The Independent View: Will Lib Dem proposals to tackle tax avoidance help save the world?

What can we expect from the Government on tax avoidance and evasion?

Cast your mind back to the Liberal Democrats’ manifesto launch in April. A major theme was the plan to raise £4.6 billion by tackling tax avoidance.

This has been reduced to a single bullet point in the coalition’s Programme for Government, a promise to “make every effort to tackle tax avoidance, including detailed development of Liberal Democrat proposals.”

Vince Cable remains committed, telling the Telegraph soon after his appointment as Business Secretary that, “tackling tax avoidance by businesses is essential and this is an area that I will be looking at closely in my new role.”

As governments around the world face a fiscal squeeze (caused, as Giles Wilkes frequently points out, as much by a post-crisis fall in tax revenues as a rise in spending) rich countries have already taken significant strides to make it harder for tax cheats to squirrel their taxable income away in tax havens. They’ve started to close loopholes, force tax havens to exchange more information with them and have even paid for leaked banking information to bring tax cheats to justice.

The Liberal Democrat manifesto was notable because it saw these initiatives in the context of global poverty. “We will crack down on tax havens which allow individuals and corporations to avoid paying taxes to developing countries,” it said. This promise is nowhere to be seen in the Programme for Government, despite a full page on international development .

Here at ActionAid, we want to see developing countries escape from poverty and aid dependence for good, something they won’t be able to do unless they mobilise more public revenue through taxation.

Although Africa raises 11 times more public revenue in tax than it receives in aid, the 2010 African Economic Outlook report out this week shows that aid still exceeds tax revenues in a quarter of African countries, and in half of them it constitutes over a third of government income.

The UK’s Department for International Development (DFID) has done great work supporting countries such as Rwanda to develop their tax policy and administration. An initial investment of £20 million is now recouped every four weeks by Rwanda’s revenue authority.

But as the Liberal Democrat manifesto highlights, another important part of the solution is the need to tackle tax avoidance and evasion in developing countries, just as the party wants to do here. The opportunity is big: it’s been estimated that Africa loses more to tax cheats each year than it gains in aid. For the UK to play a role in solving this, tax and development need to be on the agenda at BIS and the Treasury, as well as at DFID.

Dr Cable at BIS understands this. Writing in the Guardian last year he decried the fact that “in the world’s poorest countries where tonight 850 million people will go to bed hungry, governments lose billions each year to international companies dodging tax.” He called for tax havens to share information with developing countries, and for a new country-by-country accounting standard.

Liberal Democrats in government have the opportunity to do something great for developing countries. I hope they take it.

Martin Hearson is an ActionAid Policy Adviser.

The Independent View‘ is a slot on Lib Dem Voice which allows those from beyond the party to contribute to debates we believe are of interest to LDV’s readers. Please email [email protected] if you are interested in contributing.

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9 Comments

  • Andrew Duffield 28th May '10 - 3:33pm

    The way to tackle tax avoidance is by shifting to tax that’s impossible to avoid; fair taxation of property and privilege!

  • Chris Jordan 28th May '10 - 4:01pm

    There was a pretty strange, if not out right contradictory mention of tax avoidance in Cameron’s speech on the economy today:

    “Over the weeks and months ahead, we will go much, much further – especially with radical tax reform. We’ll cut corporation tax rates by simplifying reliefs and allowances and tackling avoidance – while protecting manufacturing industries.”

    Anyway, I think we should be looking much closer to home. Many tax havens – not least in the Channel Islands – are closely linked to the UK and City of London. Why not sort them out first?

  • Chris – how was what Cameron said contradictory? Indeed it’s straight out of Lib Dem tax policy!

    The UK tax system is the longest and most complex in the world, largely because successive governments have tinkered more and more. Each time they make the rules more complex, they open up yet more unintended loopholes (and also make life harder for perfectly innocent businesses and individuals). Introducing a simpler code and a purposive approach to tax avoidance (i.e. a General Anti Avoidance Rule or GAAR), as proposed by the Lib Dem tax commission, would better combat artificial tax avoidance transactions (saving money for the Exchequer) and the proceeds could in part be used to reduce the rate of corporation tax. Incidentally, the Irish has shown that reducing the CT rate can of itself increase the tax take, albeit the Irish situation is rather different to that in the UK.

  • Chris Jordan 28th May '10 - 4:36pm

    Dominic – I think the introduction of a general anti-avoidance principle is an absolute no brainer, and agree that a simpler tax code would be a good thing – as long as it’s progressive. But I’d far rather use the additional revenues to deal with the deficit and minimise public service cuts than give a tax break to business, particularly at a time when personal taxes may well increase. Making sure that everyone pays their fair share should be the guiding principle.

  • Martin Hearson 28th May '10 - 4:48pm

    Dominic, I don’t have an in depth knowledge of Lib Dem policy, I only know what’s in the manifesto, and I didn’t see cutting corporation tax in there. I would not expect the benefits and costs resulting from a CT cut to be particularly progressive. Certainly it would be way less progressive than the VAT rise that would probably pay for it.

    I also think it unlikely that it will increase overall tax revenue: while there are some instances where a correlation like that has been observed, the ‘Laffer curve’ is far from a general rule. I imagine Ireland has done well by taking investment away from other countries like the UK, and what we don’t want is to be trapped in a race to the bottom (although if you look at historical CT rates, that is what’s happening).

    Totally in agreement on the GAAP though.

  • Paul Krishnamurty 28th May '10 - 5:32pm

    The Lib Dem stance on tax avoidance was one particular reason I’ve enthusiastically supported them in recent years, as opposed to Labour or another party of the Left.

    Now that you’re in bed with the Tories, issues like this can be completely forgotten. Does anybody seriously believe the party of Lord Ashcroft, of anonymous donations channelled through anonymous offshore registries, is going to clamp down on tax avoidance? I doubt Clegg has fought one inch for this in govt.

    There are all sorts of useful things the British govt could do. Dozen of tax havens are UK Crown dependencies. We could DEMAND (rather than request) transparency overnight, or threaten to remove military and budgetary support. Most governments recognise the threat posed by tax havens. If we led the way, genuinely meaningful international reform would become possible. Obama co-sponsored the ‘Stop Tax Haven Abuse” bill. If any LDs think that a Tory govt is about to do this, they are completely deluded.

  • C H Ingoldby 28th May '10 - 10:15pm

    Tax avoidance is perfectly sensible and moral behaviour, not something to be criticised.

    If you want to reduce it then simplify and lower tax rates. Easy.

  • Actually a (smaller) cut in the Corporation Tax rate, paid for through simplification and removing reliefs, was what the Lib Dem tax commission proposed too. But I think we’re accidentally conflating these 2 issues: what both coalition partners and now the Govt are proposing is to fund a reduction in the CT rate through simplification – principally of the capital allowances regime for corporates – whereas the fiscal savings from the crackdown on avoidance are targeted towards deficit reduction/spending commitments. Clearly all money is fungible but the cut in the CT rate is entirely self-financing through the removal of CT reliefs; it’s not at the expense of spending/deficit reduction.

    As far as the impact of the rate is concerned, this is harder to model but you need to look at this as part of the investment decision-making process for inbounds. Do I site my European HQ (and potentially “principal” company) in Ireland (12.5%), Switzerland (with a ruling getting getting me anywhere between 2 and 10%) or in a higher tax jurisdiction with better business infrastructure (of which the UK is a front-runner). And if I’m a UK headquartered company struggling with the complex and often illogical UK CFC regime, do I take the plunge, like WPP and Shire have done, and shift my HQ elsewhere. That is often a finely balanced decision but you can see how a reduction in the CT rate could swing it in the UK’s favour in marginal cases. And then it’s better to get 25% of something than 28% of nothing …

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