How the UK’s ‘competitive’ tax system hurts developing countries

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The British-based non governmental body Actionaid has for some time been at or near the forefront of efforts to lobby for progressive reforms to the international tax system for the benefit of developing countries. This week their ‘Tax Justice Policy Adviser,’ Diarmid O’Sullivan, wrote a blog entitled The UK: always the bad guy on anti-tax haven rules? which says, in the first paragraph:

“Poorer countries badly need more tax revenues to pay for public services such as schools and hospitals, but they stand to be among the losers from the UK’s insistence on protecting its “competitive” low-tax regime for companies.”

We’re really delighted to see the c-word in quote marks: it’s an important signal that the writer has seen through the nonsense of so-called ‘competitive’ nation states. 

This article is about so-called Controlled Foreign Company (CFC) rules – which basically say that when a company shifts stuff to a tax haven, the rules will ignore the artificial structure and say ‘we’re going tax you anyway.’ (Ok, there’s a world of complexity behind that: but this is the general idea. Lots of countries have CFC rules: here’s the UK version.)

Back in March 2012 Actionaid put together an important report explaining how and why the UK’s plan to water down its CFC rules (or, as one might put it, to encourage UK-based multinational bodies to use tax havens) would cost developing countries an estimated £4 billion per year – constituting “a major contradiction in the UK’s international development policy”. Given that this sum was close to half the value of the UK’s aid budget at the time, this was indeed a major contradiction. Developing countries are estimated to lose US$200 billion a year to corporate tax avoidance: this is a significant fillip to the industry at the expense of poorer countries.

Here’s the basic reason how these kinds of moves spill over to developing countries, via Actionaid:

“Under the CFC rules, if a multinational shifts its profits into a tax haven in order to lower its bills anywhere in the world, the UK tops up its tax bill at home, bringing it into line with the standard UK rate. This covers all UK companies, and the rules work if a multinational is trying to avoid its tax in the UK, or in developing countries.
. . .

The changes proposed by the Treasury mean that CFC rules would only apply if the tax dodge is costing the UK money. They will no longer apply when British companies try to avoid tax in developing countries, which will make it much easier and much more lucrative to do so.”

In short, strong CFC rules transmit positive externalities to other countries: and weak ones transmit negative ones.

Why did the UK do this? Well, here’s a submission to the UK parliament, written by a former UK tax inspector, which goes a long way towards explaining why.

We have long argued on these sites that countries engage in self-harm when they put in place so-called ‘competitive’ tax policies. Britain as a whole won’t have benefited from this, we’d wager: look at this document to see a long list of reasons why this is likely to be the case. (And if you were to cheekily set that £4 billion against the UK’s aid budget, things would look even uglier.)

Now O’Sullivan’s blog makes a new point. Not only has Britain got a terrible record of exporting harm to developing countries via its ‘competitive’ CFC policies – now it is going a step further, lobbying to stop international efforts to crack down on those bad CFC policies.

For the second time in a year, once at the OECD and now in the European Union, the United Kingdom appears to be trying to block rich countries from strengthening rules that deter multinational companies from shifting profits into tax havens.”

This is all about the OECD’s flagship (and much-criticised) “Base Erosion and Profit Shifting” (BEPS) project to curb corporate tax shenanigans, which is supposed to be a co-ordinated and collaborative effort to curb the race-to-the-bottom dynamics that drive so much corporate tax erosion. O’Sullivan:

“Robert Stack, a senior U.S. tax official, said last month that the BEPS recommendations didn’t include a minimum standard for CFC rules “at the UK’s instance [sic].” The BEPS recommendations are weak enough as it is and as far as anti-tax haven rules are concerned, the objections of the UK and like-minded OECD countries have made them even weaker.
. . .
Yet this month the UK seems to be at it again, this time in Brussels.

For further details of what’s up, now read on.

And for an alternative way of looking at the issue – confronting the race to the bottom from a very different perspective – see this new paper.

Competitive tax systems – redistributing wealth upwards at home and around the world.




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