The tax system is lagging behind commercial reality in some respects, says CBI director-general
The UK government intends to use its G8 presidency to ‘drive a more serious debate on tax evasion and tax avoidance’, David Cameron told delegates at the World Economic Forum today, adding that individuals and businesses ‘must pay their fair share of tax’.
But his remarks prompted a robust defence of the role of accountants and calls for constructive dialogue on reform of the rules governing taxation of multinationals. The director-general of the CBI accepted that ‘in some cases the tax system is lagging behind commercial reality’.
‘This is an issue whose time has come,’ the prime minister said. ‘After years of abuse, people across the planet are rightly calling for more action and, most importantly, there is gathering political will to actually do something about it.’
Cameron distinguished between evasion, avoidance and ‘sensible tax planning’. But some avoidance was ‘so aggressive’ that it raised ethical issues, he said.
‘Evasion is illegal. It can – and should – be subject to the full force of the criminal law, but what about tax avoidance? Of course, there is nothing wrong with sensible tax planning – and there are some things that governments want people to do that reduce tax bills, such as investing in a pension, a start-up businesses, or giving money to a charity.
‘But there are some forms of avoidance that have become so aggressive that I think it is right to say these raise ethical issues, and it is time to call for more responsibility and for governments to act accordingly.’
Several leading tax professionals have spoken out against abusive tax avoidance schemes in recent months, and professional bodies have given a broad welcome to the UK’s proposed general anti-abuse rule.
But some experts have challenged the view that multinational groups of companies that locate certain functions or activities in low tax jurisdictions are engaging in anything other than normal tax planning, assisted in some cases by tax competition between states. They argue that while reforms may be needed, such companies are doing nothing wrong.
Tax campaigners have argued for many years that the UK has a particular responsibility to show leadership in tackling evasion and avoidance, because of its constitutional links to several tax havens.
International standards
Cameron said the UK government had already committed ‘hundreds of millions’ to efforts to tackle avoidance, but acting alone had its limits. ‘Clamp down in one country and the travelling caravan of lawyers, accountants and financial gurus will just move on elsewhere. So we need to act together, including at the G8,’ he said.
‘If there are difficult questions about whether existing standards are tough enough to tackle avoidance, we need to ask them. If there are options for more multilateral deals on automatic information exchange to catch tax evaders, we need to explore them.’
Developing countries
Cameron added: We want to work with developing countries on this too. The fact is the poorer the nation, the more they need the tax revenues, but often the weaker the capacity they have to collect them. But we must not let them off the hook – it can be done. The UK has worked with the Ethiopian authorities to help with tax collection, and in the last decade the amount of tax collected has increased by seven times.’
Low taxes
‘All of this – in developed and developing countries alike – comes down to a simple issue of fairness,’ Cameron said. ‘I believe in low taxes. That’s why my government is cutting the top rate of income tax. We’ve cut corporation tax. I am a low tax Conservative, but I’m not a “companies should pay no tax” Conservative.’
‘Smell the coffee’
Cameron continued: ‘Any businesses who think that they can carry on dodging that fair share or that they can keep on selling to the UK and setting up ever-more complex tax arrangements abroad to squeeze their tax bill right down … Well, they need to wake up and smell the coffee because the public who buy from them have had enough.’
This was a reference to Starbucks’ tax arrangements, the focus of much of the recent controversy although some experts have suggested that a Reuters investigation into the coffee chain was flawed. Bill Dodwell, chairman of the CIOT’s technical committee, told peers examining the Finance Bill yesterday that a better analysis had been provided by a Financial Times journalist in the paper’s Alphaville blog.
‘Work to change the rules’
Responding to Cameron’s speech, CBI director-general John Cridland said that the majority of businesses paid the right amount of tax. ‘For the small minority which do not, times are getting tougher, and rightly so.’
He added: ‘The CBI does not condone highly abusive avoidance schemes which serve no commercial purpose other than the minimisation of tax, even if they are legal. In some cases the tax system is lagging behind commercial reality, particularly around the taxation of the digital economy and transfer pricing. As the prime minister highlights, the UK needs to work together with other countries, including the G8, to change the rules where appropriate, so that they are fit for the global business age.'
Izza defends accountants
ICAEW chief executive Michael Izza welcomed Cameron’s pledge to prioritise tax and transparency at the G8. ‘This is overdue. Globalisation means we need a grown up debate about how countries use their tax systems to attract inward investment,’ he said.
But Izza said he was ‘disappointed to hear the prime minister again dismiss accountants, this time as an “army” of avoiders’.
Izza added: ‘We don’t recognise that description. Our members do not support illegal tax evasion or the kind aggressive tax avoidance that we believe to be unethical. In fact, an effective accountancy and finance profession can and does help solve many of the problems the prime minister wants to address.
‘We play a key role in making the UK’s tax system work. Professional accountants everywhere are helping their clients pay the right amount of tax to the right governments at the right time.’
Harmonisation
Discussion at the G8 summit in June is likely to focus on the issue of tax harmonisation and ‘whether a more joined-up tax system is the best solution to the problem of establishing where company profits are taxed’, said Frédéric Donnedieu de Vabres, chairman of Taxand, a network of tax advisers to multinationals. ‘The location of taxable profits, or “permanent establishment”, is an extremely complex area, and one made even more complicated for companies with intangible assets, whose profits are essentially global in nature.’
But he noted that increasing complexity in tax systems and ‘fierce competition’ for inward investment between countries would hinder moves towards harmonisation.
‘Internet companies in particular have been targets for public criticism, having been attracted to tax regimes where their large numbers of intangible assets are taxed in a much more accommodating manner,’ he said.
The tax system is lagging behind commercial reality in some respects, says CBI director-general
The UK government intends to use its G8 presidency to ‘drive a more serious debate on tax evasion and tax avoidance’, David Cameron told delegates at the World Economic Forum today, adding that individuals and businesses ‘must pay their fair share of tax’.
But his remarks prompted a robust defence of the role of accountants and calls for constructive dialogue on reform of the rules governing taxation of multinationals. The director-general of the CBI accepted that ‘in some cases the tax system is lagging behind commercial reality’.
‘This is an issue whose time has come,’ the prime minister said. ‘After years of abuse, people across the planet are rightly calling for more action and, most importantly, there is gathering political will to actually do something about it.’
Cameron distinguished between evasion, avoidance and ‘sensible tax planning’. But some avoidance was ‘so aggressive’ that it raised ethical issues, he said.
‘Evasion is illegal. It can – and should – be subject to the full force of the criminal law, but what about tax avoidance? Of course, there is nothing wrong with sensible tax planning – and there are some things that governments want people to do that reduce tax bills, such as investing in a pension, a start-up businesses, or giving money to a charity.
‘But there are some forms of avoidance that have become so aggressive that I think it is right to say these raise ethical issues, and it is time to call for more responsibility and for governments to act accordingly.’
Several leading tax professionals have spoken out against abusive tax avoidance schemes in recent months, and professional bodies have given a broad welcome to the UK’s proposed general anti-abuse rule.
But some experts have challenged the view that multinational groups of companies that locate certain functions or activities in low tax jurisdictions are engaging in anything other than normal tax planning, assisted in some cases by tax competition between states. They argue that while reforms may be needed, such companies are doing nothing wrong.
Tax campaigners have argued for many years that the UK has a particular responsibility to show leadership in tackling evasion and avoidance, because of its constitutional links to several tax havens.
International standards
Cameron said the UK government had already committed ‘hundreds of millions’ to efforts to tackle avoidance, but acting alone had its limits. ‘Clamp down in one country and the travelling caravan of lawyers, accountants and financial gurus will just move on elsewhere. So we need to act together, including at the G8,’ he said.
‘If there are difficult questions about whether existing standards are tough enough to tackle avoidance, we need to ask them. If there are options for more multilateral deals on automatic information exchange to catch tax evaders, we need to explore them.’
Developing countries
Cameron added: We want to work with developing countries on this too. The fact is the poorer the nation, the more they need the tax revenues, but often the weaker the capacity they have to collect them. But we must not let them off the hook – it can be done. The UK has worked with the Ethiopian authorities to help with tax collection, and in the last decade the amount of tax collected has increased by seven times.’
Low taxes
‘All of this – in developed and developing countries alike – comes down to a simple issue of fairness,’ Cameron said. ‘I believe in low taxes. That’s why my government is cutting the top rate of income tax. We’ve cut corporation tax. I am a low tax Conservative, but I’m not a “companies should pay no tax” Conservative.’
‘Smell the coffee’
Cameron continued: ‘Any businesses who think that they can carry on dodging that fair share or that they can keep on selling to the UK and setting up ever-more complex tax arrangements abroad to squeeze their tax bill right down … Well, they need to wake up and smell the coffee because the public who buy from them have had enough.’
This was a reference to Starbucks’ tax arrangements, the focus of much of the recent controversy although some experts have suggested that a Reuters investigation into the coffee chain was flawed. Bill Dodwell, chairman of the CIOT’s technical committee, told peers examining the Finance Bill yesterday that a better analysis had been provided by a Financial Times journalist in the paper’s Alphaville blog.
‘Work to change the rules’
Responding to Cameron’s speech, CBI director-general John Cridland said that the majority of businesses paid the right amount of tax. ‘For the small minority which do not, times are getting tougher, and rightly so.’
He added: ‘The CBI does not condone highly abusive avoidance schemes which serve no commercial purpose other than the minimisation of tax, even if they are legal. In some cases the tax system is lagging behind commercial reality, particularly around the taxation of the digital economy and transfer pricing. As the prime minister highlights, the UK needs to work together with other countries, including the G8, to change the rules where appropriate, so that they are fit for the global business age.'
Izza defends accountants
ICAEW chief executive Michael Izza welcomed Cameron’s pledge to prioritise tax and transparency at the G8. ‘This is overdue. Globalisation means we need a grown up debate about how countries use their tax systems to attract inward investment,’ he said.
But Izza said he was ‘disappointed to hear the prime minister again dismiss accountants, this time as an “army” of avoiders’.
Izza added: ‘We don’t recognise that description. Our members do not support illegal tax evasion or the kind aggressive tax avoidance that we believe to be unethical. In fact, an effective accountancy and finance profession can and does help solve many of the problems the prime minister wants to address.
‘We play a key role in making the UK’s tax system work. Professional accountants everywhere are helping their clients pay the right amount of tax to the right governments at the right time.’
Harmonisation
Discussion at the G8 summit in June is likely to focus on the issue of tax harmonisation and ‘whether a more joined-up tax system is the best solution to the problem of establishing where company profits are taxed’, said Frédéric Donnedieu de Vabres, chairman of Taxand, a network of tax advisers to multinationals. ‘The location of taxable profits, or “permanent establishment”, is an extremely complex area, and one made even more complicated for companies with intangible assets, whose profits are essentially global in nature.’
But he noted that increasing complexity in tax systems and ‘fierce competition’ for inward investment between countries would hinder moves towards harmonisation.
‘Internet companies in particular have been targets for public criticism, having been attracted to tax regimes where their large numbers of intangible assets are taxed in a much more accommodating manner,’ he said.
