Tackling Corporate Tax Avoidance: EAC Report

Lord MacGregor of Pulham Market Excerpts

Wednesday 30th October 2013 Lords Chamber

Moved by

[Lord MacGregor of Pulham Market]

That this House takes note of the Report of the Economic Affairs Committee on Tackling corporate tax avoidance in a global economy: is a new approach needed? (1st Report, HL Paper 48).

[Lord MacGregor of Pulham Market (Con)]

My Lords, I am pleased to introduce the report of the Economic Affairs Committee entitled Tackling Corporate Tax Avoidance in a Global Economy: Is a New Approach Needed? I declare my interests, although I think they are pretty remote for this inquiry, as chairman of the British Energy Pension Fund Trustees and of the Eggborough Power Ltd Pension Fund Trustees.

I begin by paying tribute to the Leader of the House and the business managers for giving us an early opportunity—and in prime time in the Chamber—to debate this Select Committee report. This is a welcome and swift response to criticisms by Select Committees that they have often had to wait a long time to get a debate and response from the Government, and then get one only in the Grand Committee Room.

I am grateful to all the witnesses who contributed oral and written evidence to the inquiry and to our specialist adviser Professor Michael Devereux, director of the Oxford University Centre for Business Taxation and associate dean of research at the Said Business School. Professor Devereux’s knowledge, expertise and advice made an essential contribution to our report. I am also very grateful to our committee clerk, Bill Sinton, and his staff for their first-class assistance.

We decided to undertake this inquiry because of the rising public, media and parliamentary concern that multinational companies are not paying their fair share of UK tax. We also decided to make it a relatively short one, over the spring and early summer, because, given the topicality and urgency, we did not think that we should carry on the hearings after the Summer Recess and into the winter. The Public Accounts Committee in the other place was concurrently holding its hearings and we had the benefit of having the chairman of the PAC as one of our witnesses.

Before and as we launched our inquiry, there was a steady stream of stories in the media about multinational companies that in practice pay little or no UK corporation tax, even when they are doing very good business here. Examples included Google, Amazon and Starbucks, as well as the British-based Vodafone, Thames Water and Cadbury before its takeover by Kraft. This practice undermines public trust in the fairness of the system, calls into question corporate sector responsibility, raises doubts over the effectiveness of HMRC in ensuring compliance with corporation tax, reduces the tax revenue to HMG that should legitimately be coming here, and can place UK-based firms at a competitive disadvantage if they operate mainly or solely in this country and pay their full taxes here. This can in particular affect small to medium-sized businesses that are attempting to compete and grow.

In some cases, UK corporation tax seems to a considerable extent to be a voluntary tax for multinationals. Starbucks’ volunteering of extra payments in the UK after bad publicity suggests that it recognises that. As the PAC noted, Google generated $16 billion revenue from the UK between 2006 and 2011 but paid just $16 million of UK corporation taxes in the same period. Even after accounting for all its expenditure, it is still a huge gap.

There is a serious issue of avoidance of corporation tax to be tackled. Part of the problem is the complexity of the UK’s tax system but the main scope for corporate avoidance arises from the international tax system, which allows multinational companies to shift profits between countries to lower-tax regimes and reduce their tax liabilities in the UK, even when they are doing good and substantial business here.

Our report, based on the evidence, fully recognised that the Government are giving priority to tackling these issues but, recognising the challenges and concerns, also made some further recommendations. I have to say that I find the Government’s response somewhat disappointing, defensive and perhaps slightly complacent. That may not have been the intention but the impression is given that it can be summarised as, “Of course there is a problem but we are doing all that is required to tackle it”, and they are dismissive of any other recommendations.

Two key points underlie our analysis. First, international companies, like all others, are entitled to frame their tax policies with a view to minimising tax within the rules, although multinational companies are diverting huge resources to exploiting to the maximum what the rules enable them to do. I will have something to say later about whether HMRC is sufficiently resourced to ensure that companies are paying their proper share. Secondly, we recognise that fundamentally this issue can be fully and properly tackled only at the international level because it is so often the difference between the tax regimes that makes the exploitation and ability to minimise the tax possible.

I will turn briefly to the areas in which we are in agreement with the Government’s response and where we actually said so very firmly in our report. We acknowledge that changes are being carried out throughout the corporate tax road map and steps are being taken to simplify the tax system and make UK corporation tax one of the most competitive in the world. We acknowledge all the efforts to tackle tax avoidance, in GAAR, DOTAS and so on. We acknowledge and support the increased resources and manpower for HMRC to tackle tax avoidance and evasion, and the successes it has achieved. Above all, we acknowledge the key importance of international action and the Government’s leading role in the OECD multilateral project on base erosion and profit-shifting. All this is agreed and supported by our committee.

However, three of our recommendations were not accepted. The first is our proposal for an urgent review, to be undertaken by the Treasury, of the UK corporation tax regime, which should report back with proposed changes to be made at home and pursued internationally. Our report lists six issues for this review, of varying importance. The one I would single out is a review of alternative tax structures, such as a destination-based cash-flow tax, which we analyse in some detail.

I will explain the reasoning for that recommendation. There is general agreement that the various individual countries’ tax regimes do not reflect the changing business models, the domination of multinational corporations and the challenges of the digital economy. This is well recognised in the G20 Leaders’ Declaration of September 2013. Their solution is the OECD’s action plan on base erosion and profit-shifting, to be completed in two years.

One attraction for doing the work into alternative tax structures that we are recommending is that there is no certainty, to put it mildly, of a successful outcome of the OECD’s BEPS—as it is known—action plan within two years. One needs to look only at the OECD’s plan of action, published in July, to see what a truly formidable range of work has to be undertaken, let alone agreed among so many Governments. There is a serious risk at international level that we are putting all our eggs in one basket and that three or four years on we would be no better off. The advantage of the destination-based cash-flow tax is that it could be introduced unilaterally.

Secondly, I note that the Government have by implication rejected our recommendation that HMRC should be better resourced, by outlining all that has already been done. I acknowledge that the evidence so far is that extra resource has been more than self-financing in the revenue it has produced. I have looked at this quite a few times in the past and our recommendation for more resources was designed to help and support HMRC in the good work that it has been doing. That is why I am disappointed that the Government have dismissed our recommendation. As a former Chief Secretary, I have to say that it is the kind of extra resource I would encourage. It is difficult to judge how much extra resource is needed but the evidence is that it would well justify itself.

Thirdly, I regret that our recommendation of a joint parliamentary committee, along the lines of the Intelligence and Security Committee, to oversee HMRC has been rejected on grounds of taxpayer confidentiality. The same argument about confidentiality could be used against the existing intelligence committee on grounds of national security, but there has never been a breach or leak. Meanwhile, Parliament has to take it on trust—relying on the National Audit Office, another body of officials—that all is well in HMRC with the resources that it has. I hope that this recommendation will be looked at again.

Finally, I have three specific questions for the Minister when he comes to wind up. Can he update us on progress since publication in July of the OECD Action Plan on Base Erosion and Profit Shifting? Is the way ahead any clearer? Can the Minister also update the House on progress on some of the Government’s other anti-avoidance initiatives, such as giving HMRC the ability to name high-risk promoters of tax avoidance schemes? I understand that consultation on this ended on 4 October. Can the Minister brief us on the current status of the Government’s proposals to exclude companies whose tax affairs are not in good standing from bidding for public procurement contracts? How would such measures be consistent with that respect for taxpayer confidentiality which the Government invoked against the idea of naming and shaming users of aggressive tax avoidance schemes, as well as their advisers?

I shall leave it to other noble Lords, who have practical experience of corporate issues, to focus on some of the matters I have not had time to deal with, such as debt equity finance. I look forward particularly to the maiden speech of my noble friend Lord Leigh of Hurley.

I conclude by saying that our committee is composed of many with great experience and knowledge in business, finance, tax and academia, and they have brought that business experience and wider knowledge to bear on this report. I am indebted to them all; it is a privilege to chair such a committee. I beg to move.

--- Later in debate ---

[Lord MacGregor of Pulham Market]

My Lords, for a potentially dry and technical subject, we have had a lively and well informed debate. Of course, it is not a dry subject; it is a crucial one that is fundamental to the well-being of our citizens and our businesses.

We have had many excellent contributions from noble Lords this evening and I thank them all. I particularly thank my noble friend Lord Lawson for his overgenerous remarks about me. It has been hugely rewarding for me to have had so many opportunities to work with him over the years. I congratulate my noble friend Lord Leigh of Hurley on his maiden speech. He was modest in the length of his speech and temperate in his comments. But even in the short time he spoke, he demonstrated that he has wide expertise and knowledge, from which we will all expect to benefit in future.

It is also clear that the Government and the officials who drafted the response to our report gave too little thought to it. The Government gave the impression of complacency—that they are doing all that is required and reject all other recommendations for action. That approach means that they have not perhaps obtained enough credit for what they have been doing. The Minister certainly endeavoured strenuously to put that right in his response tonight.

I share very much the view of the noble Lord, Lord Lipsey, on the Treasury. Based on my experience, I thought that his book on the Treasury, which I have read comparatively recently, was good and very revealing. I hope that this debate has demonstrated that the Treasury will need to give much more serious consideration to some of our recommendations than it has done so far. Symptomatic, I think, was the terse rejection on false grounds of our recommendation of a parliamentary committee to oversee HMRC. The participants in this debate have demonstrated the expertise in the financial and commercial world that would make such a committee highly relevant.

Ours was a swift but intensely considered report. The debate tonight and the inadequacy of the Government’s written response have convinced me that it is a subject to which we will have to return.

Motion agreed.