We estimate that a well-crafted Tax Dodging Bill could bring at least £3.6 billion more a year into the public coffers in the UK that we are calling for the government to spend on fighting poverty in our society. The Tax Dodging Bill could also help raise billions in developing countries, which could be spent on schools, hospitals and other essential services.
The UK government should spend the recaptured revenues from tackling tax dodging in the UK on poverty reduction in our society.
It’s not up to the UK of course to say how the governments of poorer countries must spend additional revenue that they generate, but it can only be a good thing if poorer countries have more money available to them to invest in poverty reduction and in essential public services. Indeed, that is what civil society in most poor countries is campaigning hard for. The experience of debt relief in developing countries for example shows the impact extra funds can have on fighting poverty. One study of 10 African countries found a 40% increase in education spending and a 70% increase in health spending after just four years of debt relief1.
These changes to the UK tax laws need to be introduced through an act of parliament, and we believe that the scale of the problem of corporate tax dodging warrants a bill dedicated to tackling it. Only a systematic, joined-up approach through a Tax Dodging Bill will tackle tax dodging and make tax fair.
We believe the measures in the Tax Dodging Bill represent the key steps the UK can take on its own to reform the UK’s tax rules to tackle corporate tax dodging. They represent a pragmatic, effective and balanced package of reforms to the UK tax system.
The Tax Dodging Bill sets out key things the UK can do, on its own, to recover billions of pounds of revenue in the UK and in developing countries. Ultimately stopping all corporate tax avoidance in the UK and developing countries will require action at an international level, and taking action at the national level can start to tackle the problem and help increase pressure for meaningful change internationally.
The Tax Dodging Bill would have no direct impact on personal taxes or on small businesses that don’t have operations in other countries or don’t benefit from big tax breaks. For most local businesses it would create a more even playing field as at present it is often large multinational companies that are most able to avoid paying tax - so by making the bigger companies pay a fair share they will have less of an advantage over smaller businesses that already pay their fair share.
Boycotts can play a useful role in putting pressure on individual companies but to tackle tax dodging for all companies we have to change the rules, rather than just target companies one by one. Responsible companies should refrain from tax dodging, but only by demanding that politicians change the rules can we ever make sure that all companies pay their fair share.
To end tax dodging some issues do need to be resolved at the international level, but there is still a lot we can do in the UK to get our own house in order - and the Tax Dodging Bill lays out what we can do to tackle some of the weakest aspects of the UK’s tax system.
Many of the aspects to the UK’s tax laws that we are suggesting be reformed were introduced without international agreement, so there is no reason why the government can’t change them again without international agreement.
At the moment countries are engaged in a race to the bottom to undercut each other on tax, and as Christine Lagarde, the head of the IMF said, the problem with a race to the bottom is that everyone ends up at the bottom2. The only way to stop that race is for countries to act, and the UK can take that lead in creating a fairer global tax system. Other countries must also play their part by taking similar steps.
Many global issues require international agreement to fully resolve, but also need countries to take strong action themselves. For example on tackling climate change, the UK government passed the Climate Act - setting targets for the UK’s unilateral action on emissions - alongside engaging in the UN process for a wider international agreement. Taking action domestically and internationally go hand in to tackle global problems.
Some have argued that strong action against tax dodging will make the UK ‘uncompetitive’. But the UK needs a tax system which ensures that companies pay their fair share of tax for the benefit of the rest of society, including the poorest, not one which encourages companies to dodge tax in other countries or move a handful of their staff here solely to take advantage of our tax system.
A recent survey by Reuters found that of seven multinationals which have moved their headquarters to the UK recently, none said they expected to create more than about 30 jobs3. Another company, the carmaker Fiat Chrysler, said it only planned to base about 50 people at its new London headquarters. These findings suggest that tax reforms which have come at great cost to the public purse do not necessarily generate corresponding benefits to our economy and society.
What is more, the costs to business of reforming corporate taxation may be far less than some have claimed. For example, it has often been claimed that public country-by-country reporting of companies’ taxes and other key data would have a substantial economic impact on business, yet a recent study by PwC for the European Commission found that public country-by-country reporting in the finance sector would be good for the economy4.
The UK economy remains hugely attractive to multinational companies, whether for the experience and knowledge of the workforce or the huge sales market the UK represents. Reforming the tax system to make it fairer for society and create a more even playing field between companies will not undermine these features of the UK as one of the world’s leading economies.
The UK government loses billions of pounds to tax avoidance every year; however the lack of transparency over companies’ tax affairs means that there are no definitive, up to date estimates for how much is being lost. Our conservative estimate is that the UK government could gain £3.6 billion in additional revenue from the measures to tackle tax dodging proposed in the Tax Dodging Bill.
If we lowered our tax rates, wouldn’t people be incentivised to pay their taxes without needing these complex changes to tax law?
This government has already cut the corporate tax rate from 28% to 20%, the lowest rate in the G7, yet we still see some companies paying little or no tax in this country. With such low tax rates it is even more vital that the tax rules are effective in making companies pay their fair share.
Based on an analysis of governments’ trade data we estimate that developing countries lose $160 billion a year from corporate tax dodging. The lack of corporate transparency makes it difficult to calculate the precise figures, but the scale of the problem is not in doubt. International organisations like the OECD recognise the massive scale of tax lost from developing countries5.
The UK government has a responsibility to ensure that our tax rules do not deprive the world’s poorer countries of vitally needed funds, and failure to do so is at odds with the UK government’s efforts to tackle global poverty. The UK’s Department for International Development (DFID) recognises that low-income countries do not want to be aid dependent6, and has said for example that “tax avoidance and evasion undermine developing countries’ ability to provide public services and increase their reliance on aid”7,8. In the long term, ensuring developing countries are able to raise tax effectively can reduce their reliance on UK aid.
By weakening its rules which deter the use of tax havens, the UK is also inviting other countries to do the same. In the end, we’ll all lose out. As the IMF’s Christine Lagarde said recently about tax competition between countries: “By definition, a race to the bottom leaves everyone at the bottom.”9
Strengthening tax authorities and tackling corruption is important and something we support, however developing countries’ tax authorities can only ensure they are getting their fair share from multinational companies if the rules are in place to allow them to tax the profits of those companies. In the UK we have a responsibility to the world’s poorest people to ensure the UK’s tax system doesn’t encourage UK companies to avoid tax in developing countries.
The scale of corruption is also actually much smaller than most people imagine. According to research from the respected US think tank Global Financial Integrity only 3% of illicit financial flows are due to corruption by government officials, compared to 65% by corporate tax dodging.10
Greater transparency and international cooperation on tax could actually make government officials more accountable and it would make it easier for developing countries’ tax authorities to detect irregularities including corruption.
Greater transparency on tax can make this information available to civil society and ordinary people in those countries. This will give civil society / people the power to hold their governments to account and ensure that companies are paying their taxes and that this money will be used to pay for education, health and the other basic rights that all governments must meet.
The experience of debt relief in developing countries shows the impact extra funds can have on fighting poverty. One study of 10 African countries found a 40% increase in education spending and a 70% increase in health spending after just four years of debt relief. A study by IMF economists in 2006 confirmed again that cutting poor countries’ debt payments has a “significant” impact in terms of increasing social spending11.
A recent study done on behalf of the European Commission, for example, found that aid recipient countries that had more aid flow directly into government budgets (as opposed to aid tied specifically to certain projects) performed better on a range of development indicators12. This research tells us that an increase in government budgets can translate into improved development outcomes, and that the funds “recovered” by developing countries from efforts to curb tax dodging by UK companies that operate there could help to reduce global poverty. This research into countries that received more aid directly into government budgets, high “general budget support” (GBS) countries, found that:
Yes, a bigger company has better access to facilitators of tax dodging in the legal, banking and accounting professions. Smaller companies have neither the resources nor the network of foreign subsidiaries through which big multinational companies can shift profits and dodge taxes.
Not all big companies are tax dodgers but the current rules mean that it is easy for irresponsible companies to dodge taxes with little, if any, consequences. We want to create a level playing field and fairer rules so that responsible companies that refrain from dodging taxes can flourish.
Tax is an obligation to society rather than a cost to business. Therefore, responsible businesses recognise that tax is a fundamental corporate responsibility issue, and they will not stand for abusive tax practices. They recognise how important tax revenues are for economic development and investment in public services and infrastructure which benefits all, including businesses.
There is a strong business case for creating a level playing field and closing the loopholes that irresponsible companies benefit from at the expense of the more responsible businesses and smaller companies. According to the CBI, public confidence in business is low, with only around half of people believing that business makes a positive contribution to society. This shows how the bad behaviour of irresponsible companies is damaging business as a whole. In addition to the public as a whole, investors and customers are also increasingly asking about a company’s approach to tax as well as calling for greater transparency of corporate reporting. Responsible businesses and progressive corporate leaders must take a stance to stop tax dodging.
Our campaign is not aimed at companies. It is aimed at changing the rules which enable irresponsible companies to get away with tax dodging. Responsible companies and business leaders have an important voice and should lend their support to level the playing field. Some companies and business leaders are already taking a stance by speaking out against tax avoidance and being more transparent about their own approach to tax13. For instance, we have recently seen the energy company SSE become the first FTSE 100 company to be awarded the ‘Fair Tax Mark’. But to ensure that no company is able to dodge taxes, we need to change the rules.
