UK u-turns on commitment to tax transparency, giving up £10 billion in corporate tax

The Tax Justice Network has raised the alarm on the UK’s regression into tax havenry

The UK missed out on collecting £2.5 billion a year in corporate tax from multinational corporations due to the UK government failing to exercise a 2016 tax transparency law designed to prevent billions in corporate tax abuse¹. Asked whether Chancellor Rishi Sunak plans to exercise powers under the Finance Act 2016 to make multinational’s country by country reporting data public, the UK Treasury confirmed to Parliament this week that is has reversed its 2016 commitment to publishing the data at a national level, and is blocking the OECD from publishing the data at an international level. In response, the Tax Justice Network has raised the alarm on the UK’s “dangerous” regression into tax havenry.

Analysis by the Tax Justice Network reveals that had the UK government exercised the powers afforded to it by the Finance Act 2016 to publish corporations’ country by country reporting data, the UK could have prevented at least £10 billion in corporate tax from being lost to tax havens since 2016, which could for example have offset the £6.6 billion the NHS is expected to receive in Covid-19 funding, and provided for additional investment in crucial equipment². By requiring multinational corporations to disclose how much profit they make and how much cost they incur in each country they operate, country by country reporting exposes and deters multinationals from shifting profits into tax havens for the purpose of under-reporting profits elsewhere and consequently paying less corporate tax.³ The reporting method was first proposed by the Tax Justice Network in 2003 and was eventually backed by the G20 group of countries in 2013, with the OECD producing a standard for use from 2015.

Responding to Dan Carden MP’s written questions⁴ on whether the Treasury will publish the country by country reporting data it has collected from multinational corporations since 2016, the Financial Secretary to the Treasury Jesse Norman MP wrote last week that the data cannot be published at a national level because doing so would be in conflict with the 2015 OECD Base Erosion and Profit Shifting (BEPS) framework which requires countries to only collect, and not publish the data. This contradicts then-Chancellor George Osborne’s 2016 commitment and lobbying efforts at the EU to go beyond the framework and publish the data once there is international agreement among other leading countries to do the same – which there now is.⁵ In 2018, the OECD committed to publishing country by country reporting data collected by its members.⁶

Dan Carden MP submitted a follow up question⁷ asking the Treasury to clarify its position on publishing its country by country reporting data as part of the on-going OECD process the UK previously lobbied for, and committed to. In response, the Treasury confirmed this Monday that it will not publish the data and will not consent to attempts by the OECD to do so. The Treasury said this is due to “consistency issues” with the data it has been collecting since 2016. The OECD has so far continued to delay the publication of members’ data, failing to meet a late 2019 deadline and a January 2020 deadline. The Treasury’s confirmed U-turn raises questions about the status of the OECD process on tax transparency.

The Treasury’s U-turn on tax transparency is a further move in a series of steps the UK government has taken towards openly positioning itself post-Brexit as an aggressive tax haven, dubbed “Singapore on Thames”. A report by the Tax Justice Network published last week⁸ identified the UK as part of an “axis of tax avoidance” consisting of the UK, Switzerland, the Netherlands and Luxembourg that costs EU countries over £27 billion a year in lost corporate tax to profit shifting. The report analysed the US’s country by country reporting data which the US published unilaterally despite delays from the OECD. The report has prompted a number of EU States to consider requiring corporations to publish their country by country reporting as a condition for receiving Covid-19 bailout packages.⁹

The UK received harsh criticism in February for increasing its ranking to 12th place on the Financial Secrecy Index, a global ranking of countries most complicit in helping individuals to hide their finances from the rule of law.¹⁰ While countries on the Financial Secrecy Index on average decreased their secrecy scores on the index, the UK increased its secrecy score, for which it was criticised for “backsliding”. The UK is the only country to be identified as part of both the “axis of secrecy” – the countries most complicit in helping individuals to hide personal wealth from the rule of law – and the “axis of tax avoidance” – the countries most complicit in helping multinational corporations avoid tax.

Also this past February, the EU added to its tax haven blacklist the Cayman Islands, the crown jewel of the UK’s corporate tax haven network of British Overseas Territories and Crown Dependencies.¹¹ Together with its corporate tax haven network, dubbed the “UK spider web”, the UK is by far the world’s greatest enabler of corporate tax avoidance, accounting for over a third of the world’s corporate tax avoidance risks as measured by the Corporate Tax Haven Index 2019.¹² The UK is four times more responsible for corporate tax avoidance risks around world than the next biggest contributor of corporate tax avoidance risks, the Netherlands, which accounts for less than 7 per cent. The UK also looks set to double down on its status as a corporate tax haven by setting up 10 freeports.¹³

Alex Cobham, chief executive at the Tax Justice Network, said:

“The coronavirus pandemic has exposed the grave costs of an international tax system programmed to prioritise the interest of corporate giants over the needs of people. For years, governments haven taken a scorched-earth approach to corporate tax, fuelling a race to the bottom between countries that hands over wealth to the biggest corporations and takes it away from the nurses and public service workers risking their lives today to protect ours.

“Now more than ever, governments must reprogramme their tax systems to prioritise people’s wellbeing over the interests of the wealthiest corporations. That starts with transparency, specifically with publishing corporations’ country by country reporting to expose the rotten apples using corporate tax havens to pay billions less in tax to the communities that host, staff and protect their operations.

“The UK showed the world true leadership in 2016 by being the first country to commit to publishing country by country reporting data and promoting the standard at a global level. The UK’s U-turn on tax transparency this week, as the world takes stock of the economic costs of COVID19 and braces for economic recession is baffling if not dangerous. By choosing not to hold corporate giants to account, the UK has not only missed out on billions of pounds in corporate tax that could have gone to NHS workers on the frontline of the pandemic, they’ve put other countries’ health services at risk by putting the brakes on years of international effort to tackle corporate tax abuse.

“The UK government seems to be claiming that they have just discovered, after four years of collecting this data, that their multinationals have been reporting inconsistently – and to such a degree that the government wants to block publication. It seems rather more likely that they’ve just realised how much anger there will be, from their own public and from neighbouring countries, when it becomes clear just how much profit shifting and tax abuse they’ve facilitated. This, of course, illustrates exactly why this data must be made public.

“The EU could reasonably interpret this U-turn on transparency as an indicator that the UK intends to double down on its role as a corporate tax haven – making it all the more urgent for the EU to move to a unitary tax approach that would nullify multinationals’ profit shifting, whether to the UK or to EU member states like Luxembourg and the Netherlands. By updating the law to tax corporations based on where they hire employees to work and generate profit instead of where corporations declare profit after rerouting into tax havens, governments can make profit shifting redundant and the world a fairer, safer place for it.”

-ENDS-

Contact the press team: media [@] taxjustice [.] net or +44 (0)7562 403078

Notes to editor:

1. Analysis by the University of Oxford estimated that the UK can prevent £2.5 billion a year in corporate tax from being lost to profit shifting. The report found that the UK loses £25 billion in corporate tax a year to multinational corporations shifting profit out of the UK. Assuming that multinational corporations may use other means to abuse their tax obligations, the researchers conservatively estimated that country by country reporting could retrieved 10 per cent of that corporate tax loss. In practice, the amount of corporate tax retrieved can be far greater. The Tax Justice Network estimates that over a four year period, public country by country reporting could have prevented at least £10 billion in corporate tax from being avoided by multinational corporations.
2. The UK Treasury has announced that the NHS will receive £6.6 billion in funds as part of a £14.5bn coronavirus emergency response fund for the NHS, local authorities, rail services and devolved governments.
3. Country by country reporting is designed to expose and deter profit shifting, a practice that involves multinational corporations moving profits from the countries where they were generated to tax havens, where corporate tax rates are low to non-existent, in order to underreport how much profit they made outside of tax havens and consequently pay less corporate tax. By requiring multinational corporations to publish how much profit they made and how much cost they incurred in each country they operate, public country by country reporting makes it impossible for corporations to shift profit into tax havens for the purpose of warping tax obligations elsewhere without being detected. This also exposes the cost of corporate tax havens aggressive tax policies to other countries.
4. On Friday 24 April 2020, Dan Carden MP submitted a series of written questions on public country by country reporting to the Chancellor of Exchequer, to which Jesse Norman MP responded on Wednesday 29 April 2020.
   
   Question: To ask the Chancellor of the Exchequer, if he will publish the UK’s company level data from country by country reporting of multinational companies. (39779)
   
   Tabled by Dan Carden MP on 24 April 2020.
   
   Answered:
   Jesse Norman MP:
   
   The UK receives Country-by-Country reports from multinational companies under the OECD BEPS Action 13 framework.
   
   As set out in that framework, the primary purpose of CbCR is to assist tax administrations in conducting high-level risk assessments for transfer pricing and BEPS purposes.
   
   The UK’s CbCR information must be treated in accordance with the internationally agreed data confidentiality standards and used only for the agreed purposes as codified in the relevant treaty.
   
   To that end, individual reports received under the OECD framework cannot be published.
   
   The answer was submitted on 29 Apr 2020 at 16:15.
   
   The questions and answers can be found on found on the UK parliament’s website. See questions 39777, 39778 and 39779.
   
   Dan Carden MP has since submitted two follow up questions asking the Treasury to clarify its concerns with the reliability of data it has collected from multinational corporations and to detail any steps it has taken to address these concerns. See question 41579 and 41580.
5. In 2016, the UK and most leading economies introduced a requirement for multinational corporations to submit country by country reporting data to their tax authorities as part of the OECD’s Base Erosion and Profit Shifting (BEPS) action plan. The UK went further, after the government accepted an opposition amendment to the 2016 Finance Bill, and gave the Treasury powers to make this data public in order to ensure tax transparency and accountability. However, the UK government committed to exercising the power only when it had obtained international agreement from other leading economies to also publish their data. To this end, then-Chancellor George Osborne lobbied his fellow EU finance ministers to support making country by country reporting data public, but the support would not materialise until the summer of 2018, after the former Chancellor had left office, when the OECD committed to publishing country by country reporting data collected by its members.
6. The OECD committed to publishing country by country reporting data collected by members in an aggregated format. This would involve each member country aggregating the country by country reporting data of all multinational corporations headquartered in its jurisdiction. For example, instead of the UK reporting its country by country data at a company level, the UK’s aggregated data would show how much profit was made and costs incurred by all UK-headquartered multinational corporations in each country UK-headquartered multinational corporations operated in. The Tax Justice Network has used such data published by the US to model and assess the impact of the OECD’s proposal for reform of international tax rules, finding that the OECD’s proposal will likely further intensify global inequalities and fail to curb rampant tax abuse. The data was also used by the Tax Justice Network to expose billions in profit shifting within Europe costing EU countries $27 billion in lost corporate tax (see note 8 below).
7. On Wednesday 29 April 2020, Dan Carden MP submitted two follow up questions to the Chancellor of Exchequer, to which Jesse Norman MP responded on Monday 4 May 2020.
   
   Question: To ask the Chancellor of the Exchequer, pursuant to the Answer of 29 April 2020 to Question 39777 on Multinational Companies: Disclosure of Information, what discussions he has had with the OECD on the (a) accuracy and reliability of country-by-country reporting data and (b) the UK’s consent for the aggregate data to be published by the OECD. (41580)
   
   Tabled by Dan Carden MP on 29 April 2020.
   
   Answered:
   Jesse Norman MP:
   Officials attended OECD meetings on this topic over the course of the last year, where data quality issues concerning the aggregated and anonymised CbCR statistics were discussed in detail.
   
   One of those issues was the distortive effect of the inclusion of intragroup dividends receivable within CbCR profit, where globally multinational groups had been taking different approaches in the absence of OECD guidance.
   
   An outcome of those discussions was the publication of new OECD CbCR guidance which clarifies the approach that should be taken by multinationals in relation to intragroup dividends when preparing their future Country-by-Country Reports.
   
   This is an important step in increasing the reliability and consistency of future CbCR data.
   
   However, it does not address the data quality and consistency issues in previously submitted Country-by-Country Reports, and the Government has been clear that it will not consent to publication of aggregated UK CbCR information unless those issues are addressed.
   
   The answer was submitted on 29 Apr 2020 at 16:15
   
   The questions and answers can be found on found on the UK parliament’s website. See questions 41580 and 41579.
8. The Tax Justice Network’s “The Axis of Tax Avoidance” report was published on Tuesday 28 April 2020 revealing the EU to be losing over $27 billion in corporate tax a year to US firms shifting profit into the UK, Switzerland, Netherlands and Luxembourg.
9. Leader of Germany’s Social Democratic Party Norbert Walter-Borjans this week called for corporations with presence in corporate tax havens to publish country by country reports as a condition for receiving coronavirus bailouts, following the Tax Justice Network’s proposed 5-rules for bailouts
10. The UK worsened its secrecy score more than any other country on the Financial Secrecy Index 2020, raising its ranking to 12th.
11. EU blacklists UK’s crown jewel tax haven while letting other tax havens off the hook.
12. The UK was found to be world’s greatest enabler of corporate tax avoidance by the Corporate Tax Haven Index 2020.
13. British PM Boris Johnson is set to launch a consultation on the creating of ten new freeports in the UK. For more information on how freeports fail to boost economic productivity and instead boost tax abuse and financial secrecy, read our article here.

About the Tax Justice Network

The Tax Justice Network believes a fair world, where everyone has the opportunities to lead a meaningful and fulfilling life, can only be built on a fair code of tax, where we each pitch in our fair share for the society we all want. Our tax systems, gripped by powerful corporations, have been programmed to ask the least from the corporate giants and wealthy elites who extract the most from society, and to ask for more from the public for a lot less in return. The Tax Justice Network is fighting to repair this injustice. Every day, we equip people and governments everywhere with the information and tools they need to reprogramme their tax and financial systems to work for everyone.