Developing Countries: Impact of Multinational Companies’ Financial Practices and UK Tax Policies

Lord McKenzie of Luton Excerpts

Tuesday 11th December 2012 Lords Chamber

[Lord McKenzie of Luton]

My Lords, like others, I congratulate the right reverend Prelate the Bishop of Derby on introducing this debate and I welcome the manner in which he did so.

I was not going to speak in this debate but I was prompted to do so because I was recalling a largely happy time in the mid to late 1990s when for a couple of years I had responsibility for leading a practice of a major accounting firm in Vietnam. We had offices in Ho Chi Min and Hanoi, and we lived in Ho Chi Min. My observations today are not meant in any way to be a criticism of those incredibly resourceful people but are an anecdotal recollection of the tax challenges of a country at an early stage of the opening of its economy to international investment.

In common with a number of countries at that stage in their development, it had no embedded concept of international accounting standards and, at best, a rudimentary set of tax rules applicable to foreign investors. Not surprisingly, there was no broad understanding of the international tax environment, or indeed of international auditing standards, and the issue of corruption, to which my noble friend and others have referred, was a challenge. In these circumstances, the need for capacity-building was paramount and continual. We certainly saw it as part of our obligation to engage in training sessions for the Ministry of Finance, but there should be a continuing government programme of secondment into the local revenue authorities and transfers and secondments out to more sophisticated regimes.

Experience on some major auditing assignments, which were funded by money from the World Bank or, in another case, the Asian Development Bank, would have been easier had the requirements to have training been more tightly prescribed. Having to have uncomfortable negotiations with a few people who wanted an international study tour, rather than several hundred of their middle-ranking people having good-quality training, was a disappointment at best.

In Vietnam, foreign investors had to be licensed. You could do business either by way of a wholly foreign-owned enterprise or a joint venture with a local partner, depending on the sector and technology transfers. Some sought an in-country presence by way of a representative office, which should have precluded them doing business there although often, sadly, it did not. The concept of aiding transparency by having separate local accounts is to be supported, although there are issues where the business is a joint venture and a local partner, possibly an arm of government, that may be less welcoming of the concept. Having a requirement to identify related party transactions in accounts is also to be strongly supported, but it is not a panacea.

Transfer pricing, or the inflated pricing of goods or services from connected companies, is a challenge the world over, and the opportunities for companies to unbundle their products, sometimes stripping out a royalty flow, is a challenge as well. The IMF points out that developing countries signing up to sophisticated OECD-type tax treaties that generally seek to lessen the tax costs on interest, royalty and dividend flows may not be in those countries’ best interests when there is a large imbalance of such flows between two territories.

Vietnam, like a number of other developing economies, has gone down the path of adopting a VAT system. It was in the process of doing this at the end of the 1990s. As a source of tax, of course, it is not reliant upon the computation of profit and the vagaries of that process. A VAT system can be supportive of exports, although it may not always be progressive. Notwithstanding that, developing countries need a profit or corporation tax also, but one which is based on clear rules and where the fuzziness of the law does not lead to tax liabilities being negotiated. The risks are obvious even for a Starbucks. Also, taxation of individuals should not be overlooked. There can be a huge differential between local wages and expat salaries. The latter are often bolstered by accommodation and tax protection packages. For some, the temptation to split contracts and park some remuneration offshore may be too great. Requiring more vigorous reporting on such arrangements opens the way for local officials to challenge this.

These are a few anecdotal comments from the coal face of a developing economy and the challenges that it faced.