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6 May 2009 : Column 94WH—continued
Tax Avoidance and Evasion
2.30 pm
David Taylor (North-West Leicestershire) (Lab/Co-op): It is a great pleasure to speak under your chairmanship, Mr. Hancock. I am grateful to Mr. Speaker for selecting this vital subject for debate in a long slot, especially as it precisely coincides with this year’s Christian Aid week. I shall focus my opening remarks on the international development implications of tax avoidance and evasion and then highlight the impact on the UK Exchequer and our society of the corporate culture of tax avoidance that has taken root in this country.
As the Finance Minister of South Africa, Trevor Manuel, has said:
“the correct spelling of the word ‘aid’ is ‘T-A-X’”.
It should be a source of consensus, or a no-brainer as the tedious phrase goes, that tax is the most sustainable source of finance for development work in poor countries. It promotes accountability and allows Governments to generate revenue from their nations’ economic activity to invest in their own infrastructure, health care and education. A broad tax base improves representation and accountability between states and citizens. It encourages good governance, as Governments who depend on their citizens for revenue are more likely to act in the interests of the people.
Because promoting economic development for all means greater revenues for the state, Governments have a vested interest in ensuring that economic growth is shared among the population. Progressive taxation also benefits the poor by redistributing wealth through society, and it can limit consumption that has harmful effects on society or the environment through the levying of heavier taxes on products and services. Angel Gurría, the head of that international free market acolyte the OECD, certainly believes that. He has observed that
“taxes provide the long term financial platform for sustainable development. Taxes are the lifeblood of state services.”
It is estimated that between $500 billion and $800 billion of illicit capital flows from developing countries every year. Of that, $160 billion is lost through commercial tax evasion—or £20 million during this 90-minute debate. It is about twice the annual bill for global aid from rich countries to poor countries. It is also several times larger than the $40 billion to $60 billion that the World Bank estimates will be needed annually to meet the United Nations millennium development goals, which are intended to halve poverty by 2015. If that money—that avoided tax—were allocated according to present spending patterns in poor countries and with the same degree of effectiveness, the additional revenues could, among other things, save the lives of 1,000 children under the age of five every day.
There is much discussion about the role of tax havens in facilitating these capital transfers. It is recognised by, among others, the current Pope—he must be infallible—that offshore centres play a major role in the imbalances of development, causing a gigantic flight of capital that is the result of tax evasion. Christian Aid estimates that, between 2005 and 2007, £35 billion of illicit capital flowed from non-EU countries to the United Kingdom as a result of trade mispricing—a practice whereby multinational companies sell goods and services across borders at inflated or sometimes deflated prices to
minimise their tax burden. Of that, £5 billion of illicit capital flowed into the UK from the world’s 49 poorest countries. That is almost equivalent to the Department for International Development’s entire programme budget for 2006-07.
The estimable researcher on these matters, Professor Prem Sikka, has pointed out that transfer pricing is used as a “key mechanism” for dodging tax by multinationals all over the world, yet its abuse is scarcely on the political agenda. These are not abstract figures. They represent essential services that the world’s poorest people are being denied by merciless and venal exploitation, not just of individual states but through the lack of regulation applied to the global movement of capital.
Bob Spink (Castle Point) (Ind): The hon. Gentleman mentioned the plight of children between the ages of one and five. He will know that malaria particularly attacks those children, that it affects 40 per cent. of the people in the world and that it infects 500 million people each year. Can he estimate just how much good it would do for mankind if just 5 per cent. of the tax that is avoided were put towards malaria research?
David Taylor: The answer is in the hon. Gentleman’s question. The figures that I have given show the scale of progress that could be made towards achieving the millennium development goals, and the point that he raises is very important. We are considering African countries. Zambia has some of the richest deposits of copper in the world, but it failed to benefit at all from the commodity boom between 2003 and 2008. Why? Because some multinational companies pursued aggressive tax avoidance strategies by pushing for special tax breaks and keeping mining contracts secret. In a country in which just 2 per cent. of people in rural areas have access to clean drinking water, there is an urgent need for more tax revenue. The concept of corporate social responsibility rings particularly hollow in the context of the fact that 98 per cent. of people in rural areas of Zambia do not have clean drinking water.
Andrew Stunell (Hazel Grove) (LD): Does the hon. Gentleman agree that Zambia has a problem not just from the direction that he mentions, but from the purchase of its sovereign debt at a discount by so-called vulture funds, which are also showing a complete lack of social and corporate responsibility?
David Taylor: I agree with that so strongly that I was on the other side of the River Thames with my hon. Friend the Member for Northampton, North (Ms Keeble) just 24 hours ago with a vulture on my arm to highlight the issue to which the hon. Gentleman refers.
The ability of sovereign Governments in both developed and developing countries to tax effectively is seriously undermined by international tax avoidance and evasion. Under-resourced tax authorities struggle to track the extent to which taxable income from multinationals is moved offshore. Few developing countries can navigate the complexities of multinationals’ structures in order to determine tax liability, especially when their people are dying for want of clean drinking water, malaria treatments and sanitation services. Long-term policies
in areas such as tax collection and enforcement cannot realistically be adequately supported in crisis and disaster-led circumstances.
This is clearly an issue of policy coherence. We cannot continue to spend billions of pounds of UK taxpayers’ money only for it to come back to the western world, including to the UK, as illicit money. Trevor Manuel has also said:
“It is a contradiction to support increased development assistance, yet turn a blind eye to actions by multinationals and others that undermine the tax base of a developing country.”
That is happening on a grand scale. Greater transparency is required globally to ensure that more of those resources stay in developing countries and are used for development. That can be achieved by implementing a new international accounting standard and addressing secrecy in tax havens and offshore financial centres.
Mr. David Drew (Stroud) (Lab/Co-op): I thank my hon. Friend for taking up this issue again. One way in which it could be dealt with is through a Tobin tax. That is an idea whose time came five or so years ago, yet lamentably we have made no progress on it. Is there a reason why?
David Taylor: I genuinely do hope to come to that point at the end of my speech and I hope that my hon. Friend will be able to stay until then.
The problems of capital flight and the financial crisis show clearly that the complexity of global financial flows has grown far beyond the ability of Governments—any Government—to monitor and regulate them effectively. The fight against poverty demands an end to the secrecy surrounding tax payments made by multinationals to poor countries’ Governments. The International Accounting Standards Board provides the framework for regulation in this area and should require multinationals to report the scale of their economic activity and the taxes paid in every single country in which they operate. That would enable sovereign Governments and civil society to ensure that multinationals paid the right amount of tax in the right place at the right time. Many investors are also keen to have that information, which allows a much closer understanding of the risk associated with investments. Such reform of global accounting practices would also promote the concept of ethical investment, which is regarded in many quarters as oxymoronic.
Christian Aid and others, including ActionAid, are calling for two key measures of global financial regulation: first, an international accounting standard on country-by-country reporting to provide investors, regulators and tax authorities with a powerful indicative tool to assess risks and highlight abuses; and, secondly, automatic tax information exchange between all jurisdictions, including tax havens, based on a global agreement, instead of a piecemeal approach involving bilateral treaties, which have been shown to have limited impact and tend to exclude developing countries.
The London summit not long ago—the G20 meeting—delivered significant progress towards financial transparency. Indeed, for the first time, the Prime Minister publicly acknowledged the link between tax evasion and development. Prior to the G20 meeting, he stated:
“we will also set down new measures to crack down on those tax havens that siphon money from developing countries, money that could otherwise be spent on bed nets, vaccinations, economic development and jobs.”
However, the measures proposed by the G20 are agreements on sharing bilateral tax information between tax havens and wealthy countries that have the economic and political muscle to negotiate. They are rushed measures; they do not help the developing world and will hinder tax investigators in countries such as the United Kingdom.
Tax information exchange agreements—TIEAs—as proposed by the G20 and the OECD, are of limited value to developing countries. First, only the richest countries have the economic power to negotiate such agreements and gain speedy access to the necessary information. Using a bilateral model, if only UN member countries had fair access to tax information, each of the 192 countries would have to sign 192 information exchange agreements. I know, Mr. Hancock, that you are good at mental arithmetic: 192 squared would mean a total of 36,864 agreements globally. There are between 50 and 72 tax havens in the world, and more than 100 countries with which they could negotiate TIEAs, so that is potentially more than 7,200 bilateral agreements. However, by March 2009, only 49 TIEAs had been signed between OECD countries and secrecy jurisdictions, and only 18 have entered into force.
The second reason why TIEAs do not work is that poor countries do not have the power to offer strong sanctions on their own, and thus cannot access the information that they need through that channel. The proposed agreements enshrine “on request” information sharing. If a poor country wants information on a tax payment, it will need to provide significant evidence that criminal activity is occurring, but it simply will not have the resources to conduct such investigations.
Andrew Stunell: I entirely support what the hon. Gentleman says. Perhaps he will take into account the words of the right hon. Member for Leeds, West (John Battle): Africa needs accountants. Many African Governments are not professionally equipped to deal with the kind of challenging financial regimes that confront them. This is a major problem. Even if the partners are willing participants, how will they evaluate the material that they receive and move on to enforcement?
David Taylor: I agree, and Zambia would be a great example. Soon after I qualified—it was quite a few years ago—I was on the point of moving to one of the towns in the copper belt in Zambia to work as an accountant, but it did not happen.
Evidence so far shows that TIEAs have produced only a trickle of information. For instance, the TIEA between the US and Jersey—two of the biggest players in the offshore system—was used only four times in 2008. States may also maintain or introduce other restrictions on the procedures for obtaining or supplying information. For example, some states consider that before any information is supplied, the person concerned must be notified of the request and given an opportunity to object. That, of course, gives tax evaders ample opportunity to cover their tracks, which highlights again the culture of secrecy and privilege that the activities of powerful multinationals are afforded by domestic and international authorities.
The Government must recognise that automatic tax information exchange between all jurisdictions, including tax havens, is the only system that can deliver rightful tax flows to poor countries. The Minister’s response to that specific point would be immensely helpful and much appreciated.
Of course, some will argue for a bilateral agreement on tax information exchange. Indeed, the Government have argued against automatic TIEAs, saying that developing countries might not have the capacity to use the data that would be transferred and that the information transfer would thus be for nought. That argument is patently absurd and deeply patronising to developing countries. It suggests that they do not have, and could not quickly develop, the ability to deal with large quantities of data of the sort that automatic information exchange would generate. In fact, many developing countries already use international software and data sources to deal with vast quantities of data—most obviously, when one’s passport is scanned at any customs point when entering an airport in almost any country at any income level.
At present, no one can tell what profits are made by companies operating in developing countries, or what taxes they have paid there, because companies are obliged to provide only a total profit figure for the whole world. That is an open invitation to avoid or evade tax liabilities—an invitation that most companies take, given the $160 billion figure for tax evasion and avoidance that I cited earlier. It is critical that the Government actively try to secure an international accounting standard on country-by-country reporting. That would provide investors, regulators and tax authorities with a powerful indicative tool to assess risks and highlight abuses.
An international accounting standard for all industries that would require companies operating internationally to disclose the profit that they make and the tax that they pay in each country in which they operate would equip developing countries with the information that they need to target corporate tax abuse. To secure an IAS on country-by-country reporting, the Government, acting in alliance with other leading economies, would need to ask the International Accounting Standards Board to create such a standard. It is important to note that the gang of four—the four big accountancy firms of Deloitte, Ernst and Young, PricewaterhouseCoopers and KPMG—are represented on the IASB, so they have a direct say in setting international accounting rules and standards. Interestingly, Christian Aid’s proposals for the country-by-country reporting of corporate profits, which are supported by ActionAid, have been rejected by the big four, and no convincing argument has been posted to date to explain why, although we can draw our own conclusions.
The IASB is little more than a trade association for international accounting firms that is funded largely by the gang of four and other corporate entities. It might be time to relieve it of responsibility for setting international accounting standards. Perhaps that should be passed to a supranational body such as the UN so that appropriate mechanisms can be developed. I am not sure whether that idea was floated at the recent G20 summit—perhaps the Minister will tell us—but the current situation is untenable. It demonstrates, once again, that in spheres as important as global accounting, self-regulation does not work—it militates against the public interest and
the public in the poorest countries. However, G20 Governments should commit themselves at least to approach the IASB in support of a country-by-country profit reporting system. I hope that we will receive an assurance that such an approach will be made today.
If implemented, the measures would have the potential to deliver a sum that would have a big impact towards eliminating poverty on a scale never seen before and achieving and embedding the millennium development goals. The Minister, who is a highly regarded, efficient and conscientious member of the Administration, might be able to elaborate on the UK’s interpretation of the G20 agreements on the regulation of capital flows to tax havens, and the way in which the impact on developing countries can be reduced.
On 12 May 1789, William Wilberforce made his first major speech in the House of Commons on the abolition of slavery. He argued that slavery was morally reprehensible and a matter of natural justice. Tax evasion on the present massive scale has been described as the most harmful economic condition since slavery, as it contributes to the desperate global poverty endured by millions every day. The financial crisis has presented us with an opportunity to reform the economic system and to address global injustices, which are hugely damaging to the world’s poorest people. Left untouched, the current system will for ever cast doubt on the legitimacy of profits derived from corporate activity in poor countries.
I do not have time to deal with the role of the Commonwealth Development Corporation, which was rebranded as the CDC on privatisation. Why do we allow the corporate culture of “greed is good” to spread into international development policy to such an extent? The Minister will not have time to answer all my questions, but the Government must answer them at some stage, and be forced to do so if necessary.
Finally I turn to the impact of tax avoidance in the United Kingdom, which is another area in which reform is overdue. We need to combat the advances made under such a highly dubious corporate culture. It is a tale of merciless profiteering that again features the infamous gang of four. Government borrowing is about to double, but we should not expect private householders alone to bear the brunt of the problems caused by the failure of regulators and the City.
I strongly support and applaud President Obama’s action to close tax loopholes, including offshore tax havens, that are exploited by US companies, which we read about in the press a day or two ago. The new Administration in Washington estimates that US companies paid an effective tax rate of 2.3 per cent. on the $700 billion that they earned in foreign profits in 2004, so action is long overdue. I hope that there is more to come. I urge the Government to display similar principles and conviction in dismantling the tax avoidance industry in the UK.
As we know from a series of excellent articles by the tax gap team of The Guardian—I referred to it in an early-day motion at the time—the tax avoidance industry and its clients will go to exceedingly convoluted lengths to avoid their full liability. The evidence of Barclays bank’s commitment to stretching Denis Healey’s famous prison cell wall that exists between tax avoidance and evasion is not only astonishing, but significant for gaining an understanding of the relative ease with which existing tax laws may be manipulated.
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