Improving tax collection - Public Accounts Contents


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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Prepared 26 March 2015