Yesterday we launched a new campaign to stop a new tax loophole that the government plans to open up in the budget, which could cost developing countries billions. Here’s a little bit more about what the government is planning to do.
The change is a relaxation of something called Controlled Foreign Company (CFC) rules, which deter British multinational companies from exploiting the low tax rates offered by tax havens. 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 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 problem with a new tax loophole
The Controlled Foreign Company rules aren’t perfect, and don’t stop all tax dodging, but they do act as a significant deterrent. For example, when we exposed tax dodging by global brewer SABMiller, the company argued that at least one of the tax haven companies we had uncovered “is not a tax avoidance vehicle [because] its full profits are subject to full UK tax as a UK controlled foreign company". (That’s evidently not the whole story, though, as SABMiller paid barely any UK tax in the financial years we looked at).
The changes proposed by the Treasury mean that CFC rules will only apply if the tax dodge is costing the UK money. They will no longer apply when British companies try to dodge tax in developing countries. If you want more detail, take a look at our Prezi. The SABMiller case illustrates exactly why this is so concerning: it’s about to become much easier, and much more lucrative, for British companies to dodge taxes in developing countries. It’s probably not too surprising, then, that SABMiller, which has extensive operations in developing countries, was one of the companies lobbying for this new loophole.
What we are calling for
We want the Treasury to assess and help mitigate the impact of any changes on developing countries, as recommended by the IMF, OECD, UN and World Bank, who said in a recent report that G-20 countries should conduct "spillover analyses" of the impact of any changes they make to their own tax policies on developing countries. Providing additional funding to help developing countries improve their own tax systems could help in the short term, but in the long term, tax dodging is an international problem that requires international solutions to make it harder for multinationals to dodge their taxes.