UK dependencies and overseas territories denounced as 'biggest tax haven'

23 March 2016

George Bull

The All-Party Parliamentary Group on responsible tax has been examining the OECD’s BEPS recommendations to the G20. So what was the outcome?

Transparency and confidentiality
Predictably, transparency and confidentiality were high on the list of topics being discussed. The status quo is under challenge. While recognising that there are two main arguments in favour of corporate taxpayer confidentiality, namely commercial secrecy and the notion that 'it’s always been that way', both defences were dismissed.

The co-chair of the meeting reminded those present of the 1993 banking crisis in the USA. On the grounds that transparency would reduce the risk of further crises emerging from unrecognised banking weaknesses, very high levels of disclosure were required of the banks. In the co-chair’s words 'and none of them went bust'.

The second argument in support of confidentiality was also rebutted on the grounds that there is no reason why a corporate body should not disclose details of all aspects of its tax computations. Specifically, and this is a fundamental public interest point, it was observed that secret tax agreements between corporations and countries do not produce healthy markets. Indeed, they evidence an unhealthy balance of power between governments and multinational corporations.

Tantalisingly, the debate did not then consider whether corporations could use the Transatlantic Trade and Investment Partnership (TTIP) and the Trans-Pacific Partnership (TPP) to challenge national governments over their application of the OECD BEPS rules.

UK and dependencies criticised as tax havens
Much time was devoted to discussing the continuing role of tax havens and the difficulties experienced by developing countries in getting their voices heard during the OECD BEPS debate.

Pointing out that not only the UK government’s policy of having the lowest business-tax regime in the G20, but also the tax-haven or quasi tax-haven status of some UK dependencies and overseas territories, the UK was described as 'the biggest tax haven in the world and the biggest problem to developing countries'. Not something the Treasury wants to hear right now.

Developing countries
There was considerable regret that developing countries, whose voices had been heard during the early phases of the OECD BEPS initiative, now found themselves marginalised while the BEPS initiative is driven by G20 member nations whose primary aim was to increase their own share of the global tax yield. It was said that some nations, such as the UK with its 'Google tax' and Australia with its corresponding attack on tech companies, were trying to steal a march on the BEPS agenda. Many deny that view but the meeting was told that it would be necessary to 'shut down tax denial'.

This led to an interesting discussion about the best tax strategy for developing countries. There seemed to be general agreement to the idea that, as multinational corporations tend to be attracted to developing countries either for a low cost base or for natural resources, it should not be necessary for those countries to also offer tax incentives to attract businesses. This was felt to be a tough message, with others concerned that, although the tax lost through MNC tax planning is greatest in the developing countries, it is OECD member nations which control the way global tax rules are changed.

The single-entity principle
Against a background of comments questioning whether the OECD is the right organisation to implement the BEPS initiative, and whether indeed a further initiative is required as the agenda has changed during the last three years, several expert witnesses voiced concerns that the OECD BEPS initiative may be 'the last great defence of the single-entity principle'. In theoretical terms, there is much to commend a unitary approach to the taxation of multinational groups, but of course the political question as to who should then divide up taxable profits between sovereign nations and on what basis quickly becomes mired in international politics.

Opaque transfer pricing
Some expressed the view that the current very complex transfer pricing rules, representing an opaque system applied on an ad hoc basis, is dysfunctional and cannot survive for long. While many disagreed with this, the lack of transparency surrounding the transfer pricing regime does bring back into sharp focus concerns about disclosure at a time when so many citizens have lost faith in their own nations’ tax systems. On this point, it was recognised that the OECD country-by-country reporting requirements will impose all the costs and administration which would be required for full public reporting, but limit the availability of information to G20 countries and, to a lesser degree, to developing nations also. It’s beginning to look as though an easy win for those concerned to restore the credentials of tax systems worldwide and of the OECD BEPS initiative might be to make public the CBC reporting of MNCs.

It seems increasingly likely that the OECD will not have the last word on global tax avoidance; this debate will run and run.

For more information please contact George Bull or your usual RSM contact.