A new approach to corporation tax?

On 31 July 2013 the House of Lords Select Committee on Economic Affairs published its first Report in the 2013-2014 session:

Tackling corporate tax avoidance in a global economy: is a new approach needed?  The Committee's thunder has been somewhat stolen by the recent G8 initiatives and the OECD's Action Plan on Base Erosion and Profit Shifting.

The Report identifies that tackling corporate tax avoidance is actually a question of taking a new approach to corporation tax itself. The "serious problem" is "due in part to the complexity of the tax regime in the UK, but mainly because the international tax system gives multinational companies opportunities to shift profits between countries in ways that reduce their liabilities in the UK".

Despite recent calls that companies pay their 'fair share' the Report can be praised for recognising that it "is primarily for the Government to correct the flaws in the UK's corporation tax regime and to pursue agreement to make the international tax framework more rigorous … [t]he present system is not working and urgently needs reform."

Unfortunately, this clarity does not necessarily carry through to the remainder of the Report.

Recommendations

The Report makes a number of recommendations:

• Parliament should establish a joint committee of MPs and Peers oversee HMRC (akin to the Intelligence and Security Committee, examining confidential evidence in private);
• the Treasury should review the UK’s corporate tax regime and report back within a year with proposed changes to be made at home and pursued internationally, especially through the OECD, but also considering more radical alternatives;
• the Treasury review should re-examine differential tax treatment of debt and equity and the scope for introduction of an allowance for corporate equity;
• in addition to policies already announced by the Government (naming and shaming promoters of tax avoidance schemes, and self-certification of compliance with tax obligations by companies bidding for public contracts) the Treasury review should also consider further anti-avoidance measures, including:
• the regulation of tax advisers;
• penalties for users of failed tax avoidance schemes; and
• greater transparency requirements for companies with large operations in the UK; and finally
• HMRC should be better resourced – the Report laments the recently announced slashed budget of the Revenue.

Comment

Despite the Committee's diagnosis that the corporation tax system is "not working", it nevertheless champions anti-avoidancemeasures such as the GAAR, and suggests that if the GAAR proves ineffective, penalties for tax avoiders may be desirable.

It is asinine to criticise corporations for their manner of compliance with a system which is admitted as being broken. The Report recognises the competitive advantage which entities achieve by minimising their liability to corporation tax, and that leaving corporations to draw the line is not the right approach. Commenting on the announcement from Starbucks in June 2013 that it would forgo tax deductions equivalent to £20 million over two years, the Report scathes: "Voluntary payments are not a sound basis for a system of taxation." This works both ways.

In focusing on anti-avoidance measures the Report fails to address the complexity of the tax regime in the UK. Corporation tax is an international issue. Whilst the Report does advocate consideration of more radical reform (and gives the examples of unitary taxation and destination-based tax) it nevertheless supports the reforms of the OECD, despite noting that the approach of the OECD (which relies on the "arms-length" principle for transactions between group companies) can be criticised as having "fundamental problems".

For corporate tax avoidance to be tackled, a profoundly different approach to corporation tax itself is required.  In asking merely that radical reform be considered, the opportunity for the Report to demand a rethink has sadly been missed.

This blog was written by Nigel Brook.