Plans by the government to change Controlled Foreign Companies (CFC) rules are threatening to deny the developing world billions of pounds in tax revenues. The current CFC rules discourage UK companies from using tax havens, by requiring them to pay UK levels of corporation tax whether they are based in the UK or abroad. This system discourages the practice of profit shifting and protects the tax incomes of both the UK and developing countries.
The changes were proposed in the Budget earlier this year and will mean that companies will only be charged full corporation tax when using tax havens if UK tax revenues are threatened. In spite of calls by the IMF, UN and World Bank for the government to look into how this will affect countries in the developing world, the government have refused. The Treasury argue that
“It is not sustainable for developing countries to protect their revenue using our tax rules, a much better way is to build their capacity and capability to collect the tax that they are due.”
To an extent this statement is true, building up the ability of developing countries to collect their own tax is the way forward. But the government’s new CFC rules will reduce the income of many countries. Considering the fact that tax revenues are a much more sustainable income for countries than aid it would be sensible to build up the capacity of these countries to collect their own tax revenues before thinking about changing the CFC rules. According to ActionAid, African governments receive more than ten times more income from tax revenues than from aid. However, this will inevitably fall once the new rules come into force, with the developing world losing out on up to £4billion.
Progress has been made towards improving the tax collection ability of governments. DfID have helped a number of countries improve their tax collecting capabilities. Rwanda is a good example of this; their government has increased tax revenues six-fold over the last decade. But this is only a drop in the ocean compared to what needs to be done. Governments face numerous problems that hinder tax collecting such as Capital Flight (the process by which assets are removed from a developing country and stored overseas), corruption and a lack of transparency. These problems, along with the fact that under the current system tax havens already cost developing countries more than three times the amount they receive in aid, means that the new rules could be very detrimental to poorer countries.
The watering down of the CFC rules will mean that there is no incentive to stop UK corporations based abroad from using tax havens. UK companies who shift their profits from one country to a tax haven will no longer be charged UK tax rates. This will encourage tax avoidance at a time when governments all over the world could do with more money. The Treasury argues that the relaxed CFC rules along with reduced corporation tax will encourage investment and growth, but their own estimates predict that Britain will lose out on £1billion a year in lost tax revenues.
These changes could potentially by very costly for both the developing world and Britain. The UK government has committed to increasing foreign aid to 0.7% of GDP but the impact of this pledge will be nullified by the actions of the Treasury. The UK government should listen to the numerous international organizations, charities and the International Development Committee who all argue that a ‘spillover analysis’ should be carried out first to see what impact the changes will have on developing countries. The Treasury’s response that they are only responsible for UK tax revenues is understandable but we do not live in isolation, we live in a global community and we should do what we can to encourage UK companies to act ethically and responsibly.
* Adrian Sanders is MP for Torbay.