Written evidence submitted by ActionAid
SUMMARY
1. In a globalised world, tax policy decisions
made in one country can have a profound impact on others, a phenomenon
most starkly illustrated by the impact on the UK and elsewhere
of the harmful tax practices of tax havens. It is also the case
that UK tax policy decisions can similarly have a positive or
negative impact on other countries.
2. As a development agency, ActionAid is particularly
concerned about the impact of UK tax policy on developing countries.
We believe that in certain, high-risk instances, an assessment
of the development impact of tax policy decisions should play
an important role in tax policymaking. Proposed reforms to the
controlled foreign companies regime, which affects UK resident
multinational firms, is a current example of such a high-risk
area.
BACKGROUND
3. ActionAid believes that private sector-driven
wealth creation which is pro-poor, equitable and low carbon is
one of the bedrocks of development. Taxation is essential to ensuring
that the development benefits of that wealth creation are fully
realised through the provision of the public services needed to
alleviate poverty; an adequately resourced state is also an essential
enabling factor for economic growth.
4. Developed countries raise at least 30% of
their national wealth in tax, with remarkable consensus on this
approximate level across the political spectrum, yet many developing
countries don't reach even 15%. If low-income countries are eventually
to reduce their dependence on aid as a part of their public revenues,
this needs to change.
5. The UK government has been at the forefront
of efforts to increase "domestic resource mobilisation",
through the provision of bilateral funds and technical assistance
to countries such as Rwanda, where revenue generation increased
fourfold over a 10 year period. Recent DFID funding for research
through the International Tax and Development Centre, in which
ActionAid is a partner, will ensure that DFID continues to lead
on this agenda.
6. One aspect of the ITDC's research agenda is
to study the mechanisms through which multinational companies
can be taxed more effectively in developing countries, including
by clamping down on international tax avoidance. This is an issue
on which it is harder for developing countries to act in isolation,
and UK tax policy can help or hinder developing countries' own
efforts.
TAX AVOIDANCE
AND MULTINATIONAL
COMPANIES
7. UK-owned companies are major investors in
developing countries, with investments of £30 billion, with
earnings remitted to the UK of £3 billion, in Africa alone.[46]
The tax revenues on these companies' earnings in developing countries,
raised through a combination of corporate income tax and withholding
tax on cross-border transactions, make a significant contribution
to funding for poverty alleviation in those countries. In Ghana,
for example, one pound in seven of tax revenue comes from corporate
taxation, mostly from large taxpayers including subsidiaries of
UK multinationals.
8. ActionAid's recent report Calling Time:
Why SABMiller should stop dodging taxes in Africa (enclosed) illustrated
the difficulties faced by developing countries in taxing multinationals
effectively. OECD transfer pricing guidelines permit companies
to make large payments—with the result of shifting profits—from
developing country subsidiaries where genuine economic activity
is taking place to companies based in tax havens. In the case
of SABMiller, these included royalty payments for the use of trademarks,
management and services fees, procurement payments and interest
on loans from a sister company which in turn were treated as tax
deductible.
9. The overall impact of the large outflows from
subsidiaries in developing countries is that their tax receipts
are dramatically diminished. The net effect of the outflows from
SABMiller's Ghanaian brewing subsidiary in 2008 and 2009 was an
overall pre-tax loss. ActionAid estimates that royalties, management
fees, and losses from other tax haven payments by SABMiller's
subsidiaries in Africa and India resulted in a total tax loss
to governments in those countries of £20 million, equivalent
in Africa to almost one-fifth of the company's estimated tax bill.
CASE STUDY:
UK CONTROLLED FOREIGN
COMPANY RULES
10. Because UK companies' income from their foreign
subsidiaries is only taxed when it is remitted back to the UK,
controlled foreign company (CFC) rules are employed by the UK
to prevent companies from avoiding tax by failing to remit, or
delaying the remittance of, profits that have been shifted to
tax havens. CFC rules deem the income and profits of tax haven
subsidiaries to have been earned by the UK parent company or other
major shareholders unless certain exemption criteria are met.
11. The current UK CFC rules offer some protection
to developing countries from tax avoidance by UK-based multinationals.
Tax avoidance techniques such as those employed by SABMiller are
more difficult and less lucrative as a result; broadly speaking,
it is necessary to show some real economic activity underlying
some corporate structures that employ tax havens. Because developing
countries' legislation and enforcement capacity on transfer pricing
and thin capitalisation are not as comprehensive as those of the
UK, the effect of UK CFC rules is to reduce the incentive to implement
some tax avoidance strategies that may otherwise be permissible
in developing countries.
12. Changes proposed by the Treasury and currently
under consultation (in particular the proposed Intra Group Activities
Exemption, Non-UK Intellectual Property Exemption and partial
finance company exemption) are designed to restrict the effect
of CFC rules so that they apply only to arrangements with an impact
on UK tax. ActionAid is concerned that these changes will make
it significantly easier for developing countries to avoid tax
in developing countries.
RECOMMENDATION: DEVELOPMENT
IMPACT ASSESSMENTS
13. The committee asks two questions of particular
relevance to ActionAid's analysis in its call for evidence:
— What
are the key principles which should underlie tax policy?
— To
what extent should the tax system be structured to support other
specific policy goals?
14. ActionAid believes that UK tax policy should
be consistent with the UK's development priorities, which include
promoting the mobilisation of domestic resources through taxation
in developing countries. The tax system should be structured so
as not to create incentives for tax avoidance in developing countries
by multinational companies that are UK taxpayers.
15. Specifically, we believe that high-risk changes
to tax policy such as the proposed changes to the CFC regime should
be accompanied by a development impact assessment to analyse the
extent to which tax revenues in developing countries might be
impacted, along with recommendations for mitigation if the impact
is negative.
January 2011
46 ONS, Foreign Direct Investment
Statistical Bulletin 2009 http://www.statistics.gov.uk/pdfdir/fdi1210.pdf Back
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