Thursday, February 25, 2010

Caesar's Coin: morality and tax

Christian Aid and the church of Saint Martin-in-the Fields, in central London, held a fine debate last night on 'morality and tax', which focused largely on the importance of tax in international development.

The event was something of a coup, bringing together - for the first time ever - speakers from the three major British political parties on a shared tax justice platform.

It was especially remarkable to hear Right Honourable Stephen Timms, Financial Secretary to the Treasury, pushing for (i) a move towards multilateral negotiations on tax information exchange, (ii) making automatic information exchange the "end destination" for international standards, (iii) promoting a country-by-country reporting standard for multinational companies (he has requested the OECD to publish a guideline on such a standard by end-2010), and (iv) pushing for a greater focus on providing technical support and funding to aid capacity building within the tax administrations of poorer countries. This is a tax justice agenda, and its fantastic to have such explicit ministerial support.

For the Liberal Democrats, Michael Moore, was equally supportive of automatic information exchange, country-by-country reporting, and taking tough measures to tackle corrupt practices. He urged civil society to continue with taking the lead on this agenda, commenting that we "can't allow the technical difficulties dim our enthusiasm for making progress on these complex issues."

The big unknown for many of us in the audience was how the Conservative Party representative would respond to the debate. There is a fairly good chance that the Conservatives will be in power in Britain in the next few months. This is the first time that a member of the Conservative Parliamentary Party has publicly engaged on the tax justice agenda, and David Gaukes was slightly hesitant. His comments about country-by-country reporting, for example - he's broadly in favour of more transparency (who isn't?), but was concerned that the information requirements would impose additional costs, including audit fees for subsidiaries in far-flung places. The fact that such subsidiaries are not being audited would probably alarm most shareholders, but that's another matter.

Gaukes was also weak on The Avoidance Issue. How many times do we have to listen to the idiotic idea that the average citizen with a Cash ISA (for non-British people, that is an Individual Savings Account with a special tax status, up to a limit) is engaged in avoidance? No, no, and no. ISAs are tax exempt: by definition you cannot avoid tax when the liability doesn't exist. Since many of the questions that followed were on the theme of avoidance, it really is time that this distinction between legitimate tax planning and avoidance is properly nailed down. Avoidance in all cases involves exploiting loopholes that have not been explicitly granted. That's what makes avoidance harmful, and that's why politicians of all hues should align themselves with South African Finance Minister Pravin Gordham when he says:

"we have allowed the word avoidance to gain too much respectability. It is just a smarter form of evasion."

One of the audience, former revenue official Richard Brooks, raised with Treasury minister Stephen Timms a serious concern about his proposed reforms to the rules governing the taxation of British multinationals' overseas profits, announced last month, and how they stand to hit developing countries very hard. Judging from his response, it looks as if this issue hadn't occurred to him, or his officials, but it is important that they should consider it.
In very broad terms, the current "controlled foreign companies" rules say that if a British multinational diverts profits into a tax haven subsidiary company, the UK can still tax these. Broadly, if any profits are shifted into such companies the rules bite - so multinationals have no incentive to shift profits from an overseas normal tax rate country into a tax haven.
Under the proposed changes, however, if profits are shifted from a non-UK normal rate country - which could well be a developing country - into the tax haven company the rules will not apply. This is a major threat to developing countries since, unlike developed ones, they don't have the laws or resources to challenge the profit shifting. This is likely to cost developing countries several hundreds of millions of pounds annually, which is a sizeable proportion of the UK aid budget.
But none of this has been thought about. The proposals are the product of exclusive discussions between a group of multinationals and Treasury officials. The development angle has not come into it.

Stephen Timms' faltering response (and David Gauke's for the Tories) was that CFC rules are there to protect UK tax. True, but they have long played an important secondary role in preventing avoidance of other countries' taxes, especially poorer ones'. That will be lost, which in the current international climate seems strangely parochial.


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