Tackling Corporate Tax Avoidance: EAC Report

Lord Brennan Excerpts

Wednesday 30th October 2013 Lords Chamber

[Lord Brennan (Lab)]

My Lords, I congratulate the noble Lord, Lord Leigh, on a maiden speech of elegance and economy. It is a remarkable example for his fellow accountants. I also commend the Economic Affairs Committee on the high quality of this report. It applies clarity to the complex and gives its recommendations succinctly and to the point. It should be required reading—where necessary, rereading—for those in government dealing with financial affairs who are given to policy complacency or the intellectually superficial. I declare an interest as chairman of Global Financial Integrity, a Washington think tank working on tax issues and illicit cash flows. It works with several Governments in a task force dealing with tax reforms. Its work informs much of what I am about to say.

I want to deal in particular with the international aspect of corporate tax reform. It was described by the noble Lord, Lord MacGregor, echoing the Government, as a topic of key importance. So, what can be done internationally that will prevent our country losing its competitive advantage and yet achieve a more stable and just tax regime? We want to achieve as level an international playing field as possible. The importance of this topic was recognised this year by the G8, by the OECD it its initial report of February and its action plan of July, and by the G20 in calling for action in Mexico last year and in Moscow this year, endorsing the OECD action plan. What does the OECD say needs to be done? There are five principal points. The first is transparency: that is obvious. The second is evidence of beneficial ownership. Who actually owns which companies in which jurisdictions and how are they interconnected? The third is the automatic transfer of tax information. This already applies to the three NAFTA countries, applying to individuals and companies. It is a three-country market of 450 million people and hundreds of thousands of companies. It can be done: it is being done. The fourth and fifth are two interrelated topics: country-by-country reporting and transfer pricing.

The OECD, in its 15-point action plan—four points of which, as a matter of interest, refer to transfer pricing—says that country-by-country reporting and transfer pricing are an essential element in tax fairness across countries. The G8 agrees that this is essential. The OECD is neither amateur nor academic. It has a tax database and a tax policy centre and it is used to reporting on, and seeking to implement, tax reform. I quote from its report on transfer documentation practices, paragraph 71—a sentence that is tediously long but important:

“It seems possible for businesses to provide without undue burden individual country data based on either management accounts, consolidating income statements and balance sheets, and/or tax returns that would provide tax administrators with a general sense as to how their global income is allocated and where pressure points in the transfer pricing arrangements might lie”.

As far as I am aware, no one in the year or two since that was published has produced a plausible argument against its practicability.

Quoting these two issues in its action plan of July, the OECD promised an urgent response. That response was given 10 days ago, on 17 October. It precedes a consultation meeting in Paris in mid-November on country-by-country reporting and transfer pricing. By this rapid interim report it anticipates a set of rules to be developed that will include a requirement that multinational companies provide all relevant Governments with necessary information on their global allocation of income, economic activity and taxes paid in the relevant countries, according to a common template. That has been produced in three months. It requires a consultation response, including from our Government, by mid-November. Action is sought, and expected. Despite the understandable concerns of those in this House about the difficulty of obtaining international co-operation, the OECD reminds us all that the Extractive Industries Transparency Initiative and the Publish What You Pay initiative have both been put into practice by Governments and international energy companies. It can work and it is working. There is no reason why the OECD recommendations should not be accepted in the next month or two on these topics. However, we need to make more significant progress.

The Government and other interested bodies have to push the OECD. It is an important institution, and I praised it. However, Professor Picciotto, a witness to the committee, laments at paragraph 32 of its report some of the OECD’s past waywardness after it had made a good start. Indeed, he complains about the transfer pricing initiatives that it took, saying:

“Regrettably, the OECD officials have been allowed to go their own way, free from any parliamentary scrutiny, and develop the increasingly complex and inappropriate Guidelines”.

So they give the initiative, but the Governments ensure that they are quickly and practically produced for action.

We must next press the accounting profession. The International Accounting Standards Board is responsible for the creation of modern accounting standards, expressed in the international financial reporting standards —the IFRS. As far as I know, at present the standards board has no programme of any action in response to the OECD plan, and neither is any draft work being done on how the IFRS might have to be changed to meet the recommendations with which I have been dealing. Therefore, although Governments call for action, which requires accounting procedures to be in place, they have no oversight over the body responsible for creating them, nor on the profession that will implement them. That surely must be dealt with. We cannot have a two-year programme from the OECD and then a further lamentable year or two—or more—of introducing accountancy standards. A competent accountancy profession can produce a draft along with the OECD proposals.

Surely the third and last point is that this has to be kept in front of the public. It is a matter of serious public concern. We ordinary people pay taxes; why should these giants escape? It is simply not fair, and the public will not forgive politicians or Governments who forget that. It is important to note, to echo the words of Prime Minister David Cameron, that this is an issue whose time has come. I hope that the Government, Parliament and those responsible for these changes will not find themselves left behind.