Summary: Treasury Select Committee - Oral Evidence Session for Shifting Sands: An Inquiry into UK tax policy and the tax base – Tuesday 14 June 2016
The committee heard from Michael Devereux, Director of the Oxford University Centre for Business Taxation, Paul Morton, Head of Group Tax, RELX Group and Steve Edge, Tax Partner, Slaughter and May.
Conservative MP Andrew Tyrie, who chairs the committee, asked what the impact of BEPS (the OECD/G20 project to tackle Base Erosion and Profit Shifting – ways in which multinational businesses can reduce their tax bills) will be. Steve Edge said business and tax professions have supported BEPS and that has led to greater clarification on transfer pricing and transparency. However, there is still uncertainly about how much interest each country will allow each company to deduct. He went on to say, in terms of clamping down on pockets of profits in jurisdictions where there is no activity to support those profits, ‘there has certainly been a behavioural change’. There are still turf battles such as anti-hybrid rules on debt.
Asked whether tax havens are a ‘relic’, Edge said developing countries are having to compete to get business and 'it seems unrealistic’ to expect them to have a similarly high level of tax as in developed counties. He said: “They have to compete in some way.” BEPS should make sure that profits are taxed whether they are generated or relate far more to where the ownership of assets are and that should apply equally to countries’ whatever their tax rates. In the UK, some OFCs (Offshore Financial Centres) have had their day, he said, but some OFCs and UK Overseas Territories that do other business, such as asset management, will still be in demand. “If you are trying to set up an investment fund that is attractive to people around the world, then you need a tax neutral jurisdiction”, he said.
Paul Morton said BEPS has “so far been successful. OECD has produced a great deal so quickly with great consensus. It is a reflection of political pressure [that] had added weight to their recommendations”. The hard part of the implementation lay ahead as countries implement BEPS conclusions within their respective domestic tax systems. It is uncertain how BEPS will be implemented country by country because most have not implemented the conclusions as yet. If there is a consistent theme apparent in financial statements from large companies [as set out in a Financial Times article mentioned by Tyrie] that companies feel they will be taxed more, BEPS has been successful, Morton said. What BEPS has done is develop a new standard, particularly with transfer pricing. Applying those new standards and changing appropriate law will lead to an increase in the tax take.
Tyrie queried why no specific action has been taken on the digital economy. Morton said the OECD has established an ‘excellent’ digital tax taskforce chaired by the USA and France which carried out a survey at business level which found the digital economy cannot be compartmentalised. Whatever rules need to be developed to address the digital economy, they must be able to be applied to all businesses, Morton said. “Other BEPS action points will address deficiencies in BEPS”, he added. Unrelated to BEPS, many countries are looking to increase the scope of their consumption tax to tax inbound digital services even when they have ‘no local presence’– for example India’s equalisation levy - Morton said. Such uncoordinated efforts are likely to lead to double taxation, he warned.
Edge told Chris Philp MP (Conservative) that he doubts the European Commission’s wish for public Country by Country (CbC) reporting will actually come in. It will be wrong if multinationals in the EU are forced to go public with CbC but not those that operate outside the EU, he argued, as this would give competitors an advantage. Edge made a general point about HMRC keeping the calculation of settlements private. He said there is ‘clearly a problem of confidence’ but it is hard to see how the public can understand the heavy amount of information to judge deals for themselves.
On permanent establishment, Edge said we need to apportion the taxation of profits to take account of the business process. Permanent establishment is less important now because of the rules on transfer pricing. He said: “You do not need to solve the permanent establishment riddle to tax profits where they are generated.” Devereux added that playing around ‘on the side’ with how permanent establishment is defined will not make a difference. He said: “If IP [intellectual property] is created in California and it is taxed somewhere else, you have to ask; how did this IP move’. That is the weakness of the system.”
Morton said: “If countries widen their definition of permanent establishment, then you will get administration issues and double taxation.”
On HMRC, Morton said it has very talented people at senior level at HMRC but at junior levels there is a need to understand how large business works. Devereux added that there is a tendency to blame HMRC if people think the wrong amount of tax is being collected from these companies and ‘that is unfair’. Edge’s view was that HMRC do a ‘very, very good job’ and the governance structure changes means HMRC officials have more ‘frightening people’ than him to deal with, which is their senior management who knowing that the public is standing on their shoulder.
Conservative Mark Garnier asked whether tax havens serve any use. Edge explained that sometimes you need a place to set up something in a tax neutral territory in investment management. In business tax they do not provide any significant role, from a UK perspective. From an international point of view you will need to convince people that they are happy to take the risk that the UK may change its tax stance in the future if you want them to choose the UK for investment management rather than a tax haven.
Devereux said that if the UK is worried about its tax base disappearing because of tax havens, ‘we should look at ourselves and our tax system to solve that problem’.
Edge said that because of the public’s current views on taxation, OFCs cannot operate on the basis of being a jurisdiction where no-one knows where money comes from or goes. He said: “There is an economic incentives for tax havens to bring themselves into line with popular thinking on tax, including BEPS.”
Conservative Stephen Hammond asked about March’s UK business tax roadmap. Edge said the UK has come under criticism, particularly in the USA, for acting as a tax haven, encouraging companies to leave the USA. Devereux said we are reducing corporation tax but introducing measures against avoidance (e.g. Diverted Profits Tax (DPT)) which seems as though we are going in two different directions simultaneously. He added that if corporation tax gets much lower there is not much point avoiding the tax.
Morton said business had welcomed the tax roadmap but added that tax is only one of many considerations for a business and a secondary one at that. The DPT dampens the enthusiasm for transferring business into the UK.
Morton said the tax regime is complex’ because it reflects that multinational business is ‘tremendously’ complex. We are seeing the effect of the UK having a competitive tax system, he added.
Devereux was more strident stating that the complexity arises because ‘governments on the whole have no clear idea of what it is they are trying to tax and where they are trying to tax it’.
Jacob Rees Mogg (Conservative) asked whether corporation tax was worth retaining. Devereux answered that corporation tax is a proxy for personal income tax - so it if I own shares in a company it is easier to tax them than me - but that is not a strong argument. There is a logic in taxing profits but as soon as you start taxing other parts of the business you create distortions.
Edge said the Americans think we have abolished corporation tax. From a business point of view, having something we know but which is not intrusive is important.
Morton said that if the UK did not have corporation tax, there would be a great deal of double taxation after a struggle to get countries to accept this. He said we should look at the impact of corporation tax on the workforce to see who bears the burden of corporation tax. Devereux said there is evidence that part of the cost of corporation tax gets passed on to the workforce, in terms of lower demand for labour and wage rates. A sales tax will have disproportionate effect on low profit companies with high sales compared to high profit with low sales and lead to competitive distortions. VAT is a tax on consumers. He said we are not at a settling point, there is more that corporation tax can fall. In ten years, corporation tax will be less than 17 per cent, he suggested. Edge added that 15 per cent is the rate that the US Treasury policy has said is the last acceptable rate before you fall into tax haven territory.
Devereux said we can always get rid of some reliefs, such as interest deductibility for example, which could reduce the tax rate by two or three per cent points.
Tyrie closed the session by stating that it was refreshing to have witnesses who are trying to answer questions..
By Hamant Verma, External Relations Officer, the Chartered Institute of Taxation