The UK government needs to explain to the public and mainstream media that its proposed general anti-abuse rule will only impact on the most abusive tax of avoidance, peers have warned, and the OECD’s review of the international tax system should be completed ‘as rapidly as possible’.
‘There is a misconception that GAAR will mean the likes of Starbucks and Amazon will be slapped with massive tax bills. This is wrong and the government needs to explain that to the public,’ said Lord MacGregor, chairman of the House of Lords economic affairs sub-committee on the Finance Bill.
‘GAAR is narrowly defined and will only impact on the most abusive of tax avoidance. While this is the right approach for now it is important that the policy is reviewed in five years to ensure it has met its objectives,’ he said.
Perception
Every effort should be made to communicate ‘particularly to the press and the public’ why the GAAR is not an appropriate mechanism to address all problems with the tax system, the committee said in a report published today.
‘In particular, that communication should focus on those issues, such as the taxation of multinational groups, where the widely held perception seems to be that the GAAR provides the answer, whereas it is clear that it does not.’
That perception will not be shared by tax professionals, but some recent statements made by senior politicians may have encouraged its growth among the wider public. The prime minister suggested last month that companies engaging in ‘aggressive tax avoidance’ lack moral scruples.
The Chartered Institute of Taxation and the Association of Tax Technicians warned more than 12 months ago that the proposed GAAR would not solve ‘the high-profile problems’ identified in the tax system. Private Eye had reported that a GAAR would not touch ‘big-time offshore avoidance’ that some considered ‘mere planning’. The CIOT and ATT said it was ‘very telling’ that Private Eye had recognised that a GAAR would not meet the aims of the politicians and would ‘disappoint public opinion’.
The committee’s recommendation echoes the views of Elspeth Orcharton, director of corporate and international tax at the Institute of Chartered Accountants of Scotland, who gave evidence to the committee in January.
Orcharton confirmed that the GAAR would not catch tax planning using ‘international business structures’. But she said it was ‘up to the government to start explaining why it won’t, [and] to explain [why] there are low amounts of corporation tax paid in the UK by international businesses’.
This was, she said, a ‘direct result of government policies to try to make the UK competitive in the global market place’.
Profit shifting
However, several multinationals have been criticised for what is widely regarded as tax avoidance by means of tax havens and low tax jurisdictions, and leaders of some businesses operating wholly in the UK have called for action to level the ‘playing field’.
The OECD said last month that gaps in the international tax system were giving multinationals an unfair competitive advantage over smaller businesses and ‘hurt investment, growth and employment’.
The UK is leading a review of the transfer pricing rules, as part of the OECD’s work to draw up an action plan to tackle ‘base erosion and profit shifting’.
Managing expectations
The Finance Bill sub-committee focused on the GAAR, including ‘how effective it is likely to be in addressing the various types of avoidance recently highlighted in the media’.
‘Most of the representative bodies and tax specialists who gave evidence thought that the narrow focus [of the GAAR] was appropriate: this was necessary to provide as much certainty as possible for business, to promote UK competitiveness and encourage inward investment, it said.
‘A minority thought the proposed GAAR too narrow. None of our witnesses thought it would meet media and public expectations that international tax planning should be addressed and multinational companies made to pay more tax in the UK …
‘We are fully persuaded that the proposed GAAR will not apply to structural issues around the taxation of multi-national groups. These have to be dealt with by negotiation in international fora. The current OECD rules need comprehensive, urgent review. In the meantime, we recommend that ministers should make every effort to explain the aims of the GAAR and the reasons why it cannot apply in many of the ways public opinion would prefer, so that unrealistic expectations are managed.’
'Risk of retalation'
The committee noted that the Law Society of England and Wales was among the many witnesses who stressed that arrangements entered into by multinational groups involved the structure of the international tax system, and that any action must be taken at an international level.
‘This is not an issue facing the UK alone but all jurisdictions which rely on corporation tax being assessed on profits made by companies resident in those jurisdictions or operating through permanent establishments in those jurisdictions … There may be a temptation for UK legislators to adopt alternative bases of tax to increase the amount of tax collected by the UK but the risk of retaliation needs to be borne in mind,’ the Law Society said.
The committee reported that unilateral action, advocated by Richard Murphy, director of Tax Research LLP, was ‘also supported by ActionAid and Christian Aid who, in joint written evidence, argued that “the Finance Bill 2013 should … give HMRC the power to compel disclosure of international tax-advantageous transactions undertaken by UK-headed multinational groups"’.
But the committee concluded that the practice of ‘arbitraging competing tax jurisdictions to minimise taxation’ must be dealt with by negotiation at the EU, OECD, G8 or G20 level.
‘If this is not resolved by agreement, retaliation, double taxation and harm to the UK’s competitive position could result,’ it said.
The committee recognised that many people were still concerned about the detail of the proposals. But it commended HM Treasury, HMRC and all involved on ‘an exemplary tax policy-making consultative process in the development of the GAAR’.
The UK government needs to explain to the public and mainstream media that its proposed general anti-abuse rule will only impact on the most abusive tax of avoidance, peers have warned, and the OECD’s review of the international tax system should be completed ‘as rapidly as possible’.
‘There is a misconception that GAAR will mean the likes of Starbucks and Amazon will be slapped with massive tax bills. This is wrong and the government needs to explain that to the public,’ said Lord MacGregor, chairman of the House of Lords economic affairs sub-committee on the Finance Bill.
‘GAAR is narrowly defined and will only impact on the most abusive of tax avoidance. While this is the right approach for now it is important that the policy is reviewed in five years to ensure it has met its objectives,’ he said.
Perception
Every effort should be made to communicate ‘particularly to the press and the public’ why the GAAR is not an appropriate mechanism to address all problems with the tax system, the committee said in a report published today.
‘In particular, that communication should focus on those issues, such as the taxation of multinational groups, where the widely held perception seems to be that the GAAR provides the answer, whereas it is clear that it does not.’
That perception will not be shared by tax professionals, but some recent statements made by senior politicians may have encouraged its growth among the wider public. The prime minister suggested last month that companies engaging in ‘aggressive tax avoidance’ lack moral scruples.
The Chartered Institute of Taxation and the Association of Tax Technicians warned more than 12 months ago that the proposed GAAR would not solve ‘the high-profile problems’ identified in the tax system. Private Eye had reported that a GAAR would not touch ‘big-time offshore avoidance’ that some considered ‘mere planning’. The CIOT and ATT said it was ‘very telling’ that Private Eye had recognised that a GAAR would not meet the aims of the politicians and would ‘disappoint public opinion’.
The committee’s recommendation echoes the views of Elspeth Orcharton, director of corporate and international tax at the Institute of Chartered Accountants of Scotland, who gave evidence to the committee in January.
Orcharton confirmed that the GAAR would not catch tax planning using ‘international business structures’. But she said it was ‘up to the government to start explaining why it won’t, [and] to explain [why] there are low amounts of corporation tax paid in the UK by international businesses’.
This was, she said, a ‘direct result of government policies to try to make the UK competitive in the global market place’.
Profit shifting
However, several multinationals have been criticised for what is widely regarded as tax avoidance by means of tax havens and low tax jurisdictions, and leaders of some businesses operating wholly in the UK have called for action to level the ‘playing field’.
The OECD said last month that gaps in the international tax system were giving multinationals an unfair competitive advantage over smaller businesses and ‘hurt investment, growth and employment’.
The UK is leading a review of the transfer pricing rules, as part of the OECD’s work to draw up an action plan to tackle ‘base erosion and profit shifting’.
Managing expectations
The Finance Bill sub-committee focused on the GAAR, including ‘how effective it is likely to be in addressing the various types of avoidance recently highlighted in the media’.
‘Most of the representative bodies and tax specialists who gave evidence thought that the narrow focus [of the GAAR] was appropriate: this was necessary to provide as much certainty as possible for business, to promote UK competitiveness and encourage inward investment, it said.
‘A minority thought the proposed GAAR too narrow. None of our witnesses thought it would meet media and public expectations that international tax planning should be addressed and multinational companies made to pay more tax in the UK …
‘We are fully persuaded that the proposed GAAR will not apply to structural issues around the taxation of multi-national groups. These have to be dealt with by negotiation in international fora. The current OECD rules need comprehensive, urgent review. In the meantime, we recommend that ministers should make every effort to explain the aims of the GAAR and the reasons why it cannot apply in many of the ways public opinion would prefer, so that unrealistic expectations are managed.’
'Risk of retalation'
The committee noted that the Law Society of England and Wales was among the many witnesses who stressed that arrangements entered into by multinational groups involved the structure of the international tax system, and that any action must be taken at an international level.
‘This is not an issue facing the UK alone but all jurisdictions which rely on corporation tax being assessed on profits made by companies resident in those jurisdictions or operating through permanent establishments in those jurisdictions … There may be a temptation for UK legislators to adopt alternative bases of tax to increase the amount of tax collected by the UK but the risk of retaliation needs to be borne in mind,’ the Law Society said.
The committee reported that unilateral action, advocated by Richard Murphy, director of Tax Research LLP, was ‘also supported by ActionAid and Christian Aid who, in joint written evidence, argued that “the Finance Bill 2013 should … give HMRC the power to compel disclosure of international tax-advantageous transactions undertaken by UK-headed multinational groups"’.
But the committee concluded that the practice of ‘arbitraging competing tax jurisdictions to minimise taxation’ must be dealt with by negotiation at the EU, OECD, G8 or G20 level.
‘If this is not resolved by agreement, retaliation, double taxation and harm to the UK’s competitive position could result,’ it said.
The committee recognised that many people were still concerned about the detail of the proposals. But it commended HM Treasury, HMRC and all involved on ‘an exemplary tax policy-making consultative process in the development of the GAAR’.
