3 Global level tax policy |
33. The ability of developing countries to collect
taxes is determined not only by their own governments' policies,
but also by policies and initiatives launched beyond their borders,
either by individual developed countries, or at intergovernmental
level. This section examines several such policies and initiatives,
and makes recommendations to the Government: both on measures
it could enact unilaterally, and on measures which need to be
taken at intergovernmental level, and which it should advocate.
Automatic exchange of information
34. Capital flight from developing countriesthe
process by which assets are removed from a developing country
and stored overseasis a serious problem for developing
countries. As DFID rightly highlights in its written evidence,
capital flight does not necessarily imply illegality; it may simply
represent a rational economic decision to invest assets overseas.
However, capital flight may also occur as a result of tax evasion.
Global Financial Integrity estimates that illicit capital
flight from developing countries totals over $1 trillion per year.
35. In this context, if the tax authorities of a
developing country wish to investigate possible tax evasion by
one of its citizens or corporations, they may need to obtain information
pertaining to the offshore activities of the relevant citizen
or corporation from the tax authorities of the relevant offshore
jurisdictionmost likely a tax haven. Until recently, the
only way for developing country authorities to do this was by
making a formal request via a bilateral agreement with the relevant
agreements take one of two forms:
· Tax Information Exchange Agreements (TIEAs),
· Double Taxation Treaties (DTTs): the principal
purpose of DTTs is to prevent the same item of income being taxed
in two separate jurisdictions. As a part of this, however, DTTs
make (limited) provision for exchange of information.
Making such requests constitutes a high and sometimes
unaffordable administrative burden for the tax authorities concerned.
36. Since 2009, developing countries have had another
option: by joining the Convention on Mutual Administrative Assistance
in Tax Matters (a multilateral treaty for the exchange
of information), the need for bilateral treaties is removed. (The
Convention originally dates from 1988, but until 2009 was open
only to Council of Europe and OECD members.)
However, developing countries still have to go through a relatively
complex process in order to join the Convention.
Additionally, even under the Convention, the need to make a formal
requestand the consequent administrative burdenstill
stands, unless two particular signatories to their convention
sign an additional agreement to the contrary.
37. Under the US Foreign Account Tax Compliance Act
(FATCA), by contrast, information is exchanged automatically,
rather than just on request. If a US citizen or corporation (subject
to certain exemptions) holds an account with a financial institution
outside of the US, this financial institution is required to provide
an annual report to the US authorities, covering information including
the account balances, gross deposits and gross withdrawals.
38. There are no similar rules in place for non-US
citizens or corporations. The EU Savings Directive is currently
the closest equivalent to FATCA in the EU: if any EU resident
holds an account in a member state other than his / her country
of residence, there is a requirement for the tax authorities of
his / her country of residence to be notified of any interest
paid on this account. (Austria and Luxembourg are currently exempt
from this obligation for a 'transitional period.) However, unlike
FATCA, which applies to tax authorities outside of the US, the
EU Savings Directive does not apply to tax authorities outside
of the EU.
39. It has thus been argued by organisations ranging
from Christian Aid to Glencore, the global commodities trader,
that a system of automatic information exchange should be implemented
more widely (rather than just in the US).
In its written evidence, the Tax Justice Network argues that:
automatic exchange has clear advantages over
the 'on request' approach mentioned above in so far as it has
a stronger deterrent effectand will therefore work faster
to shape a culture of tax complianceand it is vastly easier
and cheaper to implement.
In his oral evidence to us, Tim Scott, Global Head
of Tax at Glencore, stated that "I think this [automatic
exchange of information] is a good idea, and something that we
would have no problem with."
40. Whilst the Government claims to support automatic
exchange of information in principle, it has expressed some concerns
about the possible burden on businesses and financial institutions,
and around taxpayer confidentiality.
The Exchequer Secretary to the Treasury, Mr David Gauke MP, also
suggested that the UK should wait for an international consensus
to emerge rather than acting unilaterally, since the UK has "less
of a tradition of extraterritorial impositions" than the
US. In respect of
the possible burden on businesses, meanwhile, the Government's
concerns appear to be unwarranted: large businesses such as Glencore
and brewing giant SABMiller have no opposition to the policy.
41. The capacity of a developing country tax authority
to obtain information on the offshore activities of its citizens
or corporations (i.e. information from foreign tax authorities)
is critical to its ability to curtail illicit capital flight.
Their capacity to obtain such information could be greatly enhanced
by legislative measures: the US Foreign Account Tax Compliance
Act (FATCA) is a welcome start, but it only affects US citizens
or corporations. We recommend that the Government introduce
legislation similar to the relevant section of the US Foreign
Account Tax Compliance Act (FATCA), requiring tax authorities
automatically to exchange information relating to UK citizens
or corporations. The Government should also use its influence
(via the OECD Tax and Development Task Force, and similar avenues)
to persuade other governments to follow suit.
Tackling transfer pricing abuse
42. In order to maximise the proportion of their
profit occurring in tax havens, and to minimise that occurring
in high-tax jurisdictions, corporations which form part of a corporate
group may engage in transactions with other corporations in the
same group. For example, in a group which includes corporations
in Luxembourg and Ghana, transactions may be conducted between
the corporations with the sole aim of maximising the taxable profits
of the Luxembourg division, whilst reducing those of its Ghanaian
counterpart. The potential for corporations to reduce their tax
bills in this way is vast60% of world trade is intra-group,
and large corporations are generally able to hire the most skilled
accountants to facilitate such 'tax planning.'
According to ActionAid estimates,
payments to Switzerland, the Netherlands and
Mauritius from SABMiller's subsidiaries in Africa and India resulted
in a total tax loss to governments in those countries of £20
million, enough to put 250,000 children in school, and equivalent
in Africa to almost one-fifth of the company's estimated tax bill.
43. Under present OECD rules, this practice is not
in principle illegal, and of course corporations frequently transfer
profits for reasons unrelated to tax. For example, the commonly
accepted way for a business to reward shareholders is through
declaring a reasonable dividend, but sometimes local rules make
it very difficult to declare a dividend. In these cases, businesses
may look for other solutionssuch as profit shifting or
unjustified management fees. We believe that the acceptable and
transparent method for businesses to reward shareholders is through
the declaration and payment of reasonable dividends. Host countries
can contribute to this by establishing straightforward taxation
regimes for dividends. We therefore suggest that DFID's work for
revenue authorities includes technical support in this area, where
44. Under present OECD rules, the price charged in
intra-group transactions must be the same as that which would
have been charged if the goods / services had been sold externally,
i.e. at 'arm's length.'
However, a number of NGOs have campaigned vigorously for these
rules to be made more stringent: Christian Aid claims that there
are "substantial questions on both the practicality and applicability"
of the present rules. One of the suggestions is a system of 'formulary
apportionment,' whereby a corporation's taxable profits would
be allocated based on the proportions of total property, payroll
or sales in each country.
Given the current lack of support for such legislation within
the OECD, however,
we do not consider formulary apportionment to be a workable option
at presentunlike certain other areas of legislation discussed
in this report, transfer pricing legislation by definition requires
international agreement in order to be effective.
45. However, it is claimed that even the present
OECD rules are often broken, with intra-group transactions taking
place at non-market rates. This is what we mean by 'transfer pricing
abuse'a form of tax evasion. Global Financial Integrity
claims that Zambia lost over $4billion (an amount similar to its
total external debt) during the period 2003-09 due to transfer
pricing abuse. A
report by PwC Zambia states that:
In Zambia transfer pricing legislation exists.
Section 97A of the Income Tax Act introduces the arm's length
The enforcement of the legislation by the ZRA
has however not been as aggressive as expected.
46. Corporations from which we took evidence, including
SABMiller and Glencore, assured us that their intra-group transactions
took place at 'arm's length' pricesand hence complied with
the OECD guidelines.
Rio Tinto suggested to us that corporations should be required
to demonstrate their compliance by publishing information on intra-group
transactions on their annual tax returns in developing countries,
as is already the case in many developed countries.
Graham Mackay, the Chief Executive of SABMiller, claimed that
his business did not seek to minimise tax through intra-group
transactions at all: in other words, that it eschewed even those
methods which the OECD guidelines permitted.
However, in its subsequent submission of written evidence to the
Committee, ActionAid casts some doubt on this assertion, claiming
'... SABMiller states in its written evidence
that it has centralised the administration of its intellectual
property management and its management services. In doing so,
it has moved many of the higher-value activities of its business
out of developing countries and into low-tax jurisdictions (on
paper, the Netherlands and Switzerland). Regardless of the motivation
for this centralisation, it not only affects the global distribution
of SABMiller's tax liability, but also the extent to which its
investments result in positive spillovers such as knowledge transfers
and economic linkages in the local economy.'
47. In its written evidence, the CBI told us that
businesses had made "a number of offers" to engage with
HMRC and explain the approach they take to transfer pricing issues.
48. 'Transfer pricing abuse'corporations selling
goods or services at non-market rates to other corporations in
the same corporate groupcan seriously undermine developing
countries' capacity to collect the taxes they are due. OECD rules
prohibit this practice, but it is often difficult to detect when
these rules are breached. To help developing country revenue
authorities to tackle transfer pricing abuse, DFID should stressin
its dealings with these revenue authoritiesthe importance
of requiring 'related party transactions' (i.e. transactions taking
place within the same corporation) to be declared on annual tax
49. In order to understand the perspective of
multinational businesses on transfer pricing issues, HMRC should
meet the CBI to discuss the issue. HMRC should also seek the views
of trade unions and civil society organisations. HMRC should report
back to the Committee before the end of 2012 to advise us of the
outcome of these discussions.
Implications of UK Finance Bill
50. In the 2012 Finance Bill, the Government proposed
a relaxation of its anti-tax haven laws: the so-called 'Controlled
Foreign Companies' (CFC) rules. If the Bill is approved as it
currently stands, the newly relaxed legislation will apply to
accounting periods beginning on or after 1 January 2013.
51. Under the current system, prior to these revisions
coming into force, if a UK-owned corporation reports profits in
jurisdictions with lower corporate tax rates than the UK, (such
as by transacting with its own subsidiaries to shift its profits
from developing countries into low-tax jurisdictions) the UK Government
is able to impose an extra tax charge on the corporation to 'make
up the difference.' Profits shifted from developing countries
into tax havens, therefore, would still incur tax at UK rates:
this may disincentivise such profit-shifting.
52. Under the new system, the UK will only be able to
impose this extra levy if the profits in question have been shifted
from the UK. Profits shifted from developing countries into tax
havens, therefore, will incur tax at the tax haven rate, rather
than at the UK rateso the incentive to shift profits into
tax havens will be significantly higher.
A number of NGOs are campaigning vigorously against this legislative
change. As an example, ActionAid states its concern that:
the proposals will eliminate a significant deterrent
that discourages UK-based companies from shifting profits from
developing countries to tax havens. We estimate that the reforms
may cost developing countries as much as £4 billion.
53. The Exchequer Secretary to the Treasury told
us that he did not accept the £4 billion estimate; however,
he did not deny that there would be a cost to developing countries.
He stressed that the objective of the CFC rules was to protect
UK tax revenues, not those of developing countries.
Given that through DFID the Government is also seeking to support
revenue collection in developing countries, such a comment indicates
a lack of joined-up thinking between Departments.
54. In a recent joint report by the IMF, OECD, UN
and World Bank, it was argued that where domestic policy reforms
were likely to impact on revenue flows to developing countries,
a 'spillover analysis' should be conducted to ascertain the magnitude
of such impacts.
In the case of the revision to CFC rules, such an analysis has
not been conducted.
55. If approved, the newly-relaxed Controlled Foreign
Companies (CFC) rules, proposed in the 2012 Finance Bill and due
to come into force in January 2013, will incentivise multinational
corporations to shift profits into tax havens. This is likely
to have a significant detrimental impact on the tax revenues of
developing countries. As a matter of urgency, the Government
should conduct or commission an analysis of the likely financial
impact of the revised Controlled Foreign Companies rules on developing
countries. Depending on the results of this analysis, the Government
should consider whether to drop its proposals.
56. The Government should designate a DFID ministerial
responsibility for the development impact of tax and fiscal policy.
Furthermore there should be an administrative or legislative requirement
for the government to assess new primary and secondary UK tax
legislation against its likely impact on poverty reduction and
revenue-raising in developing countries, and to publish that assessment
alongside the draft legislation.
Role of Extractive Industries
Transparency Initiative (EITI)
57. The Extractive Industries Transparency Initiative
(EITI) was established in 2002 by the then UK Government, with
the aim of combating corruption in the extractive industries.
The EITI is governed by a Board, whose membership includes governments,
corporations and civil society organisations. It is currently
chaired by the Rt Hon Clare Short.
58. The principle underlying the EITI is that governments
disclose the amounts they receive from corporations in the extractive
sectors (including payments of taxes, signature bonuses and royalties),
whilst corporations operating in participating countries make
a corresponding disclosure of the payments they make to the government.
An 'EITI report' for the relevant country is then published, which
reconciles the amounts paid by corporations with the amounts received
by the government.
Any discrepancy between the two amounts may indicate revenues
falling into the hands of corrupt officials.
59. There are two stages of EITI accreditation: EITI
candidate status, and EITI compliant status. To achieve EITI candidate
status, a country must comply with five specific sign-up requirements.
To achieve EITI compliant status, a country must complete its
first EITI report within 18 months,
as well as fulfilling various other criteria pertaining to independent
verification within two-and-a-half years.
EITI compliant countries are re-assessed every five years to ensure
60. Despite its involvement in founding EITI, the
UK has not yet sought EITI candidacy itself.
The Parliamentary Under-Secretary of State argued that the UK
was not sufficiently resource-rich to warrant participation.
However, whilst the UK extractive sector is not as large as it
once was, we believe it remains significant enough to warrant
EITI participation: as at April 2012, mining and quarrying constitutes
approximately 16.4% of total UK production.Table
4: countries currently participating in EITI
|Countries with EITI 'compliant' status
||Countries with EITI 'candidate' status
|Central African Republic
||Democratic Republic of the Congo
|Yemen (suspended)||Madagascar (suspended)
|Republic of the Congo
|Trinidad & Tobago
Data source: EITI website. In addition, several
other countries - including the US - have indicated their intention
to become EITI candidate countries.
61. However, EITI has a number of weaknesses. Given
that figures are published on an absolute basis (rather than as
a percentage of the relevant country's GDP, or as a percentage
of mining industry profits in the relevant country), it is difficult
to draw international comparisons. Additionally, EITI does not
require the publication of contracts between mining companies
and governments: it has been suggested by the 'Publish What
You Pay' campaign that such publication would help to expose
any contracts which are patently disadvantageous to the country
might include those contracts signed by the Zambian Government
62. The Extractive Industries Transparency Initiative
(EITI), founded in 2002 by the UK Government, has had a promising
first decade. The process of creating an 'EITI report,' which
reconciles what corporations say they pay (in taxes, royalties
and signature bonuses) with what governments say they receive,
is of great help in identifying possible corruption. Whilst the
UK extractive sector is not as large as it once was, it remains
significant enough to warrant EITI participation. If the Government
genuinely hopes to encourage more developing countries to sign
up for EITI, it must be willing to lead by example. Given that
the UK was involved in founding the Extractive Industries Transparency
Initiative (EITI), we feel that it should now become an EITI candidate
itself. Additionally, the UK should encourage EITI to broaden
its scope: EITI should require participating corporations and
governments to publish the contracts which exist between them,
and should also require the publication of percentage figures
in addition to absolute figures.
63. At present, international accounting standards
do not require corporations to present financial information on
a country-by-country basis:
such information can be presented on an aggregate basis. Many
have advocated the implementation, by the International Accounting
Standards Board (IASB), of a standard requiring country-by-country
Aid argues that:
The potential for the private sector to drive
development is vast, as DFID has recognised, but this can only
provide real benefits for those living in poverty if the returns
from the private sector are shared. Therefore, there is a
clear need as DFID increasingly promotes private sector led development
to also promote mechanisms by which the contribution of the private
sector to development can be more effectively assessed, such as
a Country-by-Country reporting standard.
64. More specifically, the European Network on Debt
and Development (Eurodad) suggest that multinational corporations
should be required to present the following items of information
for each country in which they operate:
· the names of all the companies they own
in each country;
· their financial performance in each country;
· their tax liability in each country;
· details of the cost price and carrying
value of physical fixed assets in each country, and
· details of gross and net assets for each
65. The Parliamentary Under-Secretary of State for International Development assured us that he supported the passage of EU legislation requiring some degree of country-by-country reporting, but was unwilling to introduce such measures unilaterally if agreement within the EU was not reached, for fear of damaging the UK’s competitiveness..
Evidence we received suggest thatif country-by-country
reporting were to be mandatedthe extra costs for businesses
would be very modest.
Mining companies such as Rio Tinto and Glencore do not oppose
the measure (indeed, Rio Tinto already report much financial information
on a country-by-country basis voluntarily),
whilst the Chair of the OECD's Business and Industry Advisory
Committee is also broadly supportive.
66. Requiring multinational corporations to report
financial information on a country-by-country basis would constitute
both a means of detecting tax avoidance and evasion, and a conspicuous
deterrent. Given that corporations such as Rio Tinto already
report financial information on a country-by-country basis voluntarily,
we anticipate that others could follow suit at minimal inconvenience.
Irrespective of whether EU-level agreement is reached, the
Government should enact legislation requiring each UK-based multinational
corporation to report its financial information on a country-by-country
basis. Such information should include the names of all companies
belonging to it and trading in each country, its financial performance
in each country, its tax liability in each country, the cost and
net book value of its fixed assets in each country, and details
of its gross and net assets in each country. Additionally, the
UK should continue to support the progress of similar legislation
at EU level.
50 Ev 98 Back
Ev w26 Back
Ev 124-125; "Convention on Mutual Administrative Assistance
in Tax Matters", OECD, July 2012, Error! Bookmark not defined. Back
Tax Information Exchange Agreements, Draft Tax Justice Network
Briefing Paper, April 2009, Error! Bookmark not defined. Back
Ev 75 Back
"Convention on Mutual Administrative Assistance in Tax Matters",
OECD, July 2012, Error! Bookmark not defined. Back
Convention on Mutual Administrative Assistance in Tax Matters,
OECD briefing paper,17 April 2012,Error! Bookmark not defined. Back
Convention on Mutual Administrative Assistance in Tax Matters,
full text, last amended 1 June 2011,Error! Bookmark not defined. Back
Foreign Account Tax Compliance Act (FATCA): Proposed Treasury
Regulations §1.1471 - §1.1474, as published by PwC,
February 2012, Error! Bookmark not defined. - see section 1.1471-4(d)(3)(ii-iii) Back
"EU Savings Tax Rules and Savings Agreements with Third Countries:
frequently asked questions", European Union press release
MEMO/12/353, 15 May 2012 Back
Ev 75; Ev 122-125; Ev w28; Q 22; Q 89 Back
Ev 124 Back
Q 89 Back
Q 223 Back
Q 224 Back
Q 89; Q 91 Back
Transfer Pricing Service:
Unravelling the Opportunities and Risks, Deloitte, 2009, Error! Bookmark not defined.
Ev 91 Back
Ev 58 Back
Ev w9 Back
Ev 75 Back
Calling Time: why SABMiller should stop dodging taxes in Africa,
ActionAid report, 29 November 2010, Error! Bookmark not defined.
Q 213 Back
Ev w27 Back
Ev 81 Back
Q 99; Q 100 Back
Ev w76 Back
Q 101 Back
Ev 72 Back
Ev w7 Back
Finance Bill, Schedule 20 [Bill 1 (2012-13)] Back
"The problem with a new tax loophole", ActionAid, Error! Bookmark not defined.
"The problem with a new tax loophole", ActionAid, Error! Bookmark not defined. Back
Ev 61 Back
Q 207 Back
Supporting the Development of More Effective Tax Systems: a report
to the G-20 Development Working Group by the IMF, OECD, UN and
World Bank, 2011, Error! Bookmark not defined. Back
Ev 60-61 Back
Ev 121 Back
Ev 121 Back
EITI Factsheet 01, Extractive Industries Transparency Initiative,
Error! Bookmark not defined. Back
"EITI countries", Extractive Industries Transparency
Initiative, Error! Bookmark not defined. Back
"Nigeria: EITI", Extractive Industries Transparency
Initiative, Error! Bookmark not defined. Back
Ev 120-121 Back
Q 190 Back
Index of Production, April 2012, ONS Statistical Bulletin, 12
June 2012, Error! Bookmark not defined. Back
"Objectives", Publish What You Pay, Error! Bookmark not defined. Back
In most countries, including Zambia, minerals are deemed to be
the property of the government, until such point as a mining company
buys 'prospecting rights' - i.e. the right to search for, and
claim ownership of, mineral deposits. See Paul Collier, The Plundered
Planet (London, 2010), p 51-52; and Robert F. Conrad, Zambia's
Mineral Fiscal Regime, in Adam, Collier & Gondwe (eds.),
Zambia: Policies for Prosperity (Oxford, forthcoming). Back
Ev w28 Back
Ev w28; Ev w68 Back
Ev 76 Back
Exposing the lost billions: How financial transparency by multinationals
on a country by country basis can aid development. Eurodad report,
November 2011, Error! Bookmark not defined. Back
Q 196 Back
Q 130 Back
Ev w75; Q 90 Back
Q 91 Back