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.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, which seems to have led it twice now to oppose stronger international standards on so-called Controlled Foreign Companies (CFC) or anti-tax haven rules.
The UK is not the only rich country opposed to stronger CFC rules. But this insistence stands in stark contrast to the role that the UK has said it wants to play in leading the world on tax reform, for instance at the 2013 G8 summit in Lough Erne.CFC rules reduce the incentive for tax avoidance by providing that if a multinational shifts income into a tax haven where the tax rate is low or zero, then its home country can still tax that income at its own higher rate. The aim is to protect the home country’s own tax base. But strong CFC rules don’t distinguish where the income in the tax haven comes from, which means that they can also deter profit-shifting from third countries, including developing countries.
Developing countries are estimated to lose US$200 billion a year to corporate tax avoidance. Strong CFC rules in rich countries would back up their efforts to curb the problem, particularly in the poorer countries where tax officials are often outmatched by better-resourced multinationals. This is a point the OECD made during its Base Erosion and Profit Shifting (BEPS) tax reform project last year.
But 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.” 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. EU Member States are struggling to reach agreement on how to adopt the BEPS recommendations into law, with a decision due on 17th June. The European Commission proposed a minimum EU standard on CFC rules which, though very weak in the detail, did at least recognise the need for common rules against tax-havens. Once again, the UK was one of the countries to oppose it.
The Netherlands, which currently holds the Presidency of the Council, has issued a compromise text that includes the Commission’s original proposal and a new alternative which is widely said to have been championed by the UK. This new language is even weaker than the Commission’s. It’s so weak, in fact, that it could actually lower the international bar for CFC rules if widely adopted across Europe.
The Commission’s proposal would at least require multinationals to prove that their income in tax havens has come from genuine commercial activities. The proposal favoured by the UK, on the other hand, would put the burden of proof on tax officials to show that the tax haven is being used for the “essential purpose” of avoiding tax, which is a much harder test to meet. And under this proposal European CFC rules would only apply to profits shifted out of the multinational’s home country: there would be no deterrent to profit-shifting out of third countries, including developing countries.
The UK is committed to helping developing countries grow their economies, so why is it so opposed to strong rules against tax havens? The simple answer is that the UK watered down its own CFC rules in 2012 so that they no longer apply to third countries, with the explicit aim of making the country a more “competitive” location for big business. What this watering-down implies is that if multinationals put their head offices in the UK, then the UK will not concern itself if these companies avoid tax elsewhere. ActionAid argued against this change at the time because of its impact on developing countries where UK-based multinationals invest, as well as on the UK’s own tax revenues. Now it seems that the UK doesn’t want international standards which might force it to strengthen its CFC rules.
The UK is only one of a number of European countries which want to be seen as international champions against tax avoidance while defending national tax rules which have the opposite effect. Until governments give up the zero-sum game of tax competition, efforts to find a meaningful solution to tax avoidance (which hurts poorer countries more than others) will continue to meet with failure.