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CORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 130-i
House of COMMONS
TAKEN BEFORE the
International Development Committee
Tax in Developing Countries
Tuesday 15 May 2012
Stephen O’Brien MP, Justine de davila, simon whitfield and stephen sharples
David Gauke MP, Peter Steeds and Alison Shallard Brown
Evidence heard in Public Questions 1 - 73
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Taken before the International Development Committee
on Tuesday 15 May 2012
Mr Sam Gyimah
Mr Michael McCann
In the absence of the Chair, Richard Burden was called to the Chair.
Examination of Witnesses
Witnesses: Stephen O’Brien, Parliamentary Under-Secretary of State, Department for International Development, Justine de Davila, Governance Adviser, DFID, Simon Whitfield, Policy Adviser, DFID, and Stephen Sharples, Senior Governance Adviser, DFID, gave evidence.
Q1 Chair: Good morning.
Mr O’Brien: Good morning, Chairman.
Chair: It is nice to see you, Minister. First of all, apologies from Malcolm Bruce, the Chair of the Committee, who has to be elsewhere today. He asked us to pass on his apologies, and there is certainly no discourtesy intended. I am very pleased to be able to welcome you. This is our third and final evidence session on the taxation inquiry. We have been looking at taxation in developing countries very broadly: corporate and personal taxation, direct and indirect taxation, and investigating what DFID itself can do to try to strengthen revenue collection.
In our first session we heard from several leading academics and a number of NGOs. In our second session, we heard from organisations including Glencore, SABMiller and the Extractive Industries Transparency Initiative. We have also been involved in a case study of Zambia as part of the inquiry; the Committee visited Zambia in March and held a number of meetings over there with Government Ministers, the Revenue Authority, leading corporations and so on. Later this morning we will be hearing from the Exchequer Secretary to the Treasury and from HMRC, and we will have a number of specific points we will want to raise with them. There may also be some issues that we raise with you that we will want to raise with them as well.
Clearly hearing from DFID and you, Minister, will be a vital part of this inquiry. I think we have just over an hour with you, and we certainly look forward to hearing your views on all the main issues and maybe challenging you on one or two points, but we certainly do look forward to what you have to say. Without further ado, for the record, could you introduce your team, and then we can move on to the questions?
Mr O’Brien: Thank you very much indeed, Chairman, and thank you for passing on the apologies of the Chairman of the Committee. I am Stephen O’Brien, Parliamentary UnderSecretary of State at the Department for International Development, and I am accompanied this morning by three officials from that Department: Stephen Sharples, Simon Whitfield and Justine De Davila. I will ask them, if I may, just to quickly introduce themselves with their job titles and the particular areas in which they specialise.
Stephen Sharples: I am Stephen Sharples. I am a senior governance adviser in the policy division in DFID, and I work on public financial management.
Simon Whitfield: I am Simon Whitfield. I am a policy adviser in the policy division in DFID, and I cover largely the international aspects of tax work in DFID.
Justine de Davila: I am Justine de Davila, and I am a governance adviser working on extractive industries in the growth team in the policy division in DFID.
Q2 Chair: Thank you very much indeed. Taxation has been the centre of this inquiry and has been occupying us. How important would you say taxation is as a driver of development?
Mr O’Brien: We are very persuaded, and indeed I think all the evidence shows-I dare say this is completely in accordance with where the Committee’s thinking is-that tax is of course very important. This is patently because it means that countries can generate their own revenues and therefore provide the services to their own citizens, and what is taken into an Exchequer through transparent, democratic, accountable governmental systems then means that there is a compact with their peoples. It is tax that gives them the means to deliver those.
We are very clear that it therefore helps to enhance that relationship between the citizens and a Government. It makes citizens, and certainly states, more effective. So far as DFID is concerned, we are very clear that the challenges on taxation are very much along the lines that I detect have been identified by the Committee. I have been able to read a little bit about the factfinding mission you went on to Zambia in terms of the issues of informality, tax base erosion, how you work with partner countries, particularly where we have bilateral programmes, and indeed how we within Her Majesty’s Government work across Government, and not least with Her Majesty’s Treasury and HMRC, and a lot of the emerging drivers for challenge and change, in terms of information exchange on tax, looking at how technical assistance generates added benefit to partner countries, and where we can place our effort in terms of quality research and evidence, not least to incentivise other country Governments that this is an area worth putting a lot of effort into and, indeed, wanting to seek to attract those partnership approaches where we believe there is a track record-no doubt we will come on to that-of adding value in certain countries where we have had that partnership.
Q3 Chair: Thank you very much. I guess to some extent it is "How long is a piece of string?", but would you say there is any ballpark figure in terms of percentage of GDP that developing countries should be aiming for in terms of collecting that amount in tax receipts?
Mr O’Brien: I do not have that in my mind, and I have not been advised that that is a driver for us. There would be a grave danger in approaching this on a one-size-fits-all-countries basis. As we well know from well-developed Northern Hemisphere countries, the tax bases and so forth are extremely different. It does depend-and no doubt we will come on to this-whether or not you are socalled "resourcerich". It has a different profile. One of the areas that I would say highlights the difference is if you look at the common problems. They are the narrow tax base, with a large informal sector, no property taxes very often-and lots of issues over property ownership, let alone the taxes-over–reliance on natural resources in those areas where they have them, undertaxed elites-and we know about the issues in Pakistan, for instance, on that in particular. There is low compliance and widespread failure to pay taxes, which is certainly not unique to developing countries, as we well know. There is a lack of capacity in the tax authority, and corruption. A lot of this requires political will, and then we can come on to what will be the good laws and good regulations, how you achieve leadership, the staff quality, the IT systems. The broad number that has been bandied about is about 19%-I suspect the Committee has had that-which is for the implementation of the MDGs. That is an UNDPderived figure, but within DFID, if you are asking whether we have a specific target on tax, I think that would be too blunt an approach. We are trying to be, as best we can, optimal per country, depending on what part of the process and journey that country is on.
Chair: Thank you. You mentioned technical assistance as being one of the key areas here. That is something we have been looking into, and I think Michael McCann will ask you one or two things in relation to that.
Mr McCann: Good morning everyone. Nice to see you all.
Mr O’Brien: Good morning.
Q4 Mr McCann: Minister, DFID has been rightly praised for the quality of its technical assistance in the tax field, yet it appears that this work is being scaled down by the Department. Can you explain why that is?
Mr O’Brien: I am not sure I recognise that it has been scaled down. I know that if you go back 10 or even 15 years, there has been a variation in how much overseas assistance has focused on tax. There was an initial rate of activity, particularly when, if you like, one of the more obvious things to do was to help set up revenue authorities-although there have been some more recent examples of that-and then there has been a slight diminution.
On the latest figures I have seen, our effort is about £25 million per annum dedicated to particular tax projects. Certainly between 2006/07 and 2010/11, we have spent as a Department about £97 million on helping to improve revenue collection, so that is about £20 million per annum. There are three good examples of that: Rwanda, Sierra Leone and Burundi are three areas where significant effort has been made on that. On the technical assistance, there is a large series of programmes, particularly where HMRC is engaged, and we are working with them and doing our very best to ensure that that is well co-ordinated.
We, the Treasury and HMRC are working closely on the international tax change, and particularly on capacity building. It is often quite difficult to disaggregate from a broader set of programmes, but I think you will be aware of the countrylevel work, and examples such as Ethiopia, where we are working with them through the recently established Investment Climate Facility to utilise UK specialist expertise, much more easily termed iFUSE, to mobilise Whitehall expertise to support the work on the investment climate reform.
Q5 Mr McCann: The reason I asked the question is that the International Centre for Tax and Development, which provided both written and oral evidence to the Committee, said in its written evidence that DFID’s work in this field "has declined appreciably since the 1990s," and it also highlighted the lack of co-ordination between donors in the taxation field. Is that something that you would dispute? I am assuming you would, given your previous answer.
Mr O’Brien: I do somewhat. I do not recognise it. I am very happy to ask Stephen Sharples to elucidate a little further, but I think that the very same organisation has also most recently said that the effort and indeed expenditure has picked up recently. I think there has been a change.
Q6 Mr McCann: Can I buttress another question on to the back of that one then, before Stephen comes in? Would it be the case that, given the renewed focus on private sector development, there would be another look at this issue to determine whether or not additional assistance has to be supplied to support tax revenues in developing countries, with the private sector angle being taken into consideration as well?
Mr O’Brien: I personally think that is a very fair point. If we take for example Sierra Leone, where I have been twice in recent times, quite clearly they are at a point where they have a number of private sector explorers, followed by potential exploiters, of natural resources. The big challenge there is to ensure that both the laws and the regulations, as well as the potential fiscal arrangements, within Sierra Leone are ready and in place so that, as these private sector operators are taking their risk, and deciding what is possible and to address the markets that they think can be addressed with that natural resource-which, after all, is a oneoff asset for that country-they can get that balance of a fair yield to be received by the Exchequer. They have had a series of reviews of those contracts, and the tax within that, and the fiscal yield within that, has been part of the thinking through, both of what is an appropriate level of royalty, how it is measured, and where it sits within the framework and architecture of laws and regulations, and which will also give what the private sector needs, as you well understand, which is clarity, stability, and as much certainty as possible of the arrangements into which they will be placing their commercial risk, let alone geological. That is a good example where, if you like, tax technical assistance is supplied as part of our effort to work as a partner with the Sierra Leone Government, to help them put a renewed, reinvigorated, better architecture in place for those activities, to then be in a much better place in terms of fairness for the yield that should be secured off those, which would then be received into what we hope would be a very accountable, political and democratic set of decisions.
Q7 Mr McCann: Stephen, do you want to answer that point?
Stephen Sharples: Maybe I could explain. It is very difficult to monitor the level of spending on tax, because it is quite difficult to define what exactly tax is. In the exercise we carried out for the submission to the Committee, we went into quite some depth to get that information. Earlier on, in 2004/05 to 2008/09, another fiveyear period, we did an internal exercise reviewing governance programmes. We looked at tax then, and we came up with the figure of £71 million over that five–year period. That would imply it went up a bit from 2004/05 to 2008/09.
Earlier on another exercise was carried out to look at the level of spending in this area, and that came up with £159 million, though I am not sure whether it was over a five or a sixyear period. That would imply it has come down a bit since then. According to those figures, it was higher in 2001 to 2006; it then went down a bit and now it has come up a bit. However, it is very difficult to make comparisons, because exactly how rigorous we were at that time in identifying these projects, and how we apportioned what related to tax and what did not, I do not know, but those are the figures I have from previous exercises.
Q8 Mr McCann: I am grateful for that, thank you. In terms of the other written evidence that has been supplied by the Department, it also highlighted the technical assistance offered by HMRC. Let us see how generous HMRC is: did it provide this expertise for free, or did it bill DFID for it?
Mr O’Brien: I think there is-may I dare to use the term?-an internal transfer price. Maybe Simon has a better technical answer for you.
Simon Whitfield: The answer is that it depends. In some circumstances, for example in Ethiopia, where HMRC is a major provider of technical assistance, DFID funds, and ultimately it funds HMRC. In terms of one-off, small technical assistance projects-HMRC will correct me later if I am saying the wrong thing-it would fund that out of its own funds.
Q9 Mr McCann: Is that then listed as Official Development Assistance?
Mr O’Brien: I would imagine it is, isn’t it?
Simon Whitfield: I am not sure.
Mr O’Brien: We can find that out.
Q10 Mr McCann: You can find that out and come back to us?
Mr O’Brien: As long as it is in support of a development objective and is supporting countries that are of course the ones in which we operate, which are poor, then by definition one would expect it to count.
Q11 Mr McCann: If I take that answer in the round, would it be the case that the Department uses the expertise needed for the particular circumstances it faces, and thereafter will find out whether that is officially listed as ODA?
Mr O’Brien: I am absolutely sure that the way we approach the design of programmes-and I think this has always been the case within DFID-is to seek to establish where we can best meet the need in a partnership arrangement with our bilateral partners in particular, but also to work sometimes through the IMF or the World Bank, through the multilateral organisations, so that we might be able to support those programmes. The main thing is to tailor the programmes to the country need. By definition it will therefore be exceptional if there is a question mark over whether or not that qualifies for ODA, but I think you are right to raise the question and we would have to give you a specific, well-researched answer, rather than a generality.
Q12 Mr McCann: If we get some written information back, if there are any issues then we can come back and seek some clarification.
Mr O’Brien: I am happy with that. I suspect it would need to be quite specific, what you are driving at, because the answer is probably very specific in terms of particular programmes and assistance offered by HMRC. In principle, I would have thought as long as it is supporting the purposes of development that will be of service to alleviating poverty and in a country generally defined as poor, we would start from the presumption that it is likely to qualify.
Q13 Mr McCann: The final question from me then is that the CBI has told us that it has made a number of offers to co-operate with HMRC in the field of transfer pricing, and in particular to explain the multinational perspective on that particular matter. Is that something you would encourage HMRC to do?
Mr O’Brien: Clearly you will have the Treasury Minister in front of you shortly, and that is primarily a question for that Minister, on the basis that HMRC is accountable to the Treasury. I do not know if you want to address this at a later part of the meeting, Chairman, but on things like transfer pricing, which in itself encompasses a whole load of very different variables and quite a challenge when it comes to definitions and the disclosure of information, particularly as it relates to an understanding within the business world and international businesses, yes, all the expertise and the experience that can be brought to bear to assist is something that we would welcome. I do not know if you want to add something, Simon.
Q14 Chair: On the transfer pricing, we will probably come back to that later.
Mr O’Brien: I thought you might be coming back to transfer pricing later.
Chair: It might be better to do that, perhaps, in the round-up.
Mr O’Brien: But on the specific point, therefore, did you have anything you wanted to add?
Simon Whitfield: Yes. On the specific point, I cannot remember which companies, but I know there has been an offer, which has been accepted in some cases, of companies explaining their business models to developing country tax authorities, because that is essential to understanding how transfer pricing transactions will work. It is not giving specific advice about transfer pricing; it is saying, "This is how we do business, and if you understand this you will understand better how we do things." I think that has already happened, and that offer is certainly on the table. It was discussed at the Task Force on Tax and Development last week, and I think developing countries are genuinely interested in that.
Mr McCann: Thank you very much.
Q15 Jeremy Lefroy: Taxation is becoming an area of development that is quite fashionable, and understandably it is something that people want to concentrate efforts on, since it is a key to longterm development. Do you think there is a risk of lack of co-ordination among various donors in individual countries?
Mr O’Brien: I am aware that some would say that there is a lack of co-ordination. Let us start from the presumption that donor co-ordination is really important. In each country in which DFID is a partner, we make a huge effort to work and liaise very closely with others. You may or may not have had evidence already that we support the African Tax Administrator Forum, ATAF, which helps with co-ordination, and we are also involved in the Global Forum platform for co-ordinating technical assistance. I know HMRC is working with the World Customs Organisation. Some countrylevel support involves engagement with civil society. If you want, I can give you some examples, but in particular the DFIDfunded International Centre for Tax and Development does involve civil society partners. Donor co-ordination is absolutely vital; I recognise that in some countries it has been called into question, and no doubt there can always be a better co-ordination.
However, as part of our own effort we are trying very hard not to duplicate other donors’ work, which is one of the great challenges. In some places we are best placed to lead on support, for instance, to the revenue authority. In Afghanistan and Sierra Leone, that would be us, but in others it will be the other donors who lead, such as the Norwegians in Zambia, which I think is the country you know best from this perspective. As ever, we want to do what we think will carry the most impact, be most effective, and certainly carry the most value for money. When you look at some of the efforts that have been applied by us in our working in Rwanda and Burundi on the development of their revenue authorities, the value-for-money figures are extraordinarily encouraging.
Q16 Jeremy Lefroy: Could you give us some examples of that?
Mr O’Brien: Yes. I might well call upon the experts to give the numbers, but I was recently in Burundi, a subject that we have discussed before, very much as part of that succession from where we have been working with the OBR, the Office Burundais des Recettes, and we are now really working with TradeMark East Africa to carry that forward. You have to be very careful with these numbers, because of course there would have been some revenues which would have come through anyway. However, on Burundi, if I can just look it up, it looks as though the OBR is on course to double its revenues over three years, providing an extra £85 million every year for the State. I do not have the number in front of me, but I think we contributed about £30 million in the end. That is in a country where, as you well know, the tax and customs service had topped the list of East Africa’s most corrupt organisations in Transparency International’s East African Bribery Index. That is a good example. In Afghanistan we have provided £19 million over a fouryear period, strengthening the Afghanistan Revenue Department. That has raised revenues from around 4% of GDP in 2004 to now 11.6% in 2011-12. You will have the figures for Zambia even more readily than I do.
In Tanzania we have contributed about £8 million between 20082013 to the latest phase of the MultiDonor Fund tax modernisation programme, a case which, as it happens, I know you know well. The big challenge there, which is slightly beyond the question, is how allegedly Tanzania as a country and as a Government is only receiving about £48 million from revenue collected from mining and gas companies, when we know what their turnover is. I think that begs many of the questions that lie behind this inquiry. One has to look at where the incentives and the holidays were, and work out whether there is now an equitable position in terms of the yield from activity, but particularly to recognise that there needs to be the incentive to attract that investment in the first place, because people are taking large risks. At the same time, once it is clear that a profit is being generated, one has to look at how that is calibrated for tax.
Q17 Mr McCann: Thank you. You mentioned the International Centre for Tax and Development. Could you give some examples, if possible, of research that has been done that directly affected DFID’s implementation in developing countries of improvements in tax collection?
Mr O’Brien: Yes. Some of the research of that particular organisation has only just started, so I think it would be premature to give you a result. Where we are focused is: "How do you get to this fair yield?" We are focused at the moment, if you like, on the extractives, and the resourcerich areas in poor countries. This inquiry is very welcome from our point of view, because in a sense it is part of a very live, ongoing conversation about how best to establish the appropriate yield, if I can put it that way. One of the areas of research, which I know some of the NGOs have been urging us to look at and is part of the work in progress in many ways, is between taxing revenue and taxing profit. This is a very live area of research. There are a number of CSOs and NGOs who have stated what they believe to be appropriate, but I think it is a fair and remaining question: where and how do you tax?
You will know better, maybe, than I do, but when I last visited Zambia I was quite encouraged by the fact that, following a review of the mining contracts, they have now moved to a 6% royalty fee, but have chosen therefore not to repeat the windfall approach. If you like, that was the internal trade–off. It was entirely their decision, and entirely therefore something that we would support. It is not a matter for us to seek to interfere in that political decision. However, 6% is at the higher end of the best practice international norm. The question then is information, transparency, and on what the 6% is measured. Is that fair, is that right, is that provable? Similar conversations have been had in Sierra Leone.
You can see how the research leads directly into where you can help suggest an appropriate approach, but also where there are genuine challenges, where there may be some perceptions that it would be jolly easy to tax activity, because you can measure turnover. We know from a lot of practice, however-certainly from my own experience in industrial business-that the difficulty about taxing activity is that very often you can deter the incentives for investment in that activity in the first place, because a tax starts before you have generated any return for the shareholders, whose money it is, not yours, and you have placed it on risk. Therefore the advantage of profit is that it is measured by time, and it is effectively a measure of cost versus a surplus, and then you can tax surplus.
You can see how the research side is very important to understand those issues between what is fair yield, what is measurable, what can be accountable and, above all, what is likely to help encourage, rather than deter, investors to go chasing those commercial opportunities. That, as we all know, is often quite a fine balance and a fine judgment, and your experience in Zambia, from what I understand, was an interesting case study-to go for 6% but not go for more windfall. Would each member of the Committee have made the same decision as the Zambian Government made at the time? They are quite finely judged issues, because you are trying to predict an uncertain future.
I have just had a note passed to me, which also reminds me that the International Growth Centre, which has been going a little bit longer and, as you know, is located at the London School of Economics and is funded by us, is providing demandled policy and advice, particularly on taxation issues. Again, you met that in Zambia. The IGC’s analysis has demonstrated the disincentives to formalisation, for instance, of the larger informal sector firms, which you can see from things like the lack of infrastructure and banking services. That does ultimately deny Governments tax revenues, but the question is at what point you have formalised the informal sector, which I know has been another area of your concern as a Committee. How much does that then disincentivise?
Chair: Thank you. I think Hugh was going to pursue some of the issues of revenuebased taxation, but also other areas as well.
Q18 Hugh Bayley: I think, Minister, you have largely set out your stall on that. One of the questions I was going to ask was whether you would favour royalties over windfall taxes, and I think you have told us, "That is for the Government in the country concerned to address." Could I ask you a slightly broader question: what do you think are the relative benefits of profitbased taxation versus revenuebased taxation, and would you apply a different norm to different sectors of the economy?
Mr O’Brien: We could get into a very long tax and philosophical argument here-or a discussion, probably not an argument even. I think the last phrase of your question, in a sense, answers the essence of it, if I may put it that way. It is incredibly difficult to find generic, general answers for this. Each country will have a different set of assets and opportunities, a different stage of its economy, a different access to risk finance, and a different governance context into which businesses, both internal and regional as well as foreign direct investment, can have confidence and place their bets, if you like. I think the merit of profitbased taxation is, as I was seeking to hint at a moment ago, that by that being a measure over a period of time that can take into account your genuine costs versus those revenues that have exceeded your costs, it becomes something capable of being given an equitable application between return to shareholders, return to the nation in which you are operating, and return, if you like, where there is an international dimension-to the country in which you are registered and from which you started your risk journey as a commercial operator, and from which you may well draw quite a lot of your employees and technical experts, who are part of the added value of being able to extract the product in the first place. My own personal experience was not so much in extractive industries; it was in construction materials, which therefore dealt with natural materials, but once they had been extracted. Therefore the biggest challenge I remember was that my products were too heavy to go very far. We were not an export business but, by goodness, we did export technology, knowhow, and we were in partnerships and joint ventures. Therefore you have a different setup, because a lot of that will be under royalty arrangements. There will be different approaches, depending on the particular profile of the country and the particular businesses.
Q19 Hugh Bayley: Given your background, can I ask a particular question about bulk products? It struck me from my exposure to these arguments in Zambia that copper exports go out by road, in trucks. So long as you do not have corrupt customs officials, you can work out a price per tonne and charge a tariff on export, and it is pretty difficult to evade-more difficult, I would suggest, certainly than profitbased tax. If you look at the diamond trade, for instance, that would be wholly inappropriate, because you need to attack the problem on the company’s balance sheet, not the customs part. Do you think, with bulk products across borders, like refined copper, just imposing a tax or tariff of so much per tonne is a sensible, simple but safe way for a developing country to raise revenue?
Mr O’Brien: I am certainly not averse to keeping it simple, but I think there is a danger in doing something that is not co-ordinated with the way in which any particular commodity-and I think when you talk bulk, commodities are at the base of this-
Hugh Bayley: Yes.
Mr O’Brien: You have to look at the context of its world market. If one is applying a price per tonne, for instance, on copper per truckload going out of Zambia, but that is not the way that the commoditised copper is going out of other countries to reach the primary purchasers of that for onward refining, such as the Chinese and Asian markets, it could put Zambia at a serious cost disadvantage at the point of freight-on-board price at the port. That is a question, therefore, for the world context.
In principle I think it is part of the first answer. It is tailoring whatever is appropriate. If one was to be out of step with the way world commodity pricing takes place, all of which we know carries its own frightening risks in terms of volatility, very often-as we know from agricultural produce-the cash crop effect of when prices suddenly go down leaves no leverage on the part of the producer to be able to put a floor on that. Those are more economic movements than tax movements, and we need to be very careful not to allow pricing and volumes to be driven by the fiscal arrangements in order to capture the tax. Rather, it has to relate to what is likely to be most competitive in a marketplace, and the tax should then yield off the top of that.
Q20 Hugh Bayley: Thank you. One other question at this point relates to capital flight, and the comments on the very final page of your evidence. Frequently when I talk to Africans, they complain that London is a convenient banking point for ne’er-dowell politicians and public officials. They talk about the Abacha millions being banked in London, and so on. I know there has been some progress: you say that a total of £170 million of assets have been "restrained, recovered or returned" in your evidence. Could you ask your officials to write us a further note to break that down? Over what period of time is it? What were the headline cases? You mentioned one, the associates of James Ibori-
Mr O’Brien: Indeed.
Q21 Hugh Bayley: -the former Delta State Governor in Nigeria. It would be interesting to know what period of time this figure covers, what proportion has been a) restrained, b) recovered and c) returned, and which are the principal cases, whether there is a trend of increasing accountability for people who are money laundering or banking with the proceeds of corruption in the West, and whether you have a general further policy statement to make. I am interested to know how big an issue your Department thinks this is, and also how you co-operate with the Treasury, which is a reporting point, I guess, for many of these transgressions.
Mr O’Brien: The short answer to your very important question is that, as far as both Her Majesty’s Government and particularly our Department are concerned, we do not want in any sense for London, let alone anywhere else, to be a hiding place for money laundering, for illgotten gains, or for those things that have effectively been a fraud or theft from the public purse. It is absolutely vital, therefore, that we look at cases like the James Ibori case, and recognise that is not only a case that clearly requires all of the enormous amount of work and preparation that goes into securing such a result but, in the best possible legal jurisprudential world, is pour decourager les autres-in other words, to deter others.
Of course the primary issue is to tackle the phenomenon of diversion of monies at source, because of course the more successful we are in London and elsewhere in making sure that this is not in any sense a route or a haven for such monies, we do not want them simply to be diverted elsewhere. The question is for them not to be diverted full stop. Therefore it is also working at source. I did say, I think, in my very original response to the general question put by the Chairman, that you really cannot understate the importance of political will from the very top of each country in this. That is why it is so important as a Department of State, as DFID, that when we have those discussions we are there as a Department of State, on behalf of Her Majesty’s Government, having that kind of discussion to establish the political will that helps us to tackle it at source.
I have just been given quite a long list of all the crossWhitehall working going on here, which is Her Majesty’s Treasury, us, SOCA, Home Office, Met Police, CPS, City Police, all working-
Q22 Hugh Bayley: Could possibly your official, rather than detain us now, give us-?
Mr O’Brien: That looks to me as though you will get a decent response. I do certainly say that we will respond to you in the detail you ask for.
Hugh Bayley: Thank you.
Q23 Mr Gyimah: Minister, changing tack slightly to the informal sector, one of the features of a lot of the countries in which DFID operates is that the informal sector is very large and growing. Could you give us a sense of what DFID can do to help bring informal traders into the tax base?
Mr O’Brien: It is certainly an absolutely key question, and you are absolutely right in saying that it is a major challenge for many poor countries. Extending taxation to the informal economy is clearly important. We touched earlier on the fact that there can be a downside to it, but I think the principle is clear, as with any developed economy: make sure that the information is available, that economic activity is therefore accountable, and that therefore the points at which taxation can be chosen within a country’s decisionmaking can be selected.
We are funding work that should help by increasing the understanding of these issues involved. I have mentioned both the earlystage stuff that we are doing with the International Centre for Tax and Development, but also the International Growth Centre. We have a major new research programme-again, I am sure my officials can give you the details of this if required-with the Centre for Economic Policy Research, and we are funding what is now the World Bank’s Investment Climate Advisory Service, which used to be known as the Foreign Investment Advisory Service.
The other thing to bear in mind is that informal businesses are not always small, let alone poor, and when we formalise it, it is not just the technical problem that is a challenge but it is also a question of part of the broad good governance within a country. I gave you the example of how the Burundian Office des Recettes has moved, but that started from a position of being the most corrupt in that part of the subcontinent. Certainly when I was there a few weeks ago I saw a really impressive change, a really impressive performance, with great leadership and the huge experience that has been brought to it by somebody who has already been in this space doing the same thing in Rwanda, so really able to transfer best practice. How do you really get at making sure these things no longer have incentives to be corrupt but actually the incentive to pay? It is part of the political will, again, that sets a context. In Rwanda, they now have a celebration of taxpaying in the country, which I think, if I may say so, is something we could learn from. It is quite a dramatic shift around of the sense of equity that comes as a result of that, within the country.
Q24 Mr Gyimah: What steps do you think developing country Governments can take to tackle this problem themselves, though?
Mr O’Brien: Probably the easiest thing is to refer to an example of a country that is a bit further along the track on this score: Sri Lanka. It is not a country with which I am particularly familiar myself, and it is one where we do not have a bilateral programme today. There we can certainly see that, although there was a big effort within the country as well as with international donors and partners, firms seemed to be benefiting from formalising. They needed a significant cash incentive to register. So despite the benefits of formalising, there was a deep reluctance. A lot of this is to do with the culture of business. I do not know whether any of the officials have any better experience they can point to, but I know for instance in Liberia, where we have a small bilateral programme not particularly focused in this area, that the disincentive for the informal activity to become formal is that those who are operating in the informal business space like access to the traditional courts, rather than going down the formal court process. Effectively, they want to hold on to their community alternative dispute resolution procedures, if I can put it into our jargon, rather than what is then part of the formal process of resolution of tax disputes. It is possibly a little unexpected.
Stephen Sharples: I think the key to it all is understanding why businesses will not move into the formal sector, then trying to address whatever those things are. Those issues may not be what we immediately might think. That is why research is important. It will vary from country to country, but trying to understand what the issues are-it may be that speed is very important to them, that kind of thing-will be key to it. In a much more general way, the more that businesses feel their tax money will be well used, the more likely they are to be inclined to pay, and therefore improving public financial management more generally has something to contribute as well.
Q25 Mr Gyimah: One thing you have not touched on, obviously, is local property taxation, although you did refer to it in your introductory remarks. Do you think there should be a greater focus on local property taxation, and do you think this could improve the level of formality, for example, through the preparation of land registries?
Mr O’Brien: This is a very interesting question, because it touches on a broader issue about the tailored approach per country that we were discussing a moment ago. I look across all the countries in subSaharan Africa in which I have been travelling, and understanding the programmes in detail, and trying to see where we can have most impact. The question of land and land title, who has the leasehold rights, who has the occupation rights, who has the ability to be licensed-whether it is because, in Sierra Leone, as part of the paramount chief deciding that you can have the use of that bit of land for so long-the question of taxation of property at that point does not arise in terms of the person using the land. It is part of the power structure in many parts of Sierra Leone that that land is for the paramount chief effectively to dispense according to the way they are brokering their community politics. It does not even touch the sides of the way the national economy is established. In a sense, it would be way too early to even think in terms of property tax. Tanzania, as we know, has long had a particular view about not having the ability to have title to land. It is effectively a broad leasehold arrangement, so where does taxation apply? Is it on the use of land, effectively rent, or is it on the ownership? Does it happen on transfer, where a lot of transfers do not happen because there is a lack of clarity in the process of land registration?
One of the most interesting things, I think, the Committee has seen has been in Rwanda, where there is a land tenure regularisation project, supported by DFID, which has been through aerial mapping. It is a really powerful driver less of taxation than of productivity on the land as a result of knowing, "That is the bit of land I own, and therefore I will make sure it produces even more. Therefore I demand access to a market, and I demand participation in the economy so I can do more than subsistence farming and end up running a small business." Therefore that is the question relevant to what you are driving for: how do you capture that form of activity? Does it go informal and you cannot get at it, or is it at that point that you encourage even basic skills such as bookkeeping, so that you can have an account that can then look at the informal business that has emerged from that process. Land-based entitlement rights do apply in the extractive industries, in terms of the land upon which extractive industries are based. That is for the larger businesses, rather than the informal sector, which I felt you were driving at. I do not know whether you want to say anything about the larger, particularly foreignowned, businesses and land rights?
Q26 Chair: We will come on to the extractive industries a little later.
Mr O’Brien: Shall we leave that until then?
Q27 Mr Gyimah: Specifically on property taxation and bringing that into the formal sector, what is DFID doing in this area?
Mr O’Brien: I will ask Simon to answer that one.
Simon Whitfield: Thank you. Certainly it is an area of interest, particularly in the agricultural sector as well. I think FIAS, which was mentioned earlier, has been doing some work on this. The particular point about land registries and so forth is a wide issue. One of the UK Government Departments that has signed up to iFUSE, the technical assistance facility that DFID is funding, is the Land Registry, so that is a very direct way that expert support can be provided to developing countries that are tackling these issues.
Q28 Hugh Bayley: I do not want to deter you from the work you are doing on land registries; I think it is very important. However, I think you let the paramount chiefs off a bit too lightly. We were able to do a Domesday Book, which did not tax the peasantry but did tax the barons, who presumably had ways of collecting tithes from the people to whom they allocated tracts of land. Can’t we learn from our own history and find ways of operating systems without the huge Western bureaucracy of a legal land registry for every square metre of land?
Mr O’Brien: I hope I did not give you the wrong impression, Mr Bayley, because I was seeking to answer the difficulty of property taxation in relation to the informal sector, and of course the informal sector is largely not the landowners or the paramount chiefs but those who are active on the land.
I think you make a very important point. The question for us is not whether we can do it, but what the local government chooses to do, and what we can do in supplying technical assistance, if it is part of a relationship we have with them, to support them, if they make a decision that is where they wish to apply their effort to try to widen their tax base. I would personally strongly encourage the focus on property taxation, because, by and large, one of the very few things that is very difficult to shift is the land your country is based on and defined by. Once it is parcelled up into ownerships, by and large-I rather agree with you, and no doubt the Treasury Minister will have more to say about this-taxation works best when it is fixed on something you cannot hide.
Q29 Hugh Bayley: I will just make a passing comment, in part from our clerks. One of the things that bedevils African politics, in my view, is the lack of accountability of governors to those governed. One of the reasons for that is that so little taxation is raised from the people. As soon as you start taxing the people, people demand controls over the Government-Magna Carta and Runnymede and all of that. Is that not one of the benefits that comes from the introduction of systems of local taxation?
Mr O’Brien: Yes, and I think possibly, without wanting to widen the debate too far away from the central thrust of the inquiry, the experience in Nigeria most recently on the fuel subsidy shows the popular issues coupled to, effectively, what was there a reverse taxation. I think it is a very interesting case in point as to how you can couple a wider popular series of issues of equity with the demand for services through their taxed assets and income, and at the same time make sure that the country is able to maintain both its competitiveness and peace and security.
Q30 Hugh Bayley: A point well made. I must move to my allocated questions, or the Chairman will get grumpy. On the question of exchanges of information between tax authorities, the default position is that information is exchanged when one tax authority in one country asks for it from the tax authorities of another country. Would it not be better to have an international system where tax information is exchanged automatically, because it would do more to deter tax evasion?
Mr O’Brien: I hope you are aware that DFID supports automatic exchange of information in principle. Clearly, as you have just outlined, it has an important role to play, where reporting and the administrative burdens are not prohibitive. The G20 finance ministers, in February this year, called for "an interim report and update by the OECD on necessary steps to improve comprehensive information exchange, including automatic exchange of information". Now we already have automatic exchange within the EU for tax information on bank interest under the Savings Directive. The Multilateral Convention for Mutual Assistance provides a treaty basis for automatic exchange if signatory countries agree bilaterally. I think by the nature of my answer I have defined where the challenge lies. It is getting it to a sufficiency of agreement amongst the nations.
Q31 Hugh Bayley: First of all, does the Treasury fully, actively and enthusiastically share the policy you have outlined? Secondly, what would you think is a realistic timetable for achieving a universal automatic exchange? If it is good enough for the EU, surely it should be good enough for our relations with other countries?
Mr O’Brien: I have every reason to believe that I and my Treasury colleagues are absolutely batting from the same position. As for a timetable and the state of play, I think that the Minister who succeeds me on this stand will be best placed to answer that, in all fairness.
Q32 Hugh Bayley: Many organisations that advocate automatic information exchange also press for tighter transfer pricing legislation. When you think that 60% of world trade is trade between different branches of multinational companies, one can see the reason for that. One of the suggestions would be some kind of formulary apportionment whereby companies’ taxable profits would be allocated in proportion to, say, the total payroll, total value of property owned or total sales in each country, to prevent the extreme transfer mispricing that we sometimes hear about.
Mr O’Brien: If I can take the general point first, before I come on to the secondary point, we are certainly helping developing countries where we have partnerships with transfer pricing, both bilaterally and indeed multilaterally, through international organisations. The HMRC, very much part of working with DFID through the Treasury, has supported, as I mentioned earlier, the African Tax Administrator Forum on transfer pricing, which is a very important initiative and a demonstration of political will, which again is vital. HMRC has provided assistance directly to a number of countries on this: Uganda, Nigeria and South Africa are examples. The OECD, through the Task Force on Tax and Development, which again we are funding, is providing assistance on transfer pricing to Ghana, Kenya, Rwanda and Vietnam. In Ghana and Kenya, this is dovetailed with assistance on exchange of information. We are supporting the development of large taxpayer units in some countries, one of which is Bangladesh, on transfer pricing.
It is clearly an important issue for developing country tax authorities, but it has to be in the context of their overall tax, and indeed public financial management reform, programmes. For some, it is not the No. 1 priority. It cannot be, because other things, in a sequenced way, have to come first. For others, it has reached that point. Again, it is part of this tailored approach of being extremely disciplined that we do not apply a general rule. Part of the problem, to some degree, with the campaign for the formulary is that it is in danger of trying to apply a generic, general approach to something that necessarily has to be tailored according to each. At the moment I am personally not persuaded by the formulary approach, on the basis that I think it does not yet demonstrate that it would generate either significantly more, or indeed any more, tax revenues, but in particular it could add enormous administrative burdens, which one would certainly have to take into account. I think you would be the very first to understand the definitional challenges that a lot of these would pose, because the danger of formulary arguments is that not only does it potentially carry a high degree of arbitrariness, but also, if you do not get the definitions right, applied to each and every circumstance, it ends up as a continuing argument that is in danger of not being resolved. Any financial argument tends to mean postponement of cash receipts, which is not ultimately in the interests of the Exchequers. I think those are the challenges that lie behind it. I do not for a moment deny that there is a pretty active series of campaigns on this, and I know that lies behind the question, because you have obviously received representations from some who are developing a lot of thinking on this.
Chair: Thank you very much. If we can now move back to extractive industries again, I think Sam was going to ask about the EITI.
Q33 Mr Gyimah: Thank you, Mr Chair. Why has the UK Government not signed up to the EITI?
Mr O’Brien: Let us be absolutely clear: we are very strong supporters of the EITI. It is something the UK has not implemented, quite simply because the EITI is designed for, and has been focused on, resourcerich countries. We are not, by those definitions, resourcerich. We are conscious of the movement globally, not least from the US, which is the context for this, and I think that the EITI is a very important initiative. It is something that is now being looked at with a great deal of positivity in many countries. So far as the UK is concerned, the current big effort that the Chancellor of the Exchequer has been leading on is to try to get to a point where EU Member States move equally-because I think this is not something that would be in the UK’s interests to move on unilaterally-whether it is along the DoddFrank type approach that the US has led on, or on a different basis. At the moment, we are not in a position where there is agreement among Member States, and we are doing our very best to support the Treasury in making those arguments to get to a common position.
Q34 Mr Gyimah: Can I press you on that for a second? The UK Government founded the EITI. In your own words, we are strong supporters of it. We are encouraging developing Governments to sign up to it and participate. Don’t you think we should be leading by example?
Mr O’Brien: I think if we were resourcerich, that would be a pretty cogent challenge. It is important to recognise the distinction between resourcerich countries, particularly the dependence of not just the current but, as was pointed out very much earlier in the discussion, the potential proportion of GDP of countries in, not least, subSaharan Africa if there are appropriate protections, safeguards, transparencies and accountabilities that will enable those countries to get the yield.
It is very interesting to take an example like Ghana, with the recent landing of oil. The right question-often not the one that is asked, but the right question-is how to get all the necessary laws, regulations and fiscal arrangements in place, in time, in a way that is clear and certain, so that those who are the world experts at extracting this oil from miles down in the Earth’s crust can do so. That is not what Ghanaians, at a prime competitive advantage around the world, do; that is what world experts will come and do. The competitive advantage for Ghana is that they have an absolute best practice form of arrangements and transparency. That extractive industry will be able to make sure that it is transparent and that the yield to the Exchequer in Ghana then gives that democratic Government the change to place the receipts in a way that will help pumpprime the rest of the economy. Justine, as it is very much your expertise area, do you want to add on this question of our current stance on the EITI?
Justine de Davila: As the Minister set out, the UK is already a very strong supporter of the EITI. One of the arguments that is sometimes put forward for UK implementation is that this would encourage other countries to join, but the way we have approached encouraging other countries to join the EITI is through the very strong support we give to the secretariat, to the World Bank MultiDonor Trust Fund, and our individual bilateral programmes, for example in Afghanistan and the DRC, who also actively support the implementation of the EITI incountry. We have looked at this situation and decided that the best way we can encourage countries to join is by providing active support incountry.
Q35 Mr Gyimah: One final question from me: do you think the EITI has weaknesses, and if so, how can those areas be strengthened? I do not know whether Justine or the Minister would like to take that.
Mr O’Brien: That is an interesting question. I think it is the best that has gained traction at the moment, but I am absolutely sure that it will have scope for improvement. Justine, do you want to add where the perceived weaknesses are coming through?
Justine de Davila: There was an independent evaluation of the EITI last year, which you may be aware of, which found that it had built a very important international brand, that the multistakeholder platform of EITI was very important, and that it had improved transparency. Some results of EITI, for example, are that it has built trust and dialogue between different stakeholders who may not perhaps have come together to discuss extractives in the past. It has improved financial reporting. It has empowered civil society to hold Governments to account, and it has improved the operating environment for private investors.
Having said all that, I think there is a recognition within the EITI itself that it has to build on the existing platform and respond to the findings of the evaluation. For that reason, the Chair and the Board have set up a Strategy Working Group, which is looking at the future of the EITI and how it can build on the strengths of the existing standard going forward.
Q36 Chair: Time and perhaps the join between the remit of our Committee and the remit of other Committees may raise some interesting questions about the relationship between energy policy in the UK and the EITI, but I do not think I will go there right now.
Mr O’Brien: I am much relieved you do not want to go there.
Chair: Can we move on? We would like to ask some questions, if we may, about CDC and some issues relating to that.
Mr O’Brien: Yes.
Q37 Jeremy Lefroy: With CDC to start with, in our report last year we recommended that, when investing in tax havens, CDC should follow best practice guidelines. I would like to know how far along the road to that we are.
Mr O’Brien: I think that you will have seen that the revamping of CDC has now taken hold and is well rooted. We have a dynamic new Chief Executive, who is very clear about the new arrangements, which help the judgments that it will have to make as to where it invests. I am certainly persuaded that it is well tuned to the best practice of ensuring that, where it is an originating or sole investor, and that is therefore within CDC’s discretion, it should not use offshore financial centres. Of course, to some degree discretion has to be applied where it is not the originator or sole investor. That I think is one of the main issues that have arisen in the past in relation to this quite tricky area. It is clear that CDC in its new form will not make new investments in or through harmful tax regimes, or regimes that do not comply with the international tax transparency and exchange of information standards.
Q38 Jeremy Lefroy: Given that CDC is supposed to be making more direct investments, presumably that will also mean that those investments will not be made through intermediaries in tax havens.
Mr O’Brien: That is precisely the point, because it will then have the power and discretion to apply that as a policy. It has been articulated in the new way forward that that is what it wishes to do. It is well defined by the OECD and Global Forum on Transparency and Exchange of Information for Tax Purposes.
Q39 Jeremy Lefroy: We also recommended that tax payments made by CDC’s fund managers and investee companies should be published annually on a countrybycountry basis. Are you aware whether that is happening, or about to happen?
Mr O’Brien: It sits within the context of the countrybycountry reporting debate that has been going on. Maybe you want to deal with the question of countrybycountry reporting slightly separately, but I think it goes to some degree to the same answer as I gave to Mr Gyimah on that. To the extent that we can move as EU Member States together, that is the right approach. Certainly Her Majesty’s Government, led by the Treasury, is very much focused on doing what we can to get that movement together. No doubt you will have the opportunity to ask my fellow Minister shortly. However, we have to be very careful not to do anything that would put the UK’s competitiveness at risk on this. CDC is now redesigned and revamped, with a clear mandate to follow best practice and be world class in patient capital investment and in recognising that it has to be done on this more equitable basis: where it has the discretion as an originator and sole investor, it is able to do so.
Q40 Jeremy Lefroy: Since it is a topical subject, and the Secretary of State issued a statement recently about it, I would like to go back to Actis. He has announced the sale of the remaining 40% owned by the Department. I would just like to go back and confirm that in fact the UK taxpayer, or DFID, has received nothing from Actis since it was effectively partially privatised back in 2003/04, despite owning 40% of it. Is that the case?
Mr O’Brien: That is my understanding.
Q41 Jeremy Lefroy: That is certainly what the Secretary of State told us last week.
Mr O’Brien: Yes. That is what has been put out, and that is my understanding. I have not personally checked that myself, but certainly that has been the advice. I do not know whether any of my officials who are accompanying me have any contrary information. I think that is our well-understood position, as indeed has been published by the Secretary of State, as a result of which, therefore, we have the new arrangements. That is notwithstanding the fact that, as the Government were a member of that company in the past-I use the word "member" in its technical sense-and whilst they remain a member, the new arrangements have therefore given the Government rights to receive not only a value for the sale of 40% but also the carried interest on future profits.
Q42 Jeremy Lefroy: Yes, and I think we welcome the negotiations that the Secretary of State has carried out, which will be more beneficial for the UK taxpayer than the previous arrangements. I have in front of me the Actis accounts for 2007, for instance, in which the total administration costs, which are basically all wages and salaries, short and longterm incentive scheme payments, social security costs and pension costs, came to nearly $125 million for an organisation that employed 187 people. By my very rough calculation, that is something like $600,000 per person. This is 2007, as I say: you could take other years as well, most of which are slightly less than that, but I am taking 2007. This is an organisation in which the UK Government had a 40% ownership and yet was paying an average-I stress, an average-of $600,000 in that year to each of its 187 staff. That excludes any profit share going to members. At the same time, the corporation tax paid in that year on a profit on ordinary activities of $10 million was less than $1 million, i.e. less than 10%.
Of course there will be reasons for that, but it strikes me that we have a situation in which we clearly and understandably want developing countries to improve their tax revenues. We wanted this in 2007, and for long periods before that. Yet at the same time we were a shareholder in an organisation that was paying very little in the way of corporation tax in the UK and was paying astronomical returns both to employees and to members. One cannot talk about risk, because the amount of risk capital is very little-in fact, DFID invested almost the majority of the small amount of risk capital in that business. I would just like your comments on that before I move on to something else.
Mr O’Brien: What you have in front of you, I do not have in front of me, and I certainly take your report of that. I know that sitting behind me is the lawyer who has been advising the Department on the Actis arrangements. The best way I can answer this is to try to keep it simple and not too legalistic, although I am tempted to delve back into my past as a solicitor. We have to be very careful about the use of the word "member" or "shareholder".
In this case, whatever arrangements were entered into when Actis was effectively floated out and sold, it was effectively into a partnership, and as with all partnerships, the question as to where you affix the drawings within the partnership before it yields any surplus or profit is a question of how the arrangements were set up. What is absolutely clear is that under the new deal there is an opportunity for that to have to report and be accountable to members, or in our case a shareholder, before, effectively, the Executive of the partnership has been able to take out the revenues, which, as you reported from the 2007 accounts, is broadly what has happened, leaving none for the contributing members.
Jeremy Lefroy: I absolutely understand that.
Mr O’Brien: That is effectively what has changed. It is a question of choice, of course, as a corporate judgment, but as a matter of law, had there been an ability to enforce something different without going through a new negotiation to a new arrangement, I am absolutely sure that the Government would have done that. I think there was a difficulty in being able to get to the position we now are in, had there not been effectively new negotiation to reach these new arrangements.
Q43 Jeremy Lefroy: I fully accept that, but do you not agree with me that it is quite a difficult position for a Government-we are talking about the last Government, but also to some extent this Government, because they have also been a shareholder since 2010-when we are trying to encourage other Governments to up their tax take and enforce proper taxation of income, and at the same time we have an investment in a company that basically was trading on the back of UK taxpayers’ money. The entire investment portfolio initially came from CDC, which was built up through the UK taxpayer, if I am right. Therefore, this is a real lesson for the future: we have to be incredibly careful about the ways in which these deals are formulated. This applies to CDC, but also to anything else that we might undertake. Otherwise it looks as though we are being slightly hypocritical.
Mr O’Brien: It is more than "looks like"; I think it was. I think it was scandalous, and that is why it had to be addressed, and has been addressed. You are quite right: lessons had to be learned. The Secretary of State has made a number of statements on this, and there have been some issues. I think it has been identified that now we are in a better position than we were, but the main thing is that as an example to those whom we are seeking to partner with in order to help them have a better approach to revenue collection, this is a slightly different situation, because it is not revenue collection; it is effectively a shareholder interest, an investor interest, by Government, which is unusual in itself.
Q44 Jeremy Lefroy: I know we are short of time, but there is just one final thing on this. You may have noticed that post-purchase, when the DFID shareholding in Actis was bought out, there were reports in the press that the partners were constructing a rather elaborate arrangement whereby the taxation was effectively done substantially at capital gains tax rates in the UK, as opposed to income tax rates, even though effectively the money is coming through as management fees and is therefore income. Would it not therefore be advisable for the Government to look at that quite closely, because surely, particularly with things like the recent anti-avoidance declaration by the legislation brought in by the Chancellor, we would not want to be seen to be encouraging a situation in which the sale by the Government of their remaining 40% resulted in more antiavoidance schemes being used.
Mr O’Brien: Let me take this opportunity first of all to absolutely place it on the record that no Minister, member of DFID or member of the Government has any interest in Actis in the future, and in this particular set of transactions. So far as the arrangements between, as you put it, the partners and any tax now and in the future are concerned, that has to be a matter between them and HMRC. I do not think I am in any position to comment on that, but I take your point.
Chair: This may be raised later.
Q45 Mr McCann: One question, Chair; I appreciate that time is short. The Secretary of State has described the Actis deal as "scandalous", and you have just used similar terms. Can we get copies of the paperwork of the advice given to Ministers at the time the Actis deal was carried out, please?
Mr O’Brien: I think the normal principle would apply: that advice to Ministers is not something that is disclosable. Moreover, I am absolutely sure that, unless I have completely misunderstood the Ministerial rules, the current Government would not be able to command a response that would give you those papers from the previous Government. I will have to look into it.
Q46 Mr McCann: If you could look into it, because in a situation where taxpayers’ money has potentially been wasted, or worse, and where decisions were questioned at that time, I think it is important, for the sake of fairness and transparency, that we understand the advice given to Ministers that led them to make the decision to enter into the deal. If you could take it away, I would be most grateful.
Mr O’Brien: I will certainly take it away. I will certainly look into it. However, I hope you understand my response: I would expect first principles normally to apply on that, although I will certainly take your point seriously and see what we can do, if anything.
Q47 Chair: Thank you very much. One last question, because we know the Treasury Minister has been very patiently waiting for his session. Very briefly, on expatriate taxation: the tax affairs of expats in developing countries are sometimes a little bit unclear. During our first evidence session, I think, we were told by ActionAid that expat staff working permanently in a developing country may pay income tax in the country of origin rather than in the developing country, but that that would be defined by international tax rules. They have since come back to us and said that, other than in Cambodia, all their expat staff are registered taxpayers in the countries in which they are working. There are specific things, apparently, in Cambodia that change that. However, we are not quite sure what the position is in relation to other NGOs and indeed other organisations.
As far as the Government are concerned, would you feel that British citizens, if they are residing permanently in a developing country, should pay their tax there rather than in the UK, and that that would be the case whether they were NGOs, multinationals or whatever? Or do you have no position on that?
Mr O’Brien: I think I have to declare an interest, insofar as my father was a District Officer in the Southern Province of Tanganyika in the 1950s. Because that was a protectorate and not a colony, when it became independent it meant that the pension scheme for those who none the less were British Government officials was taken over by what became, after the Tanganyikan Government, the Tanzanian Government in 1964, which was subsequently declared bankrupt. Now in his 80th year, my father receives 67% of the British state pension, because his early years were declared null and void, and the British Government have never stepped up to fill that.
There is a big risk for expatriates: in my father’s case it was permanent, certainly for a number of years, as he worked abroad both for the Government of the time and also then the private sector. That was the risk. It depends what you call "permanent". I declare that as an interest, because it has affected a member of my family.
If you are asking in terms of DFID, the expatriates in our country offices are clearly there with a very important role to play: to bring both management and technical expertise to support the programmes and results that we are determined to deliver by the use of UK taxpayers’ money in securing development objectives for the poorest. They will revolve for anything between six months to three or four years, and come back. That is not regarded as permanent, and they pay UK tax when they are there, as you know.
However, the locally hired staff in those country offices pay local tax, and I can certainly confirm, as a matter of the contracts of employment for locally hired staff, that it is a disciplinary offence not to pay their tax in-country, by whatever methodology tax is collected. There are opportunities and options to choose how you pay it, whether it is through PAYE or other selfdeclared means. That helps answer the question about expatriates. So far as DFID is concerned, that is why we have that arrangement: it is a mobile transferable work force, if you like, bringing technical and management capacity and expertise to bear on tailored programmes. On the locally hired staff, we have a very clear position.
The other aspect to it is not to do with contracts of employment but to do with the current exemption for aidfunded goods, which as you know is a longstanding practice coming into a country. Whilst there are some concerns about whether that is a denial of local tax revenues and not a good example, on the other hand it does mean that the money is getting to the purpose intended. It would have to be a collective move by all the major donors. Otherwise it would be like some of the other issues we have discussed about moving in the EU, all member states together: equally you need to have all donors, otherwise you would end up with serious price, cost and access disadvantages, which would have a serious impact on the results we are able to achieve for the poorest in these poor, developing or conflictaffected states.
Q48 Chair: Thank you very much for that. We have overrun a little bit, so apologies for that, but you have answered our questions very fully. There are a number of issues that we have raised with you, and if you could come back to us on them we would be extremely grateful.
Mr O’Brien: I will certainly undertake to do my very best to give you those.
Chair: Thank you very much indeed.
Mr O’Brien: Thank you.
In the absence of the Chair, Hugh Bayley was called to the Chair.
Examination of Witnesses
Witnesses: David Gauke, Exchequer Secretary, HM Treasury, Steven Effingham, Deputy Director, International Tax Team, HM Treasury, Peter Steeds, Deputy Director, Head of Transfer Pricing, Business International, and Alison Shallard Brown, Head of International Relations, HM Revenue & Customs, gave evidence.
Q49 Chair: It is a great pleasure to have you before us, Treasury Secretary. We do not do opening statements, but would you like to introduce yourself and your team, please?
David Gauke: Yes. Thank you very much, Mr Bayley. It is a great pleasure to be here. If I may, perhaps I will ask the officials to introduce themselves. Steve, do you want to start?
Steven Effingham: My name is Steven Effingham. I am the Deputy Director of the International Tax Team in the Treasury.
Peter Steeds: I am Peter Steeds. I am a Deputy Director in Business International in HMRC, responsible for transfer pricing. I am also the ViceChair of CATA, the Commonwealth Association of Tax Administrators.
Alison Shallard Brown: Good afternoon. I am Alison Shallard Brown. I am Head of the International Relations team at HM Revenue and Customs, and we are responsible for co-ordinating the Department’s capacity building and technical assistance work.
Q50 Chair: Thank you. Let me begin by asking you about the change to the Controlled Foreign Company rules, about which you, Minister, will be aware that many development commentators and NGOs express concern. It has been suggested to us that the change could cost developing countries up to £4 billion per year. Do you accept this estimate?
David Gauke: No, we do not. The first point to make is that it is inherently very difficult to make any assessment of this, because one has to have a full understanding of the interactions between multinational companies located in developing countries and those developing countries and their tax systems, which is a very complex matter. It is not something that, frankly, either HM Treasury nor HM Revenue and Customs is well placed to make an assessment on.
As far as the £4 billion number is concerned, that is based, as I understand it, on an extrapolation of about 10 companies’ financial data. It also makes an assumption that companies would pay the full statutory rate within a developing country, whereas in reality that does not tend to be the case, because there are tax holidays, tax breaks, or what have you. That number we do not find terribly convincing-far from it-but it is quite difficult to make any kind of assessment without having a full understanding of what happens in developing countries as opposed to what happens here.
The other point I should make in this context is that the CFC rules were never designed to protect other countries’ tax revenues. The purpose has always been to protect UK tax revenues. There may well be a case that an ancillary impact of that has been a knockon effect for developing countries, but I do not think that is a sustainable way in which developing countries can protect their revenue. A much better way is building up their capacity and their capability. The CFC regime is badly in need of reform, and has never been designed with the purpose of protecting other countries’ tax revenues.
Q51 Chair: But we talk, do we not, about the need for joinedup Government-for Treasury policies to fit with, and pull in the same direction as, DFID policies, and indeed policies of other Departments? Surely the impact of a change in the taxation regime in the UK or for the UK on developing countries is something of importance to the Treasury when you are designing a policy. You do not accept the £4 billion figure. You will doubtless have had conversations with DFID about the impact. What is your best estimate? If you are unable to give a figure, would you be prepared to commission some work, some analysis of your own, to produce an estimate of the likely cost?
David Gauke: We cannot give a number, and we do not believe that we could reach a number on this, for the very reason I gave a moment or so ago. It is very dependent on the relationship between a multinational company and a developing country. It is dependent on the tax regime not here in the UK, for which rightly we have to make assessments all the time, but the tax regimes in other countries-both their tax law and their tax administration, and the relationship with multinational companies. We are simply not in a position to produce robust numbers on that, and it is therefore not something that we have done, nor can credibly do.
Q52 Mr McCann: Good afternoon, everyone. Minister, the OECD’s Task Force on Tax and Development was initiated by the UK Government back in 2009. In one of our previous evidence sessions, ActionAid was particularly critical that the current Government was a less active participant in the taskforce than your predecessor. How do you react to that criticism? Do you think it is fair?
David Gauke: I do not think it is fair. From my own personal position, I make no apology that the main focus of my job, while it is a wideranging brief, has always been ensuring that the UK has as competitive a tax system as possible. However, if you look at what we have done as a Government over the last two years, in terms of progressing the work on extractives at an EU level and reaching tax information exchange agreements with developing countries and double taxation agreements with some developing countries, we have made a lot of progress.
I think there is a degree to which, from the position of some of the NGOs, a lot of progress was made on particular items that they are very supportive of. For example, the idea of countrybycountry reporting moved up the agenda very rapidly. Where we are on that particular issue now is looking at whether countrybycountry reporting does what it is supposed to do. Is it effective? Is it getting the balance right in terms of burdens on businesses and in terms of providing people with useful information on how multinationals pay their tax?
That is something the OECD is looking at. We are very supportive of the OECD in performing that task. We want to see what the OECD comes back with and what their assessment is as to whether, for example, countrybycountry reporting is useful and in what way it can best be done. In that sense there is a degree to which, a few years ago, ideas were being floated. There is now a rigorous testing of whether those ideas are as effective as people would like, and to some extent I am sure NGOs would like to be moving faster in this area. From the Government’s point of view, I think we should look at the evidence first.
Q53 Mr McCann: Can I just ask a practical question about the Task Force? How often does it meet, and have you attended meetings of that particular group?
David Gauke: I think Steve probably knows a little bit more about that.
Steven Effingham: I am not sure of exactly the number of times the Task Force has met, but attendance tends to be covered by officials from DFID. Officials from my team have attended. The discussions were in the period of the former Government, but the proper launch came later. To explain the Treasury’s role, the Task Force is looking at the evidence on things like countrybycountry reporting, whether the system works, whether it is feasible and whether it does what many of its supporters hope it does.
The Treasury’s input to that debate is reasonably limited. The input is really about what the costs are, which is information you would get from industry, and what the benefits are, which you would get on the NGO side from people like ActionAid, who are supporters and who have done a lot of work on what the outcome of countrybycountry reporting would be. On the Government side, the expertise on benefits as well as on costs is really from DFID, and from that reason the lead on representing the UK Government at the Task Force falls to DFID, though as I say members of my team have accompanied DFID on occasion to see how the work is going, and to get a feel for how the work of the Committee is done.
Q54 Mr McCann: Chair, can I ask if we can get a copy of the data on when the meetings took place? I am anxious to compare the allegations that are made sometimes against Government with the actuality of what has happened. Can you get that information?
David Gauke: Yes, I think we will see what we can get you on that.
Chair: Thank you, Minister.
Q55 Jeremy Lefroy: I refer to my entry in the Register of Interests. We want to come on now to the recent UKSwiss Confederation Taxation Co-operation Agreement, under which the UK will only be allowed to request tax information from the Swiss revenue authority if it has plausible grounds for doing so. We are not quite sure what "plausible grounds" means, and given that there are increasing demands for a more automatic exchange of information, do you think we should have more clarity on that?
David Gauke: The first point to make on this is that this is a big step forward, because previously the opportunity of getting any information from Switzerland was very limited indeed, if not nonexistent. This is actually progress in terms of getting more information from the Swiss. I think we can provide a note to elaborate on "plausible grounds", but essentially it is about having some evidence: not fishing expeditions but specific evidence relating to particular taxpayers.
The point I would make on this is that there was no prospect that we could see that the Swiss were going to agree to automatic exchange of information. There is no indication whatever that they would be prepared to enter into such an arrangement. The Swiss banking secrecy laws have been in place for some years and there is considerable support within Switzerland for them. Indeed, if there is a controversial change of law in Switzerland, there is always a strong possibility of a referendum as well. We did not see a realistic prospect that we would move towards automatic exchange of information with Switzerland.
However, the Swiss deal, in terms of the ability to get some information out of Switzerland, the fact that there will be a levy charged on those funds for the past and indeed ongoing collection of sums relating to matters in the future, more or less in line with our rates of income tax, is a big step forward. It is noticeable that there are a number of other countries: obviously Germany have been going along a similar track as us, but the likes of Austria, Italy and Greece are also looking to explore this. It is a big step forward in closing down one potential route through which tax evaders were able to hide their money. That opportunity is now being lost to them, and I think that is a big step forward for us.
Q56 Jeremy Lefroy: Can I just move on to transfer pricing legislation? Do you see a need for tighter transfer pricing legislation, given that apparently something like 60% of world trade is intracompany? There is a suggestion around for some form of apportionment, whereby companies’ taxable profits would be allocated based on the proportion of total property, payroll or sales in each country. I can see some flaws with that in the sense that pay rates and so on are far higher in countries that maybe have lower tax rates, so that would perhaps defeat the point. Do you think there are moves that could be taken towards some tighter transfer pricing legislation?
David Gauke: Clearly transfer pricing is important, and has a very important role to play in ensuring that the right amount of tax is paid in the right jurisdiction. The UK does a lot in providing support to other jurisdictions in terms of that. I will ask Peter in a minute to say a word or two about what we are doing in that field. You are right to identify some flaws in the idea that apportionment could be done on some kind of formula. Inherently the correct and fair amount has to depend on the nature of the transaction. It has to be much more specific. If you had a formulaic apportionment regime, it would be a very blunt instrument indeed, so I think there are some concerns about it. However, you are right to raise the issue of transfer pricing. Capacity building is really important for us from the point of view of the Treasury and HMRC in terms of assisting the Government’s objectives to help developing countries, and transfer pricing is one of the areas where we should focus. Peter, perhaps you would like to say a word or two on that?
Peter Steeds: Thank you, Minister. Picking up on the formulary apportionment issue, it is a method that is condemned by the OECD and does not have support from OECD countries. Whilst it potentially has the attraction of simplicity, what it will fail to do is attribute profits to the key intangibles that are highly valuable to multinational businesses, both in terms of patents and marketing intangibles such as trademarks. It would also tend to attract profits to large markets, where you have most of the turnover of multinational businesses.
That will give a completely different result from trying to apply the arm’s length principle, which looks to replicate what the economic position would be if the multinational enterprise were trading as a series of independent entities. It would be very much a substitute for the arm’s length principle, which is the international standard. What we are trying to do is to work both with developing countries and through the OECD and other international forums, firstly to get some clarity on what the arm’s length standard is, but also to enable developing countries to implement the arm’s length standard and to apply it effectively.
Perhaps I could say a few things about some of the work HMRC has been doing to achieve that. We are very active in delivering training programmes, partly through the OECD and partly through other forums, and we have contributed to around 30 training programmes over the last two or three years. We also have secondments: a senior transfer pricing official, who has also worked with ATAF, has been seconded to SARS, the South African Revenue Service, for two years. One of ATAF’s main interests is around transfer pricing, and the individual seconded from HMRC was instrumental in developing their policies around transfer pricing, which is now spreading among ATAF members.
The other really important area is the training that we deliver through CATA, the Commonwealth Association of Tax Administrators. There is an international transactions course starting this week in Malaysia: we have presenters there next week and the week after, delivering training on treaties and transfer pricing. For the first time, for the transfer pricing week, the co-presenter is a Kenyan presenter. I think it speaks volumes for how some developing countries have increased their transfer pricing skills that Kenya, which is a very good example of a country that has made a lot of progress, is now able to provide a presenter to train other tax officials from developing countries. Perhaps my colleague might say something about CATA courses.
Alison Shallard Brown: Yes. HMRC has been involved for about 20 years in supporting the Commonwealth Association of Tax Administrators, and every summer we host two sixweek programmes in the UK. One is for senior officials from Commonwealth countries, which looks at developing their leadership skills and at a wide range of issues around good tax administration. The majority of participants are from subSaharan African countries.
We also run the Commonwealth tax inspectors course, which is a technical programme welcoming compliance officers and technicians. Again, the majority of participants are from developing countries. That is something that the Department invests heavily in every year, with around 500 days of staff time going into that programme. It gets very good feedback from delegates, and I think is a major contributor in terms of developing those individuals and the input that they are then able to take back to their home Administrations.
Q57 Mr McCann: Minister, we spoke to Stephen O’Brien about the technical assistance relationship between HMRC and DFID. I wondered what, in your view, were the particular aspects of technical assistance that HMRC is best placed to take the lead on in relation to overseas work. If DFID asked you to do more work, does HMRC have the capacity to upscale its technical assistance role in any DFID projects in the future?
David Gauke: You always have to answer that question with "up to a point", because there must come a point where there would be a constraint. Certainly from my point of view, however, I have always been very supportive of the work that HMRC does in-
Q58 Mr McCann: I am not a communist; you would get paid for it, I would imagine.
David Gauke: I am delighted to hear that, on all grounds. There are always two issues. There is DFID paying for it, but this is highly skilled work and there is also the issue of ensuring that we have the right individuals to be able to do it. I think HMRC has shown real willingness to engage in this. The Permanent Secretary for Tax, for example, has spent a considerable amount of time on this issue, and provided a lot of support to the Rwandan tax authority in particular. There is a real desire and willingness on the part of HMRC to provide that technical support and, speaking as the relevant Minister, I am very supportive of that. That is something where we can really add value, if you like.
It is important that the capability of developing countries in assessing and collecting tax is something that we focus on. That argument is made by many people, NGOs and others, and it is absolutely right. Where we can do that best is by providing some of that technical support. I am pleased with the record that HMRC has over many years. I will not claim that year zero was two years ago. It has been over many years. Certainly, this Government are very keen to encourage that, and as a Minister I am very keen to encourage that.
Mr McCann: Thank you very much.
Q59 Mr Gyimah: This is to HMRC. Firstly, one thing we have not actually heard from you is whether you think transfer pricing abuse is a serious problem. It would also be good to hear what you think HMRC can do to tackle this. While you are answering that, we have also heard from the CBI of businesses offering to co-operate with HMRC in the field of transfer pricing. It would be interesting to hear whether you have taken these offers up.
David Gauke: I think probably Peter is the best person to answer.
Peter Steeds: Yes, I think that is a question that comes to me. Your first question was around transfer pricing compliance, and the extent to which it is a problem. Transfer pricing is a very big compliance for all multinational businesses, and it is part of their bread and butter compliance structure, because they have to price every intracompany transaction they have going crossborder. The majority of multinational enterprises will look to do that with one objective in mind, and that objective is to ensure that there is no double taxation at the end. The basis on which they file will be compliant with the tax rules in both jurisdictions-the jurisdictions at either end of the transactions.
It is true to say that there is a certain amount of what could be styled aggressive tax planning-using transfer pricing to move profits into low-tax jurisdictions. My experience is that that is very much the minority of circumstances. The issue, both for developed and developing countries, is being able to tell the difference between those two, and then to direct your resources at the latter and try to support multinationals in complying in the first instance.
From HMRC’s perspective, our objective is to enable developing countries and emerging countries to both have effective transfer pricing legislation and build their compliance skills so that they can work effectively with large businesses, audit large business effectively and negotiate settlements with large business effectively, and do effective risk assessment to pick the difference between those two categories of circumstance that I have previously described. That is the first part of the question. Could you just remind me of the next part, please?
Q60 Mr Gyimah: The second part of the question was to do with business having made offers to co-operate, and whether or not you have taken them up on those offers.
Peter Steeds: I am not particularly aware of specific offers that we have had to work with business to assist developing countries. We work closely with business and with practitioners here, and we would be very interested and would respond very positively to those sorts of invitations, for two reasons. Firstly, HMRC has limited capacity in terms of people with the necessary skill set. This is a pretty scarce resource. Secondly, a working partnership between HMRC and business would give a much better perspective to developing countries in terms of their understanding of how this system works.
Q61 Mr Gyimah: What can HMRC do to help developing countries in this?
Peter Steeds: I think I have already referred to some of those things. We support a lot of training programmes; we have outward secondments, and we have had some inward secondments. I am not sure if the ones that I am particularly thinking about quite come into the developing country category, but we have had a series of secondments from the Chinese tax administration, and we are currently discussing some further secondments with them.
It is also important to bear it in mind that HMRC is seen as a world leader in transfer pricing, so we also interact with developed and emerging countries. We are still taking secondments from some of those countries. I think the final thing I want to say is that the Tax Inspectors Without Borders programme, which is proposed by the Task Force on Tax Development, looks very interesting, and that is something that we would also be interested in contributing to. Again, however, it is a question of balancing the resource capability that we have.
Q62 Mr Gyimah: Thank you for that. What I was driving at is that the CBI suggested that you offer advice on how to detect and deter tax evasion from either corporates or high net-worth individuals, and I just wanted to know whether that is something that you are already doing, and if you are, whether you would be willing to scale that up.
Peter Steeds: I can only really speak for the transfer pricing area. Perhaps Alison can talk about other areas. One other interesting area in transfer pricing is that the OECD has held its first Global Forum on Transfer Pricing this year, in March, which was attended by 250 delegates from 90 countries, including lots of developing countries. Their work programme for the first year is to look at risk assessment to be able to enable particularly nonOECD members to select appropriate cases for audit. HMRC has a strong role in that. Our published risk assessment guidance is almost the foundation of the work going on through that group.
Alison Shallard Brown: I think there are two further examples to add to that. We have a longterm capacity building programme in Ethiopia, supporting the Ethiopian Revenue and Customs Authority, and we have covered a broad range of managerial and technical topics there, with a particular focus on risk management and improving compliance techniques. The particular achievements that the Ethiopian Revenue and Customs Authority have made as a result of that are shown in their tax yield; since 2002 they have gone up from collecting ETB8.2 billion per year up to ETB70 billion for the last year.
Another area in particular where we are working on compliance issues is through the new DFID iFUSE programme, the Investment Facility for UK Specialist Expertise, which is a new fund designed to help us mobilise technical expertise in Whitehall. This year we will be delivering some technical assistance to Uganda, which again will be focusing on tax investigation and how we can help to build capability and train trainers in Uganda to deliver those skills.
Q63 Mr Gyimah: Thank you. I have a final question on technical assistance. We heard in one of our previous evidence sessions that senior experts from developed countries, which probably ties into what you just referred to, such as retired accountants, might be mobilised to provide technical assistance to revenue authorities on a pro bono basis. You mentioned mobilising expertise in Whitehall, but do you think this is something that could be encouraged?
Alison Shallard Brown: At the present time, it is not something that we do within HMRC. We use our own staff and administrators, but yes, it is an interesting idea to explore the different kinds of partnerships that we could have, and how we might make best use of retired expertise too.
Q64 Chair: There are just one or two points I would like to pick up on arising from the questions and answers of this session and the previous one. It is clear to me that HMRC provides a lot of support and advice to tax authorities in developing countries, but I wonder how much that is complemented by decisionmaking in the UK. If, for instance, you find in a company’s balance sheet profit that you think should be more reasonably taxed in a developing country, rather than in the UK, would you seek to push the tax revenue in the direction of a developing country? Or when you are looking at the financial affairs of UK companies, are you maximising or ensuring that you obtain tax that is due in the UK? In other words, is it a joinedup policy?
Peter Steeds: Yes. I think the answer to that is that our primary focus would certainly be looking to see that the right amount of tax was being paid by the UK resident companies. We would focus on what we see as the high-risk transactions, which would often perhaps be unlikely to be transactions with developing countries, partly due to the size of the markets in many of those countries. We would look far more at highrisk transactions, for example, transactions that would move profits into low-tax jurisdictions.
Q65 Chair: Other than the UK?
Peter Steeds: Yes, other than the UK, absolutely. We would see the UK as a "normal rate" jurisdiction. What we would do, though, if we saw something that we thought was particularly abusive to a third country, is make, and we have made, voluntary exchanges of information with that country, where we have the appropriate treaty provisions. We work with treaty partners in that way. However, I have to say that it would not be a primary focus of our inquiry.
Q66 Chair: I am interested in the qualification you put in there: "where there is an appropriate treaty". We had a discussion in the previous session with Stephen O’Brien about the benefits of automatic information exchange, and I think he told us that his Department was strongly committed to adopting a new international regime that would allow, as a norm, automatic exchange of information, as it currently is within the EU. Perhaps I should ask the Minister how committed the Treasury is to that. Where are you seeking to negotiate some global agreement on automatic information exchange, and what do you think is the timetable for achieving it?
David Gauke: In principle, automatic exchange is exactly what we should be aiming for. There are certain caveats. For example, from our perspective we need to ensure that there is sufficient protection of taxpayer confidentiality, in terms of ensuring that other regimes are comparable to our own. For example, there has been a lot of progress, as you mentioned, with regard to the EU, but one has to look at other jurisdictions in light of whether the same protections exist. It is difficult to put necessarily a timetable on it, and one should also bear in mind some of the burdens that may be imposed on businesses. There are practical considerations for businesses and indeed tax authorities, because there is a danger of being swamped with information that is not always helpful. In principle, however, automatic exchange of information is the right direction to be going in, and where we can make progress in a way that is practicable, we can do. However, it is difficult for me to give a timetable.
Q67 Chair: The US Foreign Account Tax Compliance Act unilaterally imposes obligations on banks to report major transactions that US nationals or US companies have in foreign banks. Why couldn’t we just go ahead and enact similar legislation in the UK, so unilaterally we would achieve at least a certain measure of automatic information exchange?
David Gauke: The FATCA legislation is a good illustration of some of the challenges and difficulties that can exist at a practical level. Certainly, there have been considerable concerns across the European Union about the challenges that the FATCA legislation has imposed on banks in particular, but also on other financial institutions. The Treasury has been very engaged in dealing with the US authorities to try to find a practical way whereby their objectives can be met without imposing unnecessary burdens on businesses here in the UK and elsewhere in the European Union. That provides an illustration of some of the challenges that exist there.
It is very difficult for the UK or the EU to try to impose on third parties and third countries in the way that the US does. Partly, we have less of a tradition of extraterritorial impositions than the US does, and partly there is striking the right balance on that. Are we moving in a direction of more exchange of information? Absolutely we are, and I welcome that. Steve, is there anything you want to add on FATCA?
Steven Effingham: One point perhaps worth adding on FATCA is that, although the aim of FATCA is information exchange and there is an extraterritorial imposition, in order to make that stick the US has had to design a very complex and burdensome system of withholding and passthrough payments to ensure that transferring information is an easier and better option for financial institutions. A lot of the discussions that we in the UK and our colleagues in the European Union have been having with the Americans are around how that system can be made to work. The practical difficulties of applying a single rule even to five European jurisdictions, let alone to the whole of the world, is proving a real challenge for all concerned. Even though the US has the advantages to which the Minister alluded, it is finding that simply applying automatic exchange on a global scale is far from a straightforward venture.
Q68 Chair: Thank you. If I could go back to Peter Steeds’ comments about what I think you called "high-risk transactions"-where an activity, perhaps a sale of services by a company in a low-tax jurisdiction, transfers profits from a higher tax regime to a lower tax regime-you said this is something you would look at. I imagine some of those lower tax regimes could be the Channel Islands, the Isle of Man, Gibraltar and other British dependent territories. To what extent are those lower tax regimes covered by OECD agreements, and to what extent does your Department-I mean the Treasury-impose certain standards upon regimes operating broadly under UK protection?
David Gauke: Let me start by saying that as far as the Crown Dependencies are concerned-Jersey, Guernsey and the Isle of Man-my understanding is that they are on the correct OECD lists in terms of exchange of information and so on, and obviously we are keen to encourage that. There have been times when a Crown Dependency has been criticised in terms of the EU Code of Conduct on tax, but steps have been taken to correct that. That is more to do with tax competition, rates and so on. As far as exchange of information is concerned, their record is not bad. Steve, do you want to add anything to that?
Steven Effingham: No, I think that covers it. There is clearly a commitment on the part of the Crown Dependencies to meet the international standard. They have moved at slightly different paces in terms of, say, signing up to automatic exchange under the Savings Directive, but since the G20 launched the Transparency Initiative back in 2009, I think there has been a significant shift in attitude in the Crown Dependencies. Certainly the number of tax information exchange agreements they have signed with other countries, including with us, has gone up enormously as they have sought to meet the standard set by the G20 and the OECD.
Q69 Chair: Thank you. Finally, we legislated some years back to require banks to report on politically exposed people-Ministers, Members of Parliament, senior civil servants, judges, senior military officers, and so on-whether UK nationals or not. I understand from talking to my bank manager that if £20,000 was deposited in my account, they would start with a conversation with me, and if I could assure them that it was my South African godmother’s legacy, they would be satisfied. If they were not satisfied, they would have to report to the Treasury. How many such reports, in respect of a) UK citizens and b) foreign nationals, do you receive a year?
David Gauke: I certainly do not know that information. This would be something for HMRC, I assume, but I do not know the answer.
Steven Effingham: I think it may be for a separate part within Treasury, but we can certainly dig into that and see if these figures are retained, and if possible we would of course report to the Committee.
Q70 Chair: The concern from a development angle is this. Often in Africa, Africans will point the finger at Britain and London and say, "When our ne’erdowell leaders steal assets-the Abacha billions, for instance-and bank them in London, London does little to help us repatriate stolen assets." There was a Nigerian case recently, where the Governor of Delta State, I think, was convicted through the British courts-or certainly there were convictions.
How hungry is the Treasury to ensure that, where there is a transfer of criminally obtained assets from a developing country to London, we expose it, bring culprits to justice, and return assets to the countries in question? Perhaps, again, this is a matter of giving us a note. Could you instance cases of where this has happened over perhaps, I would say, the last 10 years, to see if there is a trend to do this more frequently and more often, and make whatever policy comments you wish to make?
David Gauke: First of all I would say, of course, we are very supportive of that policy, and indeed it is the law. I think this is probably a matter for SOCA as much as anything, and they may well be able to enlighten the Committee on that perhaps more than we can do, but we can certainly find out what the position is.
Q71 Chair: Should we leave it that we write to SOCA with that question, or that we leave the question with you and you consult with SOCA?
David Gauke: I am entirely relaxed-whatever would be most helpful, to be honest, from your perspective.
Q72 Chair: If you could let us have what information you can from Treasury and/or Revenue sources, we will, as you suggest, make our own inquiries of SOCA.
David Gauke: Fine.
Q73 Chair: If there are no other questions from colleagues, I would like to thank you very much for your attendance. We are finishing on time.
David Gauke: Thank you very much.