Government response to House of Lords Select Committee on Economic Affairs 1 st report of Session 2013-14: Tackling corporate tax avoidance in a global economy: is a new approach needed? Chapter 1: 136. 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. We recommend that HM Treasury should undertake a comprehensive review of the operation of corporation tax in the UK, taking full account of the international dimension, and the competitiveness of the UK's economy, and report back with proposals to reduce avoidance, recover revenue, level the tax playing field between UK-based and multinational firms and restore trust in the tax system. (Paragraph 9) 137. The present system is not working and urgently needs reform. We recommend that the Treasury review we propose should also consider a full range of interim measures against those who persist in blatantly contrived avoidance of corporation tax. We are confident that the Treasury will bear in mind as it conducts the proposed review that no one is obliged to pay more tax than laid down by the law. (Paragraph 11) Chapter 6: 158. Reforming the present system or replacing it with something new is likely to be a lengthy process requiring international consensus. Meanwhile governments, including our own, are introducing initiatives such as that on transparency at the G8 or the Chancellor's promised measure to name and shame promoters of avoidance schemes. (Paragraph 134) 159. Given the complexities involved in reducing corporate tax avoidance we recommend that the Treasury should urgently review the UK's corporate taxation regime and report back with proposed changes to be made at home and pursued internationally, especially through the OECD. We consider that this important review should have an independent chairman. We recognise that the Treasury are already working towards implementation of the OECD's Action Plan to tackle Base Erosion and Profit-Shifting (BEPS) and on Government proposals to name and shame promoters of tax avoidance schemes and that companies seeking contracts from the public sector should self-certify their
compliance with tax obligations. Among the issues the Treasury review should examine are: alternative tax structures (such as destination-based cash flow tax) to curtail avoidance, promote investment and to maintain international competitiveness the tax treatment of debt and equity and the scope for introducing an allowance for corporate equity regulation of tax advisers with suitable penalties for falling short of the standards required the scope for penalising companies engaged in aggressive tax avoidance the scope for requiring companies with large operations in the UK to publish a proforma summary of their corporation tax returns to help enable Parliament and public to understand better how tax has been computed and to see when action against avoidance is needed adequate resourcing of HMRC to challenge the tax arrangements of large UK corporations and multinationals The Treasury review should report within one year. (Paragraph 135) The Government notes the Committee s recommendations, but feels that a new review of the corporate tax system would be of limited value given the range of work we are already doing in this area. The Government is committed to creating a corporate tax system that is competitive, stable and fair, with all companies abiding by the rules and making their contribution. So we are taking action in three areas: first, to make the UK tax system more competitive to ensure it supports investment and growth; second, to clamp down on tax avoidance and aggressive tax planning; and third, to drive forward reform of the international tax framework. In 2010 we reviewed the competitiveness of the UK corporation tax system, and found that the UK s lead on corporation tax rates had been eroded, as other countries cut their corporation tax rates further and faster than the UK. In 1997 the UK had the tenth lowest main rate among the EU27 countries; by 2010 it had slipped to twentieth. To address this, and to stem the flow of companies leaving the UK, we published the Corporate Tax Roadmap, setting out a range of reforms to improve the competitiveness of the UK tax regime. We have cut the main rate of corporation tax from 28% in 2010 to 23%. It will fall further in the next two years, reaching 20% in 2015 the joint lowest rate in the G20. At that point the main rate and the small profits rate will be unified, and the complex marginal relief system abolished. This is a major simplification of the tax system. These reforms have been welcomed by business and have had a major impact on the competitiveness of the UK regime. In the 2012 survey of tax competitiveness conducted by KPMG the UK was ranked first, up from second bottom just three
years earlier. However, having set a competitive tax rate, we do of course expect businesses to pay the tax that is due. That is why this Government is committed to clamping down on aggressive tax avoidance. This Parliament alone we have made 33 changes to tax law to close down tax avoidance loopholes. Budget 2013 also demonstrated a significant crackdown on tax avoidance through a number of announcements, which collectively will raise over 3.6 billion in new revenue. However, many of the issues cited by the Committee stem from flaws in the international tax framework. Most obviously, the international rules allow multinationals to artificially shift profits to avoid paying tax. This has negative implications for tax revenues, for competition, and for the perceived fairness of the tax system. We agree with the committee that that there are issues with the current system that need resolving. The UK has taken a lead within the G20 to reform these rules and address this issue, described as Base Erosion and Profit Shifting, or BEPS. The OECD has been tasked with leading a multilateral project on BEPS, to scrutinise the international tax rules to find where they are not fit for purpose in today s modern globalised economy, and to propose reforms. The UK is fully supportive of and closely engaged with this work. To demonstrate our commitment to the project, the Chancellor announced in July that the UK has contributed a further 400,000 to the OECD. The OECD published the BEPS Action Plan in July. This document, setting a clear direction for ongoing work, was endorsed by the G20 Finance Ministers at their meeting in July in Moscow. It sets an ambitious timetable across a range of issues, including a review of the transfer pricing rules to ensure they can prevent profit shifting through movement of intangible assets, risks or capital. It is important that these issues are addressed multilaterally, because the issue at hand is taxing profits from cross-border activities. Resolving these issues requires agreement and action across a large number of countries. Without a multilateral solution there will be increased double taxation, which will inhibit free trade and growth, or double non-taxation. Unilateral action would do little to address the fundamental issues and would risk undermining the UK s competitiveness. Chapter 2: 138. Corporation tax is a significant component of HMRC's portfolio of taxes and makes an important contribution to the UK's total tax revenue. (Paragraph 14) The Government notes the Committee s comment. 139. The present international corporation tax system offers great scope for multinational companies to shift their profits between countries to
reduce their tax liabilities and creates an uneven playing field. (Paragraph 37) The Government notes the Committee s comments. The international tax rules were first developed in the 1920 s, when most businesses operated domestically, dealing with tangible goods and a limited range of services. Since then, the number of multinational businesses has increased dramatically, and new technologies have enabled the development of new global business models, products and services, and increased the value of intangible assets such as intellectual property. In some cases, the international tax rules allow multinationals to artificially shift profits to avoid paying tax. This is why the UK has taken a lead within the G20 to reform these rules. We support the principle that profits and taxing rights should be linked with the economic activities that generate these. The OECD BEPS project outlined above is scrutinising the international tax rules to find where they are not fit for purpose in today s modern globalised economy. 140. HMRC maintain that new measures introduced over the last decade have had a significant impact on the tax avoidance industry in the UK. That view is broadly shared, although statistical evidence is limited. We welcome anti-avoidance measures such as Disclosure of Tax Avoidance Schemes (DOTAS), the anti-arbitrage rules and the General Anti-Abuse Rule (GAAR). The GAAR in particular has a relatively narrow focus. As we recommended in our recent report, " every effort should be made to communicate, particularly to the press and the public, why the GAAR is not an appropriate mechanism to address all problems with the tax system." We welcome HMRC's revised guidance which makes the intended scope of the GAAR clearer. (Paragraph 47) The Government notes the Committee s comments on the success of new measures introduced over the last decade to tackle tax avoidance. The Government also notes the Committee s comments on the narrow focus of the GAAR, but would like to highlight that this approach was directly recommended by an independent Study Group and that it has also been firmly endorsed by consultation respondents. The GAAR will provide certainty and retain a tax regime that is attractive to businesses, whereas a broader rule would risk causing uncertainty for business whilst significantly damaging the attractiveness of the UK as a place for business investment. The Government also notes that the GAAR does not define the boundaries of tax avoidance: where something is not caught by the GAAR, HMRC will use all other tools at its disposal to pursue the tax avoidance activity. The Government would also like to highlight the success of DOTAS: Between its introduction in 2004 and the end of March 2013, it has resulted in over 2,300 avoidance schemes being disclosed to HMRC. That, in turn, has led to over 90 changes in tax law to stop avoidance.
It has also contributed to a general reduction in marketed tax avoidance. 141. Business tax payers and their advisers share an interest in fostering the view that a complex but none-too-onerous corporation tax regime is for the best. But while companies are required to comply with tax laws in the UK and elsewhere, ways are open, especially for multinationals, to shift profits between countries so as reduce their overall tax liabilities, and to make UK corporation tax to a considerable extent voluntary for multinationals. This severely undermines public trust in the tax system, is clearly inequitable and threatens a serious loss of much-needed tax revenue. (Paragraph 55) The Government notes the Committee s comments. Paying Corporation Tax is not voluntary; it is an obligation and the Government is providing resources to HM Revenue & Customs (HMRC) to step up its fight against those multinationals that do not pay their tax in accordance with the law. The Government is committed to a competitive tax regime but we are determined to ensure all companies operating here abide by our rules. That s why the UK has taken a lead within the G20 for reform of the international tax rules to prevent multinationals from artificially shifting profits to avoid paying tax. Chapter 3: 142. The Treasury review should consider whether the international competitive position of the UK's corporation tax regime needs to be bolstered by generous tax relief on interest payments, which can lead to British businesses taking on excessive debt. It should also examine whether, and if so, how the Government should limit excessive use of debt, especially where it is used to finance foreign activities or to shift profits away from the UK. (Paragraph 60) The Government disagrees with the recommendation. A separate Treasury review on this issue is not required as this work forms part of the OECD BEPS Project. The UK tax system, as with most OECD countries and in accordance with international accounting standards, gives deductions for interest as a business expense. However, to protect the UK exchequer there are a number of rules that limit how much interest a company can deduct from its tax liability. These include: the worldwide debt cap, which limits the total tax deductions for interest that the UK part of a worldwide group can claim; transfer pricing rules, which disallow excessive interest deductions; anti-arbitrage rules; disguised interest rules; unallowable purpose rules; and withholding tax on interest.
One action within the BEPS Project is to look at the various approaches countries take to restrict interest deductions and to share best practice in this area. The UK will be engaged in this work and we will continue to work collaboratively with the G20, OECD and other countries to take forward the actions. 143. In principle there is a case for harmonising the treatment of the costs of debt and equity finance. A full allowance for corporate equity is too expensive to introduce now given the current state of the public finances. But the revenue cost of partial relief for equity finance could be offset by a reduction in the rate of relief for debt finance. We recommend that the Treasury review we propose should investigate whether and if so how the treatment of debt and equity finance could best be harmonised. (Paragraph 64) The Government welcomes the Committee s interest in this area. In response to the recommendation of the Parliamentary Commission on Banking Standards, the Government is reviewing the wider case for an allowance for corporate equity. The tax treatment of debt is one of the issues being explored by the OECD BEPS project. 144. We recommend that the Treasury should review the statutory measures available to HMRC to combat tax avoidance and arbitrage arrangements, with a view to strengthening these where possible. (Paragraph 66) The Government disagrees with the Committee s recommendation that Treasury review all statutory measures available to HMRC to combat tax avoidance and arbitrage arrangements. HMRC has a range of effective tools at its disposal to combat tax avoidance and keeps their application under review, informed by DOTAS and other intelligence. Arbitrage arrangements are included within the scope of the BEPS Action Plan and the UK will be playing an active role in this area as in others, building on the work already undertaken with other EU member States to strengthen these rules. 145. Where the Government sees a threat to the public interest from the manipulation of the existing legal and regulatory framework, the best response is for it to tighten up that framework. Naming and shaming is bound to be to a degree arbitrary and challenging to justify when the activity is within the law. So far as tax advisers and promoters are concerned, we await publication of the Chancellor of the Exchequer's plans to name and shame promoters of tax avoidance schemes. We believe that an alternative to the Chancellor's proposals is the establishment of a regulatory system, as outlined in paragraph 147 below. (Paragraph 70)
The Government notes the Committee s comments and addresses its suggestion to introduce a regulatory system at paragraph 70. 146. So far as companies are concerned, public exposure did succeed in getting Starbucks to offer to pay more tax. The threat of naming and shaming represents a reputational risk to companies; and may therefore have the effect of encouraging boards to make sure that the companies they run are not using inappropriately aggressive tax avoidance strategies. (Paragraph 71) The Government is subject to taxpayer confidentiality rules that protect the tax affairs of all taxpayers. Naming and shaming companies or individuals believed to be engaged in tax avoidance, as the Committee suggests, may well compromise these rules. The Government is currently consulting on proposals to introduce legislation to give HMRC the ability to name high-risk promoters of tax avoidance schemes. This consultation closes on 4 October 2013. 147. We consider that a new system of regulation of tax advisers could be valuable in helping ensure that advice on tax matters is in accord with a strengthened code of conduct. We recommend that the Treasury and the professional bodies should urgently examine how such a system of regulation might be established and function, bearing in mind the many practical issues involved, including the form of a regulatory body and suitable sanctions for falling short of the standards required, which might include loss of the right to act as a tax adviser. (Paragraph 76) The Government does not regulate the tax profession and disagrees with the Committee s recommendation that the Government should introduce a new system of regulation of tax advisers and a Code of Conduct. Nevertheless, the Government welcomes the recent publication by the Confederation of British Industry (CBI) of its draft Statement of Tax Principles to promote responsible tax planning. The CBI s initiative is a valuable contribution to the ongoing national and international debate around corporate tax transparency. The Government also supports the professional bodies codes, such as the ICAEW s Code of Ethics, which encourage all members to comply with its fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. 148. We broadly welcome as a first step the Government's proposals to exclude from bidding for public procurement contracts companies whose tax affairs are not in good standing. But we have concerns that they would apply only to companies that seek public contracts rather than treating companies equally under the law, and that procurement officers would have discretion over which companies to exclude. As with naming and shaming, there is no substitute for improving the tax code to reduce tax avoidance. (Paragraph 78)
The Government notes the Committee s comments. 149. It is important that the GAAR should be effective. If the range of sanctions envisaged proves ineffective, we recommend consideration of the introduction of penalties for all taxpayers in cases that are found by the courts not to meet the "double reasonableness" test in the GAAR. (Paragraph 82) The Government disagrees with the Committee s recommendation to introduce penalties for those taxpayers caught under the GAAR at this stage. The Government believes that a new and unfamiliar addition to UK tax legislation, such as the GAAR, needs a bedding-in period to allow taxpayers and advisers to get to grips with it. However, the Government does keep all policies under review and has not ruled out future action to strengthen the deterrent impact of the GAAR by attaching penalties, if necessary. 150. We recommend that the Government should actively promote implementation of the G8 proposals for improving the flow of information between tax authorities. As regards public disclosure, we recommend that large companies operating in the UK should make public disclosure of their UK corporation tax returns. We also recommend that the Treasury review should look at practical ways to require companies with large operations in the UK to publish a proforma summary of their UK corporation tax returns. This would help enable Parliament and the public to see if a fair level of corporation tax was being paid and when action against avoidance was needed. It might also act as a deterrent to aggressive tax avoidance by companies. (Paragraph 86) The Government agrees with the recommendation regarding active promotion of the G8 proposals. The G8 tasked the OECD with developing a template for multinationals to report, to tax authorities, details of profits made and taxes paid in the countries where they operate. That will help tax authorities with risk assessments for tax avoidance proposes. This work has now been incorporated into Action 13 of the BEPS Action Plan and the OECD has released a White Paper, for comment by October. The Government disagrees with the recommendation regarding public disclosure of tax returns. The Government remains committed to greater transparency, but we do not believe that requiring companies to publish their tax returns would contribute effectively to these objectives doing so would put the UK at a competitive disadvantage to other countries that do not require this. It would also do nothing to aid our efforts to tackle tax avoidance.
Chapter 4: 151. We agree that fundamental reform of the international tax framework should be pursued in the OECD. As things stand, there are too many opportunities for multinational companies to manipulate their affairs to reduce their global tax payments. Corporate manipulation of the system so as to avoid taxation reduces governments' revenues, undermines public trust in the tax system. We recommend that the Government should continue to play its full part in encouraging the OECD's reform agenda to an early successful conclusion. At the same time the Government and the Treasury review we propose should explore the scope for more radical alternative approaches to corporate tax. (Paragraph 93) The Government agrees with the Committee s recommendation that the Government should continue to play a key role in the OECD BEPS work. The UK has been actively involved in the development of the BEPS Action Plan and we will continue to work collaboratively with the G20, OECD and other countries to take forward the actions. To demonstrate our commitment to this project, the Chancellor announced that the UK, like Germany and France, has contributed a further 400,000 to the OECD to ensure work progresses to the ambitious timetable set out in the OECD BEPS Action Plan. As set out above, we do not consider that a fundamental review of the corporate tax system is necessary or would add value at this stage. 152. A unitary tax system treating multinational companies as single entities in a global economy is attractive in theory. But there would be formidable difficulty in reaching global agreement, or even within the EU, on a common tax base, let alone on the appropriate allocation. (Paragraph 102) The Government notes the Committee s comments. 153. A destination-based cash flow tax could dramatically reduce the scope for profit-shifting and tax rate competition between countries. It might also be much easier to implement than a unitary tax as agreement from many countries might not be needed to begin implementation. We recommend that a detailed study should be undertaken, alongside other options, by the Treasury review we propose to investigate reform of corporate taxes, including the scope for wide international adoption of a destination-based tax and whether the UK could bring in a destinationbased tax unilaterally. (Paragraph 111)
As set out above, we do not consider that a fundamental review of the corporate tax system is necessary or would add value at this stage. The Government agrees that the current international system for corporate income tax requires reform, which is why we are supportive of the BEPS process. We need to modernise the international framework to make sure it is fit for purpose. But we do not need to overhaul the whole system and replace it with, for instance, a destination-based cash flow tax. Alternative approaches to tax have been discussed in the course of the BEPS project, both with other countries and with business, and there is a clear consensus that we should stick to the current approach as the basis of international tax rules. All G20 and EU countries, with the exception of Estonia, impose a tax on profits. The UK is an internationally integrated economy. It is beneficial from the perspective of competitiveness and administrative efficiency if companies do not have to manage two different tax systems, and to change the rules unilaterally could undermine our attractiveness as a location. Changes on this scale could impose significant transitional costs on HMRC and businesses. Further, they could make it more difficult to collaborate with other tax authorities, as we would be trying to operate a system under different rules, and make it harder to tackle tax avoidance. Chapter 5: 154. We welcome the National Audit Office s assurance that the five settlements it reviewed were reasonable. But we remain concerned by the evidence we received that HMRC s approach to multinationals was not assertive enough, and the Commons Public Accounts Committee s critical findings of HMRC that the tax collector is not sufficiently challenging of multinationals. (Paragraph 118) HMRC s approach to managing the compliance of large businesses is widely recognised as world-class. In the three years to 31 March 2013, it recovered 23 billion additional tax from large businesses. In the 2012 Autumn Statement, the Government announced 29 million additional funding for the department to increase its capacity to identify and challenge tax risks in large businesses, including additional resources to challenge the transfer pricing arrangements of multinationals. 155. Parliament should have greater oversight over HMRC. We recommend that Parliament should establish a joint committee made up of MPs and Peers along the lines of the Intelligence and Security Committee. HMRC should be required to give members of this new committee private access to the details of individual settlements with multinationals so as to provide effective parliamentary oversight of HMRC while maintaining taxpayer confidentiality. The new committee could be advised by the National Audit Office which would need to recruit more tax experts for this role. We request both Houses to consider this recommendation as soon as possible. (Paragraph 124)
The Government does not agree with this recommendation. Decisions on complex tax disputes are rightly a matter for the Commissioners of HMRC. A joint parliamentary committee with access to details of individual taxpayers affairs could compromise the clear principle that Ministers and Parliament should hold HMRC to account for its processes and use of public money, but should not intervene in decisions on the affairs of individual taxpayers. The existing arrangements prevent any assertions of political interference in individual taxpayer cases and maintain public confidence in the administration of the tax system. In response to the Public Accounts Committee s recommendations for change in its handling of large tax disputes, HMRC has strengthened its governance arrangements and improved the transparency of its processes. This has included creating a new role of Tax Assurance Commissioner who, with two other Commissioners, takes decisions in the largest and most sensitive cases. Importantly, the Tax Assurance Commissioner does not meet with individual taxpayers to discuss their tax affairs, nor does he manage the caseworkers in HMRC who deal with taxpayers. The Tax Assurance Commissioner published his first annual report on how HMRC resolves tax disputes on 2 July 2013. The NAO has full access to the information HMRC holds about its dealings with individual taxpayers and is able to give assurance to Parliament about whether the Department is adhering to its governance arrangements and about the Department s processes and performance. 156. HMRC needs sufficient high quality staff with deep expertise in corporate tax to deal effectively with the tax affairs of complex and wellresourced multinationals. In order to achieve this, we recommend that HMRC should be better resourced. (Paragraph 128) The Government is already investing in HMRC to tackle tax avoidance and evasion and to reduce losses from fraud, error and debt that includes almost 1 billion over this Spending Review period, to bring in an additional 9 billion a year in tax revenue by 2014-15. As announced in the June 2013 Spending Round, HMRC will continue to focus resources on frontline tax collection and tackling tax avoidance, evasion, fraud and debt and to reflect this their target will be increased to 24.5 billion in 2015-16. HMRC will collect 10 billion more in compliance revenues in 2015-16 than in 2010-11. In addition to reinvestment funding of 917m in the 2010 Spending Review, the Chancellor awarded HMRC a further 77m in Autumn Statement 2012, including 29 million to increase its capacity to identify and challenge tax risks in large businesses, including additional resources to challenge the transfer pricing arrangements of multinationals. HMRC has already moved more than 5,000 people into compliance roles since 2010 through a mix of recruitment and managed moves.
HMRC has substantially increased the number of recruits to its graduate training programme for senior tax professionals, and supplemented this with the recruitment of qualified senior tax professionals and specialists to cover specific requirements. HMRC is also supporting and enhancing the capability of existing staff with high quality training, including some that leads to externally recognised qualifications up to university degree level. 157. The use of staff seconded from the Big Four accountants by HM Treasury and HMRC to help design taxes is counterproductive. The risks are two-fold: that those on secondment will not have any incentive to design robust, hard-to-avoid taxes and that when they return to private practice they will be better placed to advise how to exploit loopholes. We recommend that the Treasury and HMRC should be better resourced to design and implement taxes, without undue dependence on shortterm professional advisers. (Paragraph 131) The Government does not accept that the use of staff seconded from the Big Four accountancy firms is counterproductive, or that that HM Treasury and HMRC are unduly dependent on short-term professional advisers. The nature of the work of HM Treasury and HMRC means staff with specialist knowledge and skills are, on occasion, seconded from the private sector to assist with specific projects where such expertise is needed. HM Treasury and HMRC are fully committed to securing benefits brought to their Departments by staff who have a greater depth and breadth of expertise and knowledge gained as a result of outside experience. The Government is committed to better tax policy making and recognises the importance when developing policy of engaging fully with those that will have to operate the rules and with all other interested parties. The Government takes their views into consideration, but ultimately decisions on tax are for Ministers. Safeguards are in place to ensure that official information is treated confidentially and that conflicts of interest are appropriately managed.