Government tax and aid policy: robbing Peter AND Paul!
The Government has come under fire from right-wing Conservatives over its commitment – shared with Labour and the Liberal Democrats – to spend 0.7% of GNI on overseas development assistance by the next financial year. Because spending on international development has been effectively frozen at 0.56% since the election, George Osborne will have to increase DFID’s budget by around £3bn in the next budget. And at the same time he is planning to reduce company taxes by £1bn in a move that could cost developing countries as much as £4bn a year.
You don’t have to be sceptical about the value of developed economies sending aid overseas at the same time as their multinationals use tax havens to drain far more straight back out of developing countries to see what a massive blunder this is. The British government will, at one blow, cut its own revenues, increase its own expenditure and at the same time see developing countries worse off too. All so that corporations can cut their tax bills even further, and fill their boots at the expense of ordinary families in the north and the poorest of the poor in the south.
It’s robbing Peter and Paul, to pay Mammon!
Here’s how it ‘works’.
In the past, multinationals based in the UK have had to pay Corporation Tax not only on profits made in the UK, but also on those made through subsidiaries – known as Controlled Foreign Companies (CFCs) – and branches abroad (less any taxes paid in the countries where the profits were made to avoid double taxation.) In 2009 dividends paid back to UK parent companies from subsidiaries were made exempt from tax, leaving the CFC rules as the main measure of taxing overseas profits.
This has effectively stopped companies moving profits out of the UK to avoid tax, but companies argue that it increases the incentive to move their headquarters out of the UK, and avoid tax altogether on their overseas profits.
Plans to further exempt company profits made abroad would cost the Exchequer nearly £1bn a year once they have bedded in, to prevent companies moving their headquarters out of the UK to lower tax regimes. This is yet another concession to what is known as ‘arbitrage’ (the process of regime swapping to reduce tax) – a rather unpatriotic approach by companies often keen to brand themselves as ‘British’, but showing no other loyalty to their home country.
It’s bad enough that the Government is offering companies a £1bn bribe to stay here, and thus reducing the amount the Treasury has to pay for public services or even reduce the deficit. But it gets worse.
By making it more possible for companies to evade UK tax by relocating their profits abroad, the Treasury is also reducing the incentive for companies operating in developing countries to pay their taxes to those countries. Before now, they had an incentive to pay their taxes where the profits were actually made because they would be netted off against their UK tax bill anyway. Under the new rules, there will be no reason why companies shouldn’t channel even more of their profits through low or no tax offshore tax havens.
Action Aid and Christian Aid say this could cost developing countries up to £4bn a year in lost tax revenues.
So here’s the thing. Next year, UK aid spending is forecast to rise by £3bn while the effect of these tax changes costs developing countries £4bn in lost taxes – a net cost to developing countries of £1bn a year. So British taxpayers will end up losing £4bn and developing countries will lose £1bn: it’s only a win-win for multinational companies, who will gain £5bn out of the change.
Is this just another example of Tory support for their tax-dodging chums? Elected politicians around the world are caught in a downward spiral because of tax arbitrage, where companies either shift their profits to the lowest charging country or blackmail the rest into dropping their tax rates for fear of losing all their tax revenues. The only solution is to agree tax rules multilaterally so that multinationals can’t play beggar my neighbour with national exchequers (measures like a Robin Hood Tax on currency transactions would help too). And that is something that the current Government has shown limited willingness to support, let alone promote.
But until Governments are convinced of the need for a global crackdown on corporate tax avoidance, either by their people demanding better public services and more progressive taxation to pay for them, or by developing countries demanding tax justice from the north, we’ll see more Finance Ministers robbing Peter and Paul, so that corporate fat cats can get richer and richer.