Annex: Public Accounts Committee Conference
on The Impact of Globalisation on Taxation
Introduction
1. As our inquiries on tax avoidance throughout the
Parliament have demonstrated, international tax law and the tax
practices of multinational companies have a significant bearing
on the amount of tax paid in the UK, and affect governments and
citizens across the world. We therefore decided to hold an international
conference in the City of London to discuss the nature of the
problem, progress made to address it, particularly in relation
to the work of the OECD, and outstanding challenges and potential
solutions at both the national and international level.
2. The conference was sponsored by the Institute
of Chartered Accountants in England and Wales, and was hosted
by the City of London Corporation in the Guildhall on 30 October
2014. We welcomed 200 delegates including fellow parliamentarians
from eight European countries, business representatives, academics,
campaigners, tax lawyers and experts from the OECD.
3. We summarise the main areas of discussion below.
The problem
4. Conference delegates were in broad agreement that
international tax laws and administration are no longer appropriate
for the 21st century and are in need of updating.
5. The current rules had been introduced with the
aim of eliminating borders to encourage global trade. However,
in a globalised economy, companies have increasingly adopted global,
decentralised business models. This enables companies to operate,
for example, sales in Europe, production in Asia, and R&D
in America, but not pay tax on profits anywhere. Double tax arrangements
were designed to ensure that firms and individuals did not have
to pay tax twice on the same profits in different countries but
some companies have managed to take advantage of these rules to
achieve double non-taxation, meaning they pay no tax in either
jurisdiction.
6. The status quo causes problems for governments,
individuals and, increasingly, companies themselves.
7. Governments have been losing revenue as corporation
tax receipts decline. It is a particular problem for developing
countries, who have a far greater reliance on corporation tax
as individual tax is not as developed a process.
8. As a result, the burden of taxation is shifting
from companies to individuals: income tax, VAT and property taxes
have all been increasing to cover these losses.
9. Delegates had differing views about the extent
of the problem. Some argued that it was one more of perception
than reality, and that the huge increase in the amount of international
tax transfers was a natural result of the huge increase in the
amount of international trade that has occurred. There
was also disagreement as to whether or not companies and individuals
have a moral duty to pay their "fair share", with one
speaker arguing we should discuss these issues in the language
of values and good citizenship, rather than morality.
10. However, as the public has woken up to this issue,
companies have been increasingly concerned to avoid reputational
damage and tax policy now features prominently on boardroom and
Corporate Social Responsibility agendas. The public often
simply do not believe the figures on profit presented by companies,
even if they are technically accurate. If there is no trust in
business, it makes it much harder to do business, making it harder
to create wealth. Moreover, companies who do pay their "fair
share" can be disadvantaged by the current system where it
creates unfair competition.
11. Although the debate on tax avoidance is often
polarised, and different views exist as to how it should be addressed,
there is therefore a shared agenda for reform.
International action to increase
the effectiveness of tax collection
12. On this basis, the G20 and the OECD have begun
a process of international tax reform to combat tax avoidance.
Delegates heard that the OECD wants to continue to promote global
trade to create successful businesses which create wealth for
countries, but wants better transfer pricing guidelines and more
transparency.
13. First, the OECD has led negotiations to improve
transparency, leading to the Automatic Exchange of Information
(AEI) which by 2017 will have 92 signatory countries. Delegates
were told that as a result of this, for example, the Philippines
had recovered $1 million in 2014 through Exchange of Information;
and Sweden had recovered €139 million from 230 exchanges
of information from Germany.
14. The G20 has further mandated the OECD to develop
an action plan to prevent base erosion and profit shifting, focusing
on three core principles:
· Coherence;
· Substance (i.e.
defining the substance of transactions, and where they occur);
and
· Transparency.
15. Progress is being made to deliver these actions,
assisted by a broad international consensus regarding the need
for change. However, delegates posed a number of challenges to
those charged with implementing these reforms, from a range of
different perspectives:
· Are
all the right people involved in the process? For example,
· is
the US sufficiently engaged?
· should
the UN, and the IMF be involved?
· given
the impact of tax avoidance on developing countries, should they
not be brought into the negotiations?
· There
was scepticism about the extent to which the new rules would apply
to/sufficiently target tax havens.
· The reforms
would require the calculation of arm's length prices; some delegates
queried if this is possible.
· In relation
to country-by-country reporting, some considered the proposals
should go further in mandating authorities themselves to access
each other's information, rather than being reliant of the companies
providing the information.
· More fundamentally,
some delegates were of the view that the entire process is flawed
as it is merely tinkering round the edges of a broken system.
Domestic action to increase the
effectiveness of tax collection
16. Delegates proposed a range of further actions
that could be taken at UK level.
A more powerful, better-resourced tax authority
17. The conference was told that HMRC staff numbers
have been cut by around a third recently, with further reductions
planned. It was alleged that HMRC does not have the resources
to read corporate tax returns and that Companies House could do
more to investigate the thousands of companies which don't
post companies accounts, rather than assuming they are not trading.
Without accurate information, information exchange will be less
effective.
A fairer approach
18. It was alleged that multinationals regularly
get a better deal from HMRC than SMEs, because they have Company
Relationship Managers. It was suggested that this approach be
extended to SMEs to ensure they are treated on an equitable basis.
19. More generally, however, there was a perception
amongst delegates representing the business community that they
now have a more positive relationship with HMRC.
Less complexity and more consistency
20. Delegates were told that the UK has the most
complex tax law in the world. The tax code is now 17,000 pages
long. As a result, vast resources are being spent both by governments
and companies to avoid and chase tax, which could be better spent
elsewhere. There was a consensus of the need to simplify the tax
code.
21. Delegates also discussed whether governments
operate "double standards" which send out a confusing
message to corporations, with some arguing that, if companies
take advantage of incentives which governments have offered them
to encourage them to act in a certain way, it is unfair to then
criticise those companies to act in a way a country wants them
to act.
22. Better economic analysis would help governments-and
the public-decide tax policy. It is hard to prove what figures
there were on increased jobs as a result of lower taxes so it
is hard for businesses to make this case.
Focusing on evasion
23. It was agreed that tax avoidance is now high
on the political agenda, but, now that this had occurred, some
delegates argued there is a need to extend this focus to tax evasion.
There were differing views as to what proportion of the tax gap
comprised evasion.
24. Strongly differing views were expressed as to
the extent of tax evasion, and the relationship between avoidance
and evasion by corporations. Irrespective of this, a public perception
of high tax avoidance at the top end could contribute towards
a tolerance for evasion by individuals amongst the general public.
Better scrutiny
25. Better public and parliamentary scrutiny of taxation
could drive improvements. One proposal was to introduce an inventory
of credits, so that politicians can see all the various policies
that exist, and all the various schemes which have been created
contributing to an extremely complex system of tax credits and
rebates. On tax credits, there is poor disclosure in companies'
accounts of the tax credits they have received so it is hard to
calculate. Customers don't understand the tax disclosures made
as they are too opaque.
26. It was suggested that parliamentary committees
themselves need better expert advice. There is no one individual
in HMRC who knows all of the tax legislation, so it was impossible
for the PAC to be able to understand it. If the PAC and other
committees had expert tax advisors they could better scrutinise
tax legislation.
27. One delegate proposed an Office for Tax Responsibility
which would analyse the impacts of all tax policies being drafted,
reporting to the PAC. This would help identify what the costs
of a tax are, and what impacts on the tax gap new tax legislation
would have. It could also further investigate the tax gap to reduce
its size.
Consumer behaviour
28. Some delegates argued that consumer behaviour
would change companies' behaviour far quicker than what regulators
or governments could achieve, which should influence the extent
to which governments should focus on behaviour change rather than
enforcement.
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