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 giftso 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
Financial Crimes Branch, HM Treasury
M666k: Sch.D CI/CII: trade deductions: corruption
offences: territorial aspects
Schedule Cases I and IIDeductions
Disallowablepayments which are a criminal
act for the payer
Corruption offencesterritorial 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.