Tax avoidance: the role of large accountancy firms - Public Accounts Committee Contents


2  The complexity of tax law

International tax law

10.  International tax rules are out of date. We were told that the laws, treaties and principles on which international tax laws are based were not designed for the world we now live in. The treaties of the 1920s and 1930s, and the transfer pricing models of the 1970s and 1980s, were based on predominantly domestic economies, when companies were not global in nature and there were very few cross-border transactions.[26]

11.  This business model no longer reflects the modern economy in which the global nature of companies' operations and transactions mean that countries compete for tax. Countries are increasingly using tax incentives to attract inward investment. Many create specific reliefs to encourage particular activities, and some operate as tax havens by offering very low levels of taxation.[27] Whilst multi-national companies take into account a wide range of factors when deciding where to locate their business, such as the available workforce and infrastructure, we are concerned that tax considerations appear to dominate their decisions and that avoiding tax has become a new source of profit.[28]

12.  Existing international tax laws mean it is relatively easy for companies to establish a viable office for tax purposes in a low tax location, and pay their tax there, rather than where the majority of their business activity takes place. With modern communications technology, this can be done with as little as a computer and a few members of staff.[29] We were told that it is possible for a company to take orders over the internet from customers in the UK, fulfil those orders through UK warehouses, yet not be taxed in the UK because the website and servers are based outside the UK.[30] This is unfair to those UK businesses that do not use these complex international structures to avoid paying their fair share of tax and puts them at a competitive disadvantage.[31]

13.  We asked the four firms what changes would make the international tax regime fairer. The witnesses made some useful suggestions about how to ensure tax and profits are recognised in the right place. For example, we were told that in some US states, companies are taxed by apportioning the companies' global profit based on business activity, such as the level of sales, the amount of capital or the number of people employed in that state.[32]

14.  We were reassured that the four firms confirmed that international tax laws need changing, and welcome the Prime Minister's commitment to securing an international agreement.[33] The Organisation for Economic Co-operation and Development published a study shortly after our hearing which concluded that global solutions are needed to ensure that tax systems do not unduly favour multinational enterprises, leaving citizens and small businesses with bigger tax bills.[34] We are concerned, however, that this will be a lengthy process and any negotiations may take many years. In the meantime, some companies will continue to find ways to avoid paying tax where they actually do business.[35]

UK tax law

15.  We have previously reported on the complexity of UK tax law and the opportunities that this complexity creates for tax avoidance.[36] The four firms told us that nobody benefits from complexity and a simpler tax system is required. PwC said that many of the recent changes to incentives in the tax system were unnecessary, and that very few of the additions made in the last Finance Bill—almost 700 pages, plus 600 pages of explanatory notes—tackled the abuse of tax laws.[37]

16.  HM Treasury's Office of Tax Simplification was established to provide the government with independent advice on how to simplify the UK tax system. Deloitte and PwC told us that they have seconded staff to work at the Office of Tax Simplification. The Office, however, is under-resourced and employs fewer than six full time staff.[38] So far it has focused on the deletion of tax reliefs which are not used. To make headway it needs sufficient resources to take a more radical approach to simplifying UK tax law.[39]


26   Q 50 Back

27   Qq 50, 97 Back

28   Qq 31-32, 229-230 Back

29   Q 138 Back

30   Q 105 Back

31   Q 158 Back

32   Q 170 Back

33   Qq 60, 97 Back

34   Organisation for Economic Co-operation and Development, 'Base erosion and profit shifting', February 2013, http://www.oecd.org/ctp/beps.htm, accessed 14 February 2013  Back

35   Q 60 Back

36   Committee of Public Accounts, Tax avoidance: tackling marketed avoidance schemes, Twenty-Ninth Report of Session 2012-13, HC 788, February 2013 Back

37   Qq 160-162 Back

38   Qq 162-164 Back

39   Q 165 Back


 
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Prepared 26 April 2013