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Earlier this week, eight leaders travelled to the picturesque Lough Erne lakes of Northern Ireland for the annual G8 Summit under the stewardship of David Cameron. Whilst Syria was the hot topic on the agenda, for the British PM it was all about ‘the three T’s: Tax, Transparency and Trade.’
In the UK, anger has been growing over the scale of corporate tax avoidance, with campaigners hoping that the two day summit would eke out tough new measures for companies like Google, Amazon and Starbucks, who use legal loopholes to channel profits through tax havens and reduce their tax bill.
Whilst discussions touched on all the key issues, grand statements aside, there was very little actual detail here. The biggest win for campaigners was a call to wider adoption of the US’s Foreign Account Tax Compliance Act (FATCA), a bold initiative that compels financial firms to disclose all the information they hold on US citizens or face punitively high taxes. It’s a step up from the system that many countries currently have in place.
Less successful was their bid to lift the corporate veil and disclose beneficial owners of companies on national registers. The assembled party could not agree on the terms and in the end, all they could offer was a renewed commitment for more rigorous self-policing – a damp squib for those who had hoped for fundamental reform.
This is a blow, not just for campaigners and the public but for law enforcement as well because identifying the owners of offshore companies is half the battle. Officials spend valuable time trying to determine the ultimate beneficiary of a company’s ownership, making investigations – for tax purposes or otherwise – lengthy and expensive.
Tax evaders typically weave their company holdings through a maze of jurisdictions so that it can take months, or even years of red tape and bureaucratic guff before you even know who you’re dealing with.
On corporate tax avoidance, the issue that’s galvanised the public, and latterly, the government into action, there was a nod here and there to joined up thinking but the proposed national Action Plans will be where the substance lies.
For all the fuzzy rhetoric, David Cameron has not yet clarified what constitutes ‘proper tax’ or ‘aggressive’ tax avoidance. The gulf between the UK’s current domestic corporation tax (23%) and the rate of tax paid by multinationals (as low as 0.06% on UK profits) shows that there is ample room for debate on where the line should be drawn.
It will be an uneasy line for Mr Osborne to tread, a man who has been softly wooing big business for some time in a bid to secure jobs and investment. His triumphant refrain ‘open for business’ does not have quite the same convivial ring to it when tempered with the proviso ‘for those who pay’.
Whilst his priority is relentlessly, emphatically growth, that growth has come at a heavy cost to the taxpayer in the form of generous government grants and rock bottom tax rates. How much are we prepared to pay for the privilege of gainful employment? And crucially, where might that money be better spent?
Small business owners and fledgling entrepreneurs are just one group of would-be recipients: gutsy, visionaries who have taken this grim recession by the horns and spun a silk’s purse. Despite that pluck they’re struggling to source funding from the banks and, when they do turn a profit they’re liable to pay tax of at least 20% whilst their wealthy competitors consolidate their market share through low taxes and subsidies.
Last year, independent book stores displayed stickers in their windows proclaiming ‘We Pay Our Taxes!’ and ‘Can Pay Do Pay!’ – tongue in cheek jibes that mask a genuine concern over the decline of the high street in the face of competition from the web. Competition is all very well, unless it’s skewed by one party having an artificial advantage over the other.
The current situation is untenable in a system where competition and failure are intended to winkle out the under-performers. The problem is how to devise concrete regulations without being so ham-fisted that you penalise companies using multi-jurisdictional arrangements for operational rather than tax purposes.
One thing is clear at least: the current negotiation with the HMRC, through which a company’s tax rate is determined, is not fit for purpose. Off the cuff decisions make it difficult for businesses to plan ahead, whilst the HMRC is too often cowed into embarrassingly low rates.
For months now, David Cameron has cited his decision to prioritise tax at the G8 as proof of his commitment to tackling corporate tax avoidance. This week he made a compelling case for change, but it’s only when the dust settles that we’ll see just how far he’s prepared to go.