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6 May 2009 : Column 100WH—continued
There is a compelling argument that complex tax avoidance strategies were a major factor in the collapse of our over-leveraged and indebted financial system. However, the bottom line is that HMRC annually loses a minimum of £25 billion in tax revenue as a result of the tax avoidance activities of the wealthiest individuals and 700 largest businesses. This places an unfair and intolerable burden on working families, small businesses and pensioners at the best of times, but during a recession, when general taxation is expected to increase to meet the Government’s higher borrowing, that potentially toxic load that could fuel serious civil unrest.
As an accountant myself, I have been studying the special purpose vehicles and other formulae used to channel funds offshore to avoid tax liabilities. We all need to be aware of the damage that such complex instruments wreak on the public purse. We do not let scientists develop chemicals that have a destructive environmental impact, so we should never exempt accountants from the social consequences of their actions, no matter how lucrative their proposals might be in the short term.
The Public and Commercial Services Union’s tax justice campaign, which builds on the work of its members and that of the Tax Justice Network, focuses on the loss of local tax offices and the consequent problems for HMRC when tackling tax avoidance. Given the Chancellor’s Budget announcement just two weeks ago of more resources for HMRC to devote to closing tax loopholes and tackling tax avoidance, it is vital that the programme of so-called efficiency measures does not include the continued closure of local tax offices, as that is akin to tying one hand behind HMRC’s back as it tries to deal with the serried ranks of accountants employed by private sector firms to avoid tax.
Mr. Drew: I concur totally with my hon. Friend and pay due tribute to the work of Richard Murphy of the Tax Justice Network. Does my hon. Friend agree that one of the good things that the Government did—this has been heavily criticised since—was to shut down advanced corporation tax? Quite simply, that was a major loophole for larger companies and a scam that could be used to hide many things relating to pension arrangements—not least early retirement problems—and company pension holidays. Is it not about time that the truth came out about advanced corporation tax? There are too many fables about what it was really about.
David Taylor: The criticism of that measure in the 1997 Budget is often misplaced. It has been developed and promoted by Opposition parties and demonstrates quite vividly their financial illiteracy—that is a great pity! I have always believed that although there is a register for tax avoidance schemes, the enforcement of the registration is pathetic. Some organisations fail to register with tax avoidance schemes and accept the relatively small fine incurred as an operational cost. Why do we let people get away with that?
Finally, we need to look beyond limited measures, such as a Tobin tax, on regulating the global flow of capital, and to set independently and enforce international accounting standards and equitable tax information sharing agreements—KPMG is particularly bad in that
respect. Accountancy might be boring—that dreadful suggestion was made in the “Monty Python” series years ago—and taxation might be seen as a black art, but the devil is in the fiscal detail. We politicians must make a stand against endemic greed and corruption before it infects the values of fairness and equality that bind humanity.
Mr. Mike Hancock (in the Chair): Order. A number of colleagues want to contribute to the debate. I intend to start the winding-up speeches at 3.30 pm. If people are generous to, and tolerant of, each other, everyone will get a chance to speak.
2.54 pm
Tony Baldry (Banbury) (Con): There is a danger that we might be conflating two separate issues. In a communiqué put out immediately after the G20 summit, our Chancellor noted that leaders had agreed to
“take action to protect the world’s financial system and our public finances by cracking down on tax havens”.
His statement made no mention of the need to take action to protect developing countries. Almost all the references in the Library paper prepared for today’s debate relate to tax avoidance schemes in developed countries depriving the Exchequers of developed countries of funds. The first paragraph of the first article in the pack reads:
“UBS yesterday defended itself against attempts by the US Internal Revenue Service to extract names of thousands of American customers holding offshore accounts, telling a federal court that matters should be resolved via talks between Bern and Washington. The beleaguered Swiss bank was responding to a legal challenge by the IRS to reveal the names of up to 52,000 accounts as part of the US administration’s efforts to combat tax evasion.”
There is not a scintilla of a quarrel—I suspect—between hon. Members about it being right for mature democracies, or indeed all countries, to bear down on tax evasion. However, in none of the briefings that I have been sent have I seen evidence supporting the suggestion that developing countries are losing huge amounts of revenue each year through commercial tax evasion. Not a single article in the Library pack gives any statistics or evidence in support of that suggestion. I am not saying that it is incorrect, but I am bemused. If we are not careful, this will become an article of faith, and the danger of such articles of faith is that they can be used as alibis in other ways.
In other words, developed countries can say to developing countries, “Well, you would be in a much better position, and you would not need so much development assistance, if you had in place a better tax system, and if you were properly taxing companies doing business in your jurisdiction.” As times start to get hard, the risk is that countries that signed up to the millennium development goals and increased development funding will seek to find such excuses. If it is to be asserted that developing countries lose large amounts of money through commercial tax evasion, it needs to be much more evidence-based. We then also need to consider how we can strengthen developing countries’ tax systems and administrations through increased targeted aid.
I find something else bemusing about this debate: I cannot recall having seen, in any of DFID’s country plans—I stand to be corrected—a reference to enhancing the efficiency of Exchequers and Treasuries in those
countries. Much work is being done on good governance, on bearing down on corruption, and on improving the judicial system, courts and general machinery of governance, but very little, as of yet, is being done on improving and strengthening developing countries’ tax systems and administrations.
As I said, I am slightly concerned that we are conflating two issues. If we are not careful, we will create an article of faith that says that huge amounts of revenue in developing countries are going missing, and we will give an alibi to developed countries to say, “If only developing countries sorted out their tax system better, they would not be in so much difficulty.”
Mr. Drew: As the hon. Gentleman knows, my knowledge of the Sudan is better than that of any other African country. When the government of southern Sudan were setting up their administration, the British Government paid for a number of people—admittedly from the private sector—to go in to help them set up their tax system. Without such a system, southern Sudan had no mechanism to raise revenue. The hon. Gentleman was right to draw attention to the matter but, to be fair, the British Government have a history of trying to help.
Tony Baldry: As yet, there is no de jure state of southern Sudan. The government in Rumbek are pretty sui generis. We will have to see whether they hold a referendum and decide to go for a de jure state. I am not saying that the British Government have never given funding to help Exchequers, but having read through a large number of plans for developing countries, I cannot recall seeing that they have.
The difficulty with such debates is that we approach them thinking about the developed north and the developing south. We need to think about a system that will be effective for Chinese companies operating anywhere, be it in the Sudan or in Kazakhstan. If we are to have a system that is globally transparent—this is not just about UK banks and companies or US companies—it must apply to companies throughout the world, or it simply will not stick.
Dr. Vincent Cable (Twickenham) (LD): Is the hon. Gentleman aware that he is suggesting that there is a lack of evidence on the subject of revenue loss from tax avoidance in developing countries? Is he aware of the Christian Aid report on death and taxes that seems, on first sight, to be a very serious piece of econometric work? It suggests that somewhere between 10 and 15 per cent. of the revenue of developing countries, and medium and low-income countries, has been lost as a result of systematic manipulation of prices and, therefore, the revenue deriving from them?
Tony Baldry:
If policies are to be taken forward, they must be based on evidence. I am slightly concerned that in the four years that I served on the Select Committee on International Development, very little work was done on that issue. It may well be that Christian Aid is one of the first organisations to have done some work. There is a danger that we create an impression that developing countries would have access to more money than they do currently if only they started taxing more efficiently and more effectively. Ironically, when one visits pretty much any country in Africa, the major
concern relates to jobs. Most countries are worried about jobs and employment. Interestingly, most developing countries will offer substantial “tax holidays” to new inward investors. That is true of almost any capital city in Africa. Many developing countries in Africa have free ports and other such mechanisms to encourage investors and job creators to invest in those countries because their primary concern is job creation.
Andrew Stunell: The hon. Gentleman seems to be developing an argument that poorer countries are giving such incentives of their free will to provide the right business environment to create jobs. Surely the reality is that the multinationals go on a reverse Dutch bidding war to see which country will give them the biggest discounts. One only has to look at copper pricing in Zambia to see how damaging it is to the income stream of poorer countries. Surely the balance of trade in that negotiation is very much with the larger multinational corporations and not with the developing countries’ Governments.
Tony Baldry: There is a slightly 1960s feel about how we describe the multinationals. If the hon. Gentleman goes to Khartoum, Freetown or Dar es-Salaam, he will find that the major new investors seeking the best fiscal arrangements are Chinese or Russian. Most African countries will seek to attract those companies—whether they be from China or elsewhere—by giving fiscal incentives.
My next point relates to tax havens, but I will try to be brief because I am conscious that others wish to speak. If the UK Government believe that something is wrong with tax havens, they are probably in the best position to sort it out because a large number of them are UK overseas territories. In part, UK overseas territories, such as the Turks and Caicos, the Cayman Islands and Bermuda were encouraged by successive UK Governments to go into banking and financial services as a means of becoming self sufficient. That also applies to the British Virgin Islands and, to a lesser extent, Anguilla, Montserrat and Gibraltar. I have never been entirely clear as to the constitutional status of Guernsey, Jersey and the Isle of Man. None the less, if it is being said that there is something wrong with tax havens, it is within the gift of the UK Government to take action. After all, they managed the constitutions of all of those overseas territories.
The Government have decided to return the Turks and Caicos to direct administration under the governor, but that is because of allegations of corruption and nothing to do with it being a tax haven. I am slightly surprised that the Chancellor has proclaimed at the G20 and elsewhere that they will take action on tax avoidance and evasion because many of the tax havens are under UK jurisdiction. Therefore, if action needs to be taken against tax havens, it is within the gift of the UK Government. However, if we are going to take action, it should be based on evidence. We should not put developing countries in a position in which they are being accused of being the authors of their own misfortune. There is a danger of giving an alibi to developed countries to cut back on their assistance to developing countries on the grounds that if only developing countries took the necessary action to increase their own tax yields, they would be in a far better position. If we say that the amount of taxation in developing countries is roughly
one and a half times the amount of annual global aid from rich countries to poor, we will see where that argument goes when the developed world is under pressure.
3.9 pm
Nia Griffith (Llanelli) (Lab): I very much welcome the attention that the G20 is giving tax havens and tax avoidance, which is long overdue. No one can pretend that ruling out the immoral and devious practices that companies use to avoid playing fair and to wriggle out of paying their dues—in short, to cheat—will be easy. Those involved defraud the exchequers of the world of billions of pounds, and we all pay for that because we are defrauded as consumers and taxpayers. When we as consumers buy something from a company, we expect a certain amount to go towards legitimate taxation, not towards lining the pockets of millionaires. Similarly, we as taxpayers will pay more or enjoy fewer services if others do not pay their dues.
The Government are a big consumer, and procurement can be a powerful tool. My hon. Friend the Minister will be aware that I introduced a ten-minute Bill—the Public Contracts (UK Tax Requirements) Bill—last year. Its purpose was to place certain requirements relating to the payment of UK tax on companies bidding for public contracts, to prohibit the transfer of such contracts overseas and to require such companies to provide certain information about tax payments. My hon. Friend the Member for Great Grimsby (Mr. Mitchell) introduced an early-day motion in a similar vein.
The problem is that some companies that have won Government contracts, including private finance initiative contracts, can transfer ownership of the company to a tax haven. In that way, they can avoid paying UK tax on their income and profits. I find it particularly outrageous—and so, I think, do the electorate—that those untaxed profits come from the public purse and from taxpayers’ hard-earned money.
The real difficulty is that there is a lack of transparency and that those who award public-private partnerships or PFI contracts are not required to request sufficient explanation and detail about the tax arrangements of the companies that bid for them. We all understand that large companies have projects and businesses in many different countries, but the British public want to be sure that the money that they pay in taxes does not go into schemes that pay companies that do not pay their full UK tax dues.
It would be nice to think that we will see the end of tax havens and that we will no longer need a Bill such as mine, but there is still a long way to go and much international negotiation to do. I therefore ask my hon. Friend the Minister to do everything possible to demand much greater transparency from companies that bid for public contracts. In that way, we can ensure that we do not aid and abet some of the practices we have heard about today and that British taxpayers do not pay companies that use tax havens to avoid paying their dues.
3.12 pm
Mr. Austin Mitchell (Great Grimsby) (Lab):
I congratulate my hon. Friend the Member for North-West Leicestershire (David Taylor) on raising this important subject. He,
I and others have been lobbying Ministers and HMRC to do something about it for several years, and we have always received an interested hearing along the lines of “Gosh, we didn’t know that!” but no action has resulted. Now that we are in a recession or near-depression, and the manipulations, greed and derelictions of the financial sector have produced their own nemesis, something will clearly be done. When the Minister speaks, and when Ministers do act, however, I hope that they will not just fob us off with the idea that everything is very difficult and that we can act only through international agreement. As my hon. Friend said, there are actions that this country can take at a national level.
One of the basic problems that we face is the avoidance of taxation through the formation of holding companies, which can be found around the world. Thirty per cent. of Barclays subsidiaries are in tax havens, Lloyds has 80 holding companies in Jersey and BP has 3,000 holding companies. Such companies are used to manipulate profits. News Corporation is very adept at that. It makes huge profits from The Sun and now from Sky television, which do not pay tax on their earnings in this country as they should, because those earnings are manipulated through holding companies.
Google is a classic instance. It must generate between £1 billion and £2 billion of its £7.5 billion worldwide profits in this country. It is headquartered in Ireland, and the money is filtered out through Ireland. It does not pay any tax in Ireland, so the Irish get no benefit from providing the European headquarters—ultimately, the headquarters are in Bermuda. Google has more advertising revenue than ITV, which produces programmes in this country, but it does not pay tax on that revenue and is making no contribution to production in this country.
Last year, in an interesting pamphlet entitled “The Missing Billions”, the TUC estimated—its estimates are very moderate—that such practices cost the British taxpayer £25 billion in lost revenue. That will become increasingly important, because we need the revenue to repay the debts that we are accumulating as a result of trying to expand the economy at a time of deflation. Individuals are failing to pay £13 billion in tax in this country, while companies are failing to pay £12 billion.
As my hon. Friend said, we can deal with the problem through action in this country. We need not to tax companies registered as subsidiaries, but to view corporations and multinationals as a whole. We need a unitary tax system with formulaic apportionment. Where is the revenue generated? As my hon. Friend said, we need national accounts of what is generated where so that we can tax in this country the revenues accruing from profits, plants and workers in this country. Such a system of unitary tax with formulaic apportionment operates between states in the United States and it could well operate here. Why do we not introduce it? That would put an end to the loss of tax capacity and tax revenue in this country.
Dr. Cable: Will the hon. Gentleman give way?
Mr. Mitchell: I would rather get through my speech, because the hon. Gentleman will have some interesting opinions to give us.
The system that I have set out should be the basis for our tax system given that we need the revenue in the current crisis.
A second general principle that this country could and should adopt is anti-avoidance. Why not? It works well in Australia. Under legislation from 1903, Australia does not look at what the law actually says about what is due—lawyers will quibble about that for ages, and corporations have huge staffs of well-paid lawyers. Instead, it looks at the intention of the legislation. As a result, any structures that are designed to avoid taxation, rather than to improve a company’s competitiveness and strength, are struck down. Why do we not have that principle in this country to avoid the manipulations that are going on?
The third thing that we can do unilaterally is deal with the tax havens, although the hon. Member for Banbury (Tony Baldry) indicated some reluctance to do that. As he said, there are two categories of tax haven. The British overseas territories—particularly the West Indies—are mainly of concern to America because of tax avoidance in the United States. The hon. Gentleman was correct to say that we encouraged those territories to develop financial and banking centres as an alternative to paying them aid. We said, “We won’t give those West Indian chappies aid. We’ll let them develop banks such as we have”—the same successful banks that have brought this country to its knees. We used that as a substitute for paying them aid because it was cheaper—that is what it was all about. However, the countries involved are British overseas territories and they can be dealt with as such.
The consequence of such development is the corruption that we see in the Turks and Caicos Islands, with its corrupt regimes and inefficiency. It failed to develop the economy’s industrial and agricultural potential because it concentrated on financial services, which are skimming off the cream.
The second category of overseas territory, as the hon. Gentleman intimated, is the Crown dependencies—the Channel Islands and the Isle of Man. Those are of more interest because they are escape hatches—subsidiaries—which allow finance in the City of London to manipulate its money. We can deal with such dependencies quite effectively. The only inhibition is the constitutional one, which Governments make much of, although they do not hesitate to cross that line on moral issues, equality issues or rights.
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