Tackling corporate tax avoidance in the Autumn Statement – measures welcome but will they work?
The Office of Budget Responsibility (OBR) notes that the ‘giveaways’ and the ‘takeaways’ in the Autumn Statement roughly balance out. A huge proportion of the so-called ‘takeaways’ – ie, that will generate net income for government revenues – stem from measures to tackle corporate tax avoidance and profit-shifting and proposals to prevent banks from using their past losses to avoid paying corporation tax now and in the future.
The TUC has long called for stronger measures to tackle profit-shifting and corporate tax avoidance, and it is welcome that the government is proposing to address this. However, these are notoriously difficult areas to tackle effectively. This does not mean for a moment that it is not worth trying; the potential gains in revenues are huge and there is an overwhelming argument in terms of fairness that multinationals should pay their share of tax. But it does mean that by counting their corporate tax chickens before they’re hatched the government is taking a substantial risk in terms of its future budgeting.
Base erosion and profit shifting, or BEPS, basically refers to multinational companies moving profits from the countries where economic activity has taken place to lower tax jurisdictions in order to reduce their tax payments. Tackling this is predicted to generate revenues of £440m in 2017-18 and 2018-19, rising to £460m in 2019-20, which is a more than the total net gains the Chancellor claims his Autumn Statement will generate in these years.
However, the OBR assesses the risks attached to the policies in the autumn statement. It rates the measures included under BEPS from medium-high to very high. The key explains that a rating of ‘Very high’ means that there is very little data, what data does exist is of poor quality, there are significant modelling challenges and there is no information on potential behaviour. Medium-high means there is a little data, much of it poor quality, there are significant modelling challenges and behaviour is volatile and dependent on external factors – a bit better but hardly reassuring. The significant cuts to HMRC staffing since the government came into office add further uncertainty about the ability of the government to make good on these predictions.
But by far the largest line of predicted revenue from the autumn statement decisions is ‘corporate tax bank losses restriction’. Again, the TUC has long called for reform to the rule that allows corporations to set interests payments on debt against their tax payments. It is outrageous that the banks, having been bailed out by the taxpayer, should be able to offset their past losses against current and future tax payments and it is welcome that the government proposes to address this. The problem, again, is reliance on revenues from this measure to balance the books. The OBR’s assessment is as follows:
This costing receives a ‘very high’ uncertainty rating. The measure restricts banks’ ability to set their accumulated losses off against their taxable profits. The yield from this measure is based on uncertain assumptions around the profitability of banks over the scorecard period – a key source of uncertainty in our corporation tax receipts forecast – and their behavioural response to this measure. In particular, we consider the modelling to be both complex and important for the costing. If the banking sector makes higher or lower than expected gross profits over the next few years then the yield from this measure could be considerably higher or lower.
The predicted gains from corporate tax bank losses restriction dwarf all other revenues lines: £695m in 2015-16, peaking at £765 in 2016-17. If these revenues do not materialise, the impact of the autumn statement on overall government revenues will become sharply negative.
So, while measures to address corporate tax avoidance, BEPS and corporate tax bank losses restriction are welcome, there is a substantial risk that the revenues they are predicted to generate in the next five years will not materialise.
Which will mean…further squeezes on government departments.