The House of Commons International Development Committee published their report on Tax in Developing Countries yesterday.
Media coverage has focused mainly on two of the committee’s recommendations –
- That the UK Government should scale up its technical assistance work with the national revenue authorities of developing countries, and improve their reporting on this (eg. BBC);
- That the Government should urgently conduct or commission an analysis of the likely financial impact of the revised Controlled Foreign Companies rules on developing countries and, depending on the results of this analysis, consider whether to drop its proposals (eg Guardian).
The first of these is (as the committee note in their report) one of the main recommendations made by the CIOT in our submission to the committee’s inquiry. We are delighted to see it make it into the final report.
The second of these is rather less likely to happen than the first, given that the new CFC rules (broadly supported by the CIOT) are now law thanks to the recently passed Finance Act 2012, and are set to come into effect in January 2013. Indeed the Treasury has repeated its robust response that (a) CFC rules are there to protect UK tax revenues not those of other countries, and (b) producing such an analysis is anyway unfeasibly difficult.
Another controversial area looked at by the committee was transfer pricing abuse. Campaigners such as Action Aid and Christian Aid have suggested developing countries lose $160 billion a year in tax in this way. In our submission to the committee the CIOT noted that this figure was ‘highly questionable’(see paragraphs 4.2 and 4.3 of our submission for more on this) but we acknowledged that there is an absence of reliable estimates of the extent of transfer mispricing or of other abusive or illegal practices by business in developing countries. We said that we would like to see more work done in this area using individual country and firm data.
What the committee has to say in this area is interesting. Unlike, say, country-by-country reporting where they did adopt the line pushed by campaigners, here their conclusions are far more nuanced. They acknowledge that corporations frequently transfer profits for reasons unrelated to tax - for example, because local rules sometimes make it very difficult to declare a dividend (consequently they call for host countries to establish more straightforward tax regimes for dividends). They reject Christian Aid’s call for ‘formulary apportionment’ (allocating a corporation’s taxable profits based on the proportions of total property, payroll or sales in each country) as not a workable option at present, given its lack of international support. What they do recommend as a way forward is (a) that the UK Government stress the importance of requiring 'related party transactions' (i.e. transactions taking place within the same corporation) to be declared on annual tax returns, and (b) that HMRC seek the views of both multinational businesses (via the CBI) and trade unions and civil society organisations on transfer pricing issues, reporting back to the committee before the end of 2012 on the outcome of the discussions. So that looks like a statement of intent from the committee to return to the issue.
Among the report’s other recommendations are that the UK Government should:
- Introduce legislation requiring tax authorities automatically to exchange information relating to UK citizens or corporations (as with FATCA in the US), and use its influence to persuade other governments to follow suit.
- Encourage the OECD and other standard-setting fora to require the filing of public statutory accounts in all jurisdictions, and press Crown Dependencies to meet these standards.
- Designate a DFID ministerial responsibility for the development impact of tax and fiscal policy.
- Be required to assess new primary and secondary UK tax legislation against its likely impact on poverty reduction and revenue-raising in developing countries, and to publish that assessment alongside the draft legislation.
- Make the UK an Extractive Industries Transparency Initiative (EITI) candidate.
- Enact legislation requiring UK-based multinationals to report their financial information on a country-by-country basis and continue to support the progress of similar legislation at EU level.
- Encourage and support programmes in developing countries that engage civil society and others in the tax policymaking process.
The failure to collect adequate levels of tax in developing countries is undoubtedly a major concern. This is not just about tax administration. Anecdotal evidence from tax advisers – reported by us in our submission to the inquiry – suggests that corruption and the lack of effective rule of law may be the biggest obstacles to effective tax administration – as they are to wider economic progress – in developing countries. Inward investment suffers too. As one CIOT member explained of his client who decided not to invest in a particular country: 'He was perfectly happy to pay the right rate of tax. He didn’t want to have to pay bribes and be left at the whim of local officials.'
As our submission noted, measures to improve governance, strengthen the rule of law and develop expertise will be at least as important to building effective tax administrations as any tax-specific measures. The committee’s inquiry has been a useful investigation into this area and produced some helpful recommendations, but there is a long way to go, and the issues involved go well beyond tax.
CIOT External Relations Manager
Friday 24 August 2012