A ‘top-up’ tax charge is imposed by the UK government on its companies if they report profits in jurisdictions with lower tax rates than in the UK. This is usually achieved by UK-multinationals creating transactions with their own subsidiaries to shift profits to so-called ‘tax havens’.
The legal basis for this type of ‘anti-tax haven’ law is found in the Controlled-Foreign-Corporations or ‘CFC’ rules.
The UK government proposes a relaxation of its CFC rules in the 2012 Finance Bill which according to the House of Commons International Development Committee in its just released report on Tax in Developing Countries: Increasing Resources for Development will result in in a loss of £4billion to developing countries.
The Committee has demanded an urgent review of this proposal and says that the Exchequer Secretary to the Treasury admits that the proposed changes to the CFC rules will result in tax income shifts away from developing countries to tax havens although he does not accept the estimate endorsed by the report and provided by Action Aid.
‘Anti-Tax Haven’ Laws Not to Protect Developing Countries.
In its report the Committee also made reference to the Exchequer Secretary’s assertion that the objective of the relaxed CFC rules is to protect UK tax revenues and not those of developing countries.
An interesting point considering that in the 2011 Report to the G-20 Development working Group by the IMF OECD, UN and World Bank, titled Supporting the Development of Effective Tax Systems it was argued that “where domestic policy reforms were likely to impact on revenue flows to developing countries, a ‘spillover analysis’ should be conducted to ascertain the magnitude of such impacts”.
Lack of Joined-Up Thinking!
The comment was equally noteworthy because as the Committee remarked it points to a lack of “joined-up” thinking between government departments because through the Department for International Development (DIFD) the Government seeks to support revenue collection in developing countries.
Proposed Limits of ‘Top-Up’ Tax Charge.
The change to the CFC rules contemplated by the 2012 Bill means that for the accounting period beginning on or after January 1, next year the UK will only be able to impose this ‘top-up’ tax if the profits in question have been shifted from the UK. As a result profits shifted from developing countries into tax havens will suffer tax at the tax haven rate which is significantly lower than the UK rate.
In the Committee’s view this will incentivise multinational corporations to shift profits into tax havens and eliminate a significant deterrent that discourages UK-based companies from shifting profits from developing countries.
In this regard the Committee has made the following recommendations:
- As a matter of urgency, the Government should conduct or commission an analysis of the likely financial impact of the revised Controlled Foreign Companies rules on developing countries. Depending on the results of this analysis, the Government should consider whether to drop its proposals.
- The Government should designate a DFID ministerial responsibility for the development impact of tax and fiscal policy. Furthermore there should be an administrative or legislative requirement for the government to assess new primary and secondary UK tax legislation against its likely impact on poverty reduction and revenue-raising in developing countries, and to publish that assessment alongside the draft legislation.
Can Tax Revenues Replace Aid?
It remains to be seen however whether the premise of the Committee that “tax revenues represent a more predictable and sustainable source of revenue than aid flows ever can” will influence UK domestic tax policy especially in circumstances where its international tax policy is making increasingly onerous demands on developing countries to join in the speedy implementation of rules that serve to guard against the erosion of the tax bases of the developed world economies many of whom are themselves significant tax havens.
For the full report see: