Tax avoidance hurts both Britain and developing countries

February 9, 2013 12:59 pm

Tax avoidance is hurting the UK and developing countries. Public pressure is now also worrying multinational companies. Recent moves by Starbucks to apologise in the Observer, for example, are symptomatic of wider efforts to offer corporate contrition and repair damaged reputations with small, voluntary tax payments. While I welcome the Government’s intention to put an end to years of tax avoidance, any real action on the issue has fallen far short of a real crackdown. David Cameron’s pledge to tackle tax avoidance as part of the UK Presidency of the G8 needs to move rhetoric to really and that requires serious leadership which is far from forthcoming.

Corporations can too easily mask where their profits are made. While global tax regimes are local, i.e. based in one country, revenue and profits can be moved around the world with electronic speed. Companies, especially e-commerce businesses, can legally locate themselves anywhere in the world. The result is that earning profits in the UK does not necessarily mean paying taxes in the UK. Instead, companies use techniques such as “transfer pricing” in order to move UK profits into countries with lower tax regimes. Essentially, that means moving money around inside the same company. At the click of a button, profits can be taken from an area of high tax and declared in an area of low tax, thereby essentially making it possible and for revenue authorities to be deceived.

It is high time this situation was changed. Tax avoidance is not just hurting the UK, it is also seriously hindering our global efforts to help developing countries improve their tax revenue raising abilities.

Tax and public finance are the backbone of governance and state-building, and a vital component for public accountability and democracy. A legitimate and accountable system for raising tax revenue is of critical importance to international development and poverty alleviation.

Over time, dependable tax revenue can help end aid dependency. Action Aid estimates that developing countries lose more to tax dodging than they receive in aid each year and in excess of $13 trillion may be hidden in tax havens. They calculate this costs developing countries a colossal $160 billion per year, which far exceeds global aid.

The 2012 Finance Act will have a detrimental effect on developing countries’ tax revenues. Proposed reforms to current Control of Foreign Companies (CFC) rules – which discourage UK-based companies from shifting profits from developing countries to tax havens – could, cost the developing world up to £4 billion. While HM Treasury has refuted this figure, it has conceded that the reforms will be costly for developing nations.

Labour championed action after the financial crisis to deal with tax avoidance. Ed Balls has repeatedly called for EU and international action to tackle the problems caused by tax havens. We also sought to amend the Finance Bill to require HM Treasury and HMRC to publish annual reports for the first three years after these changes came into effect in order to show the reforms’ impact on tax revenues in the developing world, the cost to the Exchequer and whether the rules are operating as expected.

The Conservative-led Government’s rhetoric on the issue has not been matched by reality. While we ideally need to give Her Majesty’s Revenue and Customs the power to compel disclosure from UK-headed multinationals about the funds that they make in the UK, we also need a fail-safe method of tackling tax avoidance that does not rely on corporate goodwill.

Any new UK tax regime, if it cracks down on tax avoidance in the UK, must address the international advantage companies have.

It is time to have a serious discussion about how to tax multinational UK profits. We can no longer accept a situation in which international corporations think they can announce they are sorry for years of tax avoidance and then choose a figure for themselves to pay in tax. Tax avoidance is simply immoral and unacceptable in the 21st century world.

Rushanara Ali is MP for Bethnal Green and Bow and Shadow Minister for International Development

  • David B

    Tax avoidance is LEGAL. It is possible because the tax system is so over complex that tax authorities open the loopholes or are unable to implement the the system properly.

    Business engage in tax avoidance because the cost of being over taxed prevents the business from making a sustainable return on investment to pay dividends to our pension schemes and create the investment pool to ensue the business can invest for the future survival

    But in the interest of fairness lets here Labour MP’s answer the question they have been asked on tax avoidance rather than critising others and ignoring their own affairs.

  • JoeDM

    Excellent point.

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