Tackling Corporate Tax Avoidance: EAC Report

Lord Shipley Excerpts

Wednesday 30th October 2013 Lords Chamber

[Lord Shipley (LD)]

My Lords, I thank the noble Lord, Lord MacGregor of Pulham Market, for chairing our committee and for leading so effectively this speedy but very important inquiry. I also congratulate the noble Lord, Lord Leigh of Hurley, on his excellent maiden speech.

The days are long gone when tax collectors could stand at the gates of towns and cities and levy tax in cash on goods brought in for sale. They could raise taxation successfully by that means because there was a clear border and goods were visible. As we have heard, HMRC estimates our loss of tax today through avoidance, evasion and non-payment at £35 billion, which begs the question of how it knows. There is a lot of evidence to suggest that the figure is a great deal higher than that, as we heard earlier in the debate.

I remind the Minister that the coalition agreement of 2010 stated:

“The parties agree that tackling tax avoidance is essential for the new government, and that all efforts will be made to do so”.

Therefore it is reasonable for the Government to assess what has been achieved. Our report poses the question: “Is a new approach needed to tackle corporate tax avoidance in a global economy?”. The answer is, “Without a doubt”. The general public certainly agree, because they see it as an issue of fairness. Perhaps, therefore, the Government’s response to this report should have been a bit warmer. As the noble Lord, Lord Smith of Clifton, explained, that response can be construed in the verbs used. I will add one verb to his list of “agrees”, “notes” and “disagrees”. The Government “welcome” what we say just once.

The constant use of the word “notes” seems odd when the word “agrees” would be absolutely justified. For example, paragraph 138 of our report says:

“Corporation tax is a significant component of HMRC’s portfolio of taxes and makes an important contribution to the UK’s total tax revenue”.

That is self-evidently true, but rather than say that they agree, the Government in their response simply “note” what we have to say. I am puzzled as to why this should be. It seems to relate to the fact that the Government agreed at G8 that work to minimise avoidance is an international matter and that we should therefore await the progress of the OECD. It implies that there is little that the Government can do on their own. However, as we have heard, is this true? It is not.

Our report says in Chapter 1:

“It is primarily for the Government to correct the flaws in the UK’s corporation tax regime and to pursue agreement to make the international tax framework more rigorous”.

There is no doubt that following the G8 decision the latter is starting to be done. G8 and G20 countries have realised that something must be done about international rules which allow multinationals to shift profits across borders to avoid tax. Governments get less money, other taxpayers are short-changed, and the general public rightly wonder how this can be fair and what their Government will do about it.

I accept entirely that multinational solutions are needed and I welcome the OECD initiative. However, I have concluded that the Government must do more themselves to correct flaws in our corporation tax structure. Indeed, they have made 33 changes to tax law and are investing more resources in HMRC, which should repay that investment. That is welcome. However, the public expect that HMRC will be properly resourced to reduce the large amount of tax being lost. I hope that the Minister in his reply will be able to confirm that it will be resourced in the way we need.

In response to paragraph 141 of our report, the Government confirm that:

“Paying Corporation Tax is not voluntary; it is an obligation”.

Indeed it is. But if it is an obligation, will the Minister confirm whether it is true that a British multinational company can take out a loan in the UK, count it against its tax liability, and then place it in a finance company in a tax haven, which can then lend the money on to another company elsewhere in the world? If so, what if that company lent via a tax haven to a sister company? Would tax be saved twice—in the UK because the money is borrowed, and in the receiving country because it is borrowed there, too? Can the Minister tell the House how extensive this practice is thought to be, and what action HMRC is taking to block the loophole? I understand that many other countries are now doing that. Surely the UK should not encourage offshore tax havens at a financial loss to our own taxpayers.

We said in our report:

“As things stand, there are too many opportunities for multinational companies to manipulate their affairs to reduce their global tax payments”.

We also said that,

“ways are open, especially for multinationals, to shift profits between countries so as to reduce their overall tax liabilities, and to make UK corporation tax to a considerable extent voluntary for multinationals”.

Surprisingly, in response to paragraph 141 the Government have simply noted our comments saying, first, that corporation tax is not voluntary—when for some multinationals it clearly can be voluntary—and, secondly, that HMRC is to,

“step up its fight against those multinationals that do not pay their tax in accordance with the law”.

But not paying according to the law is tax evasion. Tax avoidance is about devising ways to get round the law. We have ended up with multinational companies able to avoid corporation tax and national companies unable to do so.

We refer in our report to the “tax avoidance industry”—and I think we are justified in talking about an industry because, from the evidence we received, there is clearly an industry at work. There is now little public trust in the corporate tax system and, as we have heard, it has become potentially very damaging to our democratic processes. So, why is there to be no Treasury review? Why is there no publication of corporation tax paid? Why is there to be no regulation of tax advisers? Why is there a refusal to review all statutory measures available to HMRC to combat tax avoidance, even aggressive tax avoidance? Why is there to be no Joint Committee?

As we have heard, developing countries are some of the worst affected by profit shifting. Christian Aid claims that developing countries lose more revenues as a result of tax avoidance and evasion than they receive in aid. That means that while we are delivering the 0.7% target through the front door, a bigger sum is seemingly going out of the back door. The problems of developing countries are implicit in our report, but perhaps we should ensure that as the OECD, the G8 and the G20 lead reform, developing countries get involved and that due account is taken of their needs. Effective tax collection is vital if poor countries are to reduce their dependency on aid.

Will the Minister comment on the practice of trade mispricing, in which multinational companies can reduce the amount of tax they pay in a developing country by buying raw materials at below market rate and reselling them on the international market at a much higher rate? For example, Christian Aid estimates that if Zambia had received the same price for its copper exports in 2010 as Switzerland did for selling on the copper, Zambia could have doubled its GDP. There is a remedy: international guidance prices, at which I hope the OECD will look closely.

I ask the Minister two things in respect of developing countries. Following the G8 declaration, what support are the Government providing bilaterally, and through the OECD and G20, to ensure that developing countries have a say in the renegotiation of global tax rules? Secondly, what other steps are the Government taking to ensure that the UK’s own tax rules do not allow or encourage any multinational enterprises to reduce overall taxes paid by artificially shifting profits to low-tax jurisdictions? The general public think that tax should be paid where the profit is made. The problem is not going to go away. The mispricing of transactions, and the mislocation of the profits of economic activity into a tax haven to avoid tax, have become a very big political issue.

In conclusion, I ask: are the Government doing all they can? It has been reported that last year, for example, HMRC investigated only 1,000 out of 250,000 reports of transactions that were thought to deserve further inquiry. As we have heard, the Government must lead by example. I agree entirely, and I hope that, in summing up, the Minister will be able to confirm that we will do just that.