Select Committee on International Development Minutes of Evidence

Memorandum submitted by Ceri Smith, Financial Crimes Branch, HM Treasury


  As I promised at the hearing last week, I am writing to clarify the situation in UK law on tax and bribes.

  2.  OECD adopted a Recommendation in May 1994 that all Member States should look at criminalising bribes paid to overseas officials and also ensure that tax systems did not indirectly encourage bribery by allowing tax relief for bribes paid. In April 1996 OECD followed it up with a specific Recommendation that an end be put to tax relief for bribes to foreign government officials, and in 1997 Member States signed a Convention on criminalisation of such bribes, which the UK has since ratified.

  3.  In all of these discussions the UK has been able to adopt a positive stance on tax deductibility. In 1993 a fairly wide provision was enacted (as Section 577A, Income and Corporation Taxes Act (ICTA) 1988) which denies tax relief for any payment the making of which constitutes the commission of a criminal offence. The Section is constructed in such a way that it follows UK criminal law; whatever is defined as an offence for UK criminal law purposes follows through so that tax relief is denied for the related payments. This is desirable so that Treasury Ministers do not have to keep reviewing tax law every time that the criminal law is amended or extended. It also means that we do not have to incorporate into tax law difficult definitions of classes of payments we wish to exclude; the offences are defined in criminal law and tax law does not need to develop its own definitions for tax purposes.

  4.  Section 577A effectively denies relief, inter alia, for any bribe which is contrary to the Prevention of Corruption Acts. The Corruption Acts bite on any bribe where any part of the offence is committed within UK jurisdiction. Thus if the offer, agreement to pay, the payment itself, or the acceptance or soliciting of the bribe, take place in the UK, it is an offence, and the tax provision would therefore deny relief for the payment.

  5.  There is also general provision (Section 577 ICTA) which denies tax relief for any form of business entertainment, hospitality or gift—so some payments which might be in a grey area might in any event be denied relief without the need to show that they were in any way corrupt payments.

  6.  Transparency International (TI) has been quoted as suggesting that bribes are tax deductible under UK law. I have enclosed the relevant section of the instructions to Tax Inspectors on the deductibility for tax purposes of payments made overseas (see attachment). I believe that TI have exaggerated the limited application of the tax measure. The tax provision is explicitly linked to UK criminal law. If a bribe is paid wholly outside the UK, it is not an offence in the UK and the tax provision does not bite. It is only bribes where no aspect of the crime takes place within the UK's jurisdiction that might still be eligible for tax relief, provided they meet other statutory tests for relief. These other test include evidence of the payment which will often be unavailable (corrupted officials are obviously wary of leaving an audit trail linking them to their crime). Where bribes are paid overseas, it is possible that some part of the offence will in fact take place within UK jurisdiction. For example, if the decision to pay is taken here, the fact that the payment itself is arranged overseas does not mean that it is not a bribe under the UK law. And even if all steps are outside the UK, it might still be deductible, for example because it is a gift or hospitality.

  7.  Moreover, if UK criminal law is ever extended, as was suggested in the Home Office recent paper "Raising Standards and Upholding Integrity: the Prevention of Corruption", the tax provision follows automatically. The thrust of the TI allegation is not really against the tax provision, or how it is described in the Inspectors' Manual; it is about extending UK jurisdiction to enlarge the crime of corruption to catch offences that take place wholly outside the UK. This issue has been addressed by the Home Office in their paper.

  8.  I hope that this Committee finds this explanation helpful.

Ceri Smith

Financial Crimes Branch, HM Treasury

November 2000



  M666k: Sch.D CI/CII: trade deductions: corruption offences: territorial aspects

  Schedule Cases I and II—Deductions

  Disallowable—payments which are a criminal act for the payer

Corruption offences—territorial aspects

  Corruption offences are not subject to any special jurisdictional rules but the law is applied territorially. Anyone of any nationality who corruptly offers, solicits, pays or accepts a bribe within Great Britain (or on board a British ship or aircraft, in British territorial waters or British airspace) is therefore guilty of an offence. This includes foreign officials who offer, solicit, pay or receive bribes here, and those who offer bribes to them or receive bribes from them here.


  The territorial rule does not require the recipient to be physically present in this country. For example, a UK resident trader may agree to pay a bribe to a foreign official into the official's bank account in London. Both parties would be guilty of a corruption offence under UK law because the payment was made here.


  The UK does not generally have jurisdiction over a corruption offence merely because some preparatory action took place here provided the actual offer or payment of the bribe took place abroad. Nevertheless, Sections 5-7 of the Criminal Justice (Terrorism and Conspiracy) Act 1998 make it an offence to conspire to commit offences abroad, and this may well cover preparatory actions here, and in turn may render the related payments disallowable under Section 577A.

Jurisdicition and nationality IM 6661

  Jurisdiction is not tied to nationality and, except where British Crown servants are involved, the UK courts do not have jurisdiction over corruption offences which take place entirely abroad, even if all those involved are British nationals. But if the offer, acceptance, or agreement to accept, takes place in the UK, then the UK will have jurisdiction over the offence, and the payment in question will be a disallowable criminal payment within the terms of Section 577A.

  It should be remembered that payments not caught by Section 577A because all relevant events are wholly outside the UK may in any event be disallowed under Section 577 because they are gifts, or hospitality or business entertaining.


  Indictable offences committed by British Crown servants abroad, acting or purporting to act in their official capacity, are subject to UK jurisdiction by virtue of Section 31 of the Criminal Justice Act 1948. Corruption offences are indictable and so they are subject to this rule. The other party to the corruption would not be guilty of any offence under UK law unless he were also a British Crown servant.

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