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 International tax rules are out of date.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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