3 December 2014
For decades, Britain has been the centre of a web of tax havens which have sucked countless sums in corporate profit out of countries around the world and into offshore bank accounts where they face little or no tax, often quite legally.
British governments, for at least the last decade, have gone out of their way to make the UK’s tax system as attractive as possible to multinational companies. But changing times have forced a limited, partial but still significant change of tone from the country’s politicians.
Public anger against tax avoidance
At a time when public finances are tight, discontent is growing among the British public against tax avoidance by big companies. A poll commissioned by ActionAid and Christian Aid found that more than four out of five British adults think the practice is wrong, even when it’s legal, and nearly four out of five worry about tax avoidance in poor countries too.
Politicians are keen to be seen to respond. In his Autumn Statement, a mid-year snapshot of the British government’s economic plans, Chancellor George Osborne has just announced a new “Diverted Profits Tax” which will impose a 25 per cent tax on profits “generated by multinationals from economic activity here in the UK which they then artificially shift out of the country.”
What will the new “diverted profits tax” mean in practice?
As we wrote back in September, the Chancellor is thinking of digital giants like Google which use tax planning techniques to ensure that their profits legally end up in tax havens, rather than the countries where they actually make their money. The government says this new tax will bring in around £300 million a year over the next five years, which seems conservative but plausible given what we know about the sales and profits of big tech companies.
But companies in other sectors of the UK economy are known to use similar techniques, so we need to see the fine detail of the new tax before we can judge whether will be a significant counter-strike against corporate tax-dodging or more of a tactical response to a few big cases highlighted in the media. We’ll also need to see how it sits within the constraints of European law, which some multinationals are adept at exploiting.
Why Britain needs to reform other tax rules
Despite the uncertainties about what it would mean in practice in the UK, the concept of a tax which claws back revenue from profit-shifting multinationals is one that finance ministries in poorer countries ought to study closely, to see how it can be adapted for their own conditions. Developing countries are known to lose huge sums to tax avoidance, including by British companies, and this new tax could be a model.
But despite the newfound willingness of Britain’s politicians (from all parties) to take a more vigorous stance against certain forms of tax avoidance, the bigger picture unfortunately hasn’t changed much. British tax law (specifically, the anti-tax haven or “Controlled Foreign Companies” rules) still includes some provisions which are deliberately designed to attract multinationals to the UK by ignoring their tax-dodging activities overseas. British companies still publish so little information about their global activities that it’s hard to tell whether they might be paying enough tax in developing countries or not.
So as far as the tax problems of developing countries are concerned, there’s still a long way for Britain to go. With a general election coming up in the middle of next year, now is the time for the UK’s political parties to show that they’re willing to make root-and-branch changes to the tax rules, in the interests of fighting poverty overseas as well as ensuring greater economic justice at home.