Tackling Corporate Tax Avoidance: EAC Report

Lord McFall of Alcluith Excerpts

Wednesday 30th October 2013 Lords Chamber

[Lord McFall of Alcluith (Lab)]

My Lords, it is a pleasure to participate in this debate and to have been a member of the Economic Affairs Committee under the wise chairmanship of the noble Lord, Lord MacGregor. As he said, this is a short report which will advance matters a small amount, but it contains the opportunity for the Government and others to act on issues and to take them forward.

Our report asks whether a new approach is needed. The answer is an unequivocal yes. At the heart of the report is the statement that the UK has serious problems with the avoidance of corporation tax. As the noble Lord mentioned, that is partly due to the complexity of our domestic tax regime, but principally it is because of an international tax system which gives multinational companies the ability to shift profits between countries in ways which minimise their tax liabilities in the UK. The effect of that is to damage the economy and undermine trust in the taxation system. It has both social and economic consequences. We are witnessing democratic failure here and the electorate have caught on. They are unconvinced that the political class will solve these big issues, and there are no issues as big as this to solve. The electorate are of that opinion because they see the social contract as broken—the social contract which was founded on the premise that everyone got a slice of the pie. Over the years, some got a bigger slice, but now we find that, while some are still getting a big slice, others are getting nothing.

The noble Lord, Lord King, the former Governor of the Bank of England, made the point recently that wages and standards of living in 2017 will be the same as they were in 2007. Professor Joseph Stiglitz, who is a professor at Columbia University and a former chief economist at the World Bank, stated, in his book, The Price of Inequality, that the global economy is sick, has been sick for a long time, and that that is infecting our politics. He cited figures to show that, in the US since 1979, output per hour has gone up by 40%, but pay has barely increased. Meanwhile, the top 1% in the US takes home more than 20% of national income. He asked whether the great recession has made things worse. It has made things worse for 99% of people, but 95% of the gains between 2009 and 2012 went to the top 1% of society.

We can see the same trends in our own country. The electorate feel that their views are less important than those of the banks and financial institutions, the energy companies and the multinationals like Google and Starbucks. Our report backs that up when it says that multinational companies are unique in that their corporation tax payments are largely a voluntary activity. That is endorsed by Sir Martin Sorrell of WPP, among others. However, it is not a voluntary activity for the rest of society. The message from HMRC at the end of the year will be that people better get their self-assessment tax returns in by 31 January otherwise they are liable to a £100 fine per day. Rightly so, we should say. But, if we are to have a level playing field, and the chance to restore both economics and politics to health, then we must urgently look at this situation.

Earlier this month, HMRC estimated that there was a £35 billion tax gap which it was failing to collect. The noble Lord, Lord MacGregor, made the point that our proposal for HMRC to have extra resources had been rejected. If it had those resources, as it has done in the past with positive results, then some of that £35 billion could be clawed back. If the Chancellor had that £35 billion in his hands, he could reduce the basic rate of tax from 20p in the pound to 12p. There is a big pot to get hold of, but we need the resources to do so, and it is disappointing that the Government have rejected that proposal. Tax evasion is relevant to the everyday lives and struggles of us all, particularly at this present time of austerity.

Is the UK a soft touch here? It does seem so. The recent examples of Starbucks and others who shifted their profits elsewhere illustrate that point. Since their naming and shaming, the voluntary payment of £20 million by Starbucks is welcome, but it is not the answer. We need to change the structure. The use of outlandish gimmicks to shelter profits in other countries must cease. Google is claiming, absurd though it is, that its intellectual capital resides in Bermuda. That would be okay if it was not for the fact that it was approved by the US Internal Revenue Service. That illustrates just how difficult the situation is and how we need to tackle it globally. In my capacity as a member of the Parliamentary Commission on Banking Standards, we saw how our own domestic banks—HSBC, UBS, Standard Chartered, Barclays and others—were fined almost $4 billion by the American authorities for engaging in money laundering activities. The HSBC evidence to the Parliamentary Commission on Banking Standards was very clear. It admitted that, on day one of assuming control of a Mexican bank in 2002, there was an e-mail from the head of compliance which made it clear that there was no recognised compliance or money laundering function in the company. Yet it allowed that to fester for years.

Why do I mention that in the context of a global financial situation? It is not a victimless crime. During the period of HSBC’s ownership of that Mexican bank, 35,000 individuals in Mexico died at the hands of local drug gangs. So there is a moral as well as an economic case to be looked at. We need international co-operation. We cannot do this alone. The G8 took place in Lough Erne, where warm words and a forced solidarity of leaders gave some reassurance. However, the mild language in our report where we say that we are not yet clear how effective the proposed solutions can be or whether they are achievable within the timescale puts a question mark against the purpose of the G8 in ensuring that this issue is tackled.

I want to put forward a few proposals for what we need to do. First, we need to tackle the opacity of the international structures. They are giving companies an easy advantage in using differences in tax rates between jurisdictions to avoid paying tax legally. The International Financial Reporting Standards, which are overseen by the International Accounting Standards Board, need to be urgently reviewed. Presently the International Accounting Standards Board is an independent, non-governmental body comprised of representatives from the accountancy and tax professions, but it is not overseen or regulated by government. Given the state we are in, there has to be a role for government oversight of this issue. We have to look at how tax structuring is based in the IFRS and elsewhere. The Government need oversight of these accounting standards.

Secondly, we need also to ensure that we remove the lack of transparency of, lack of control over and lack of accountability in the basic tax system that we are now witnessing. Thirdly, in promoting transparency and more democratic accountability, we need a stronger culture. A public beneficial ownership registry is an important aspect of that. Both the Government and the EU have carried out cost-benefit analyses on it. The Government’s cost-benefit analysis produced a figure showing a saving of £30 million in police time alone, while the European Commission has said that the United Kingdom could save €420 million if this register was created. It would be the correct thing to do to have such a register so that we know who owns the companies and what benefits they bring. Apart from revealing savings and costs and being able to tackle money laundering and fraud, one of the key aspects of such a register would be transparency.

For example, in the recent horsemeat scandal, the key companies were set up by the same Cypriot professionals who helped the infamous arms dealer, Viktor Bout, to create his web of secretive companies. If such a register was established, it would provide business with important information about partners, suppliers, investors and customers, and it would ensure that the law enforcement and tax authorities, including those outwith the UK, would have quick and guaranteed access to information. That would be helpful to us all. At the G8 summit the Prime Minister promised,

“to push for more transparency on who owns companies”.

We need this public register. I know that this Thursday and Friday the Open Governance Partnership will hold its summit meeting, and I would like to think that the Government will take up this recommendation and ensure the establishment of a register.

I turn now to transfer pricing and the many ways companies find to shift profits between countries. As the noble Lord, Lord MacGregor, said, the Government’s response on this issue is inadequate. Stepping up the fight, as they say, misses the point. Our report shows that currently there are legal ways to avoid paying UK taxes that are owed because of the very many existing loopholes. We need to identify and close those loopholes. If I was asked to choose between name and shame or ensure transparency, I would ensure transparency on the basis that if we name and shame the “bad” acts, we will see that many of those acts are perfectly legal at this time. Transparency is the key here.

In the end, Starbucks did us a favour because the public finally became aware of an international financial structure that has substantially reduced government tax receipts in a way that directly affects the daily lives of many lower and middle income families in the UK and around the world. The question should not be “How much is Starbucks paying in tax and is that fair?” but “What are all UK companies paying in tax?”. Paragraph 86 of our report makes this point clearly by stating that,

“large companies operating in the UK should make public disclosure of their UK corporation tax returns”.

If the amounts are low when we see the figures in the public domain, the Government can review the applicable tax structuring and identify what legal arrangements are needed to allow these companies to continue operating in the United Kingdom.

In addition, it is essential to make country by country financial reporting publicly available in order to identify problematic tax arrangements. The charity Christian Aid has identified the fact that $160 billion are lost from poor countries every year due to tax dodging. That is more than all the developing countries together receive in aid. This haemorrhaging of the much-needed resources that are required to combat poverty and hunger and to fund vital public services is a continuing scandal. The situation is being allowed to continue to fester.

As the noble Lord, Lord MacGregor, said, the OECD has been charged with some responsibilities, but it has stated that the information from country to country reporting should be made available only to tax authorities, not to the public. I suggest that if that practice continues, we are not going to advance this issue by one whit. The Government urgently need to take this on as part of an international agenda and ensure that country by country financial reporting is secured. Professor Paul Collier of Oxford University has done much to highlight the social and economic injustices of global tax structures. He has noted that the G8 countries are now beset by the corporate opacity that Africa has faced for decades. He identifies the G8 as being far more important now, in times of austerity, than it was in the easy years of the rising economic tide.

I suggest that this short but sharp report can help us to think about the bigger picture, one that we should use to put our own house in order so that at last we can do something beneficial not only for our own citizens, both rich and poor, but for the poor in developing countries around the world.