’s work on taxation, citing a successful programme in Rwanda, where revenues collected increased sixfold over 10 years. It recommended that DfID increase its technical assistance work with the national revenue authorities of developing countries.

The committee also said UK-owned multinationals should be required to report their accounts on a country-by-country rather than aggregate basis, which would enable irregularities to be more easily detected. Requiring tax authorities to exchange information automatically with their counterparts would also constitute a strong deterrent against cross-border tax evasion, the report said. The committee urged the government to enact unilateral legislation to achieve both objectives.

NGOs strongly endorsed the committee’s findings. “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. “For the sake of the billions of people harmed by tax dodging, the prime minister must act on the committee’s powerful recommendations. Next year’s UK presidency of the G8 provides a global platform to demonstrate this leadership.”

Lucia Fry, head of policy at ActionAid, said: “The international development committee has rightly recognised just how fundamental tax revenues are for developing countries. 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.”

The Treasury, however, said the CFC rules protected UK tax revenues and were never designed to protect other countries’ tax revenues.

“Their reform will encourage investment and drive growth in the UK,” it said in a statement. “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.”

The Treasury also questioned the feasibility of analysing the impact of the tax changes.

“Any assessment of the impact of CFC reform on developing countries would need to primarily focus on the nature of, and interaction of companies with, the tax regimes in developing countries. It would be an assessment not of our tax rules, but of the tax rules of other countries,” said a Treasury spokesperson. “Preparing an assessment of the impacts across a range of countries is inherently difficult and uncertain and the government does not think that such an assessment is feasible.”

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