Lords call on government to tighten the tax noose on multinationals

Despite European finance ministers tasking the OECD to close corporation tax loopholes across Europe, the UK continues to face a "serious problem of avoidance of corporation tax", says the House of Lords Economic Affairs Committee.

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Despite European finance ministers tasking the OECD to close corporation tax loopholes across Europe, the UK continues to face a "serious problem of avoidance of corporation tax", says the House of Lords Economic Affairs Committee.

This is due in part to the "complexity of the tax regime in the UK", said the Committee, 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".

Technology companies including Apple, Microsoft, Google, Amazon and others have been in the spotlight for doing precisely this.

The lords says this damages the economy and "undermines trust" in the tax system, in a report published this week.

The Committee supports the case for fundamental reform of the international corporate tax framework being pursued by the Organisation for Economic Co-operation and Development (OECD).

The lords say there are too many opportunities for multinational companies to "manipulate their affairs" to reduce their global tax payments. The Committee says that this can undermine public trust in the tax system and calls on the government to continue to play a full part in encouraging the OECD’s reform agenda to "an early successful conclusion".

But the Committee says it is not clear that the OECD reforms will be effective or whether they can be achieved within the proposed two year timescale.

The report therefore calls for the Treasury to undertake a "fundamental review" of the UK’s corporate tax regime, including the differential treatment of debt and equity.

The present system can encourage multinational companies to take on excessive debt in the UK, including by borrowing money from an overseas subsidiary, to reduce their tax liability.

The lords say the government should consider a new system of regulation for tax advisers with the "threat of removing advisers’ right to practise" if they breach a regulatory code of conduct by promoting "blatantly contrived" tax avoidance schemes.

There also needs to be better "parliamentary oversight of HMRC", so that the public can be confident that tax deals it agrees with multinational companies are "appropriate". The Committee is concerned that HMRC may not be "assertive enough" in these negotiations.

The Committee also recommends that HMRC should be "adequately resourced" to deal more effectively with multinationals and their tax advisors. The report is also critical of the practice of HMRC employing seconded staff from the Big Four accountancy firms, who work for the large firms under scrutiny.

Lord MacGregor, chairman of the House of Lords Select Committee on Economic Affairs, said: “The Select Committee launched this short inquiry in response to public and political concern about corporate tax avoidance.

"There is a sense that corporation tax is voluntary for some multinationals which operate globally, while small UK-based businesses go by the book and have to pay. That brings the tax system into disrepute and loses much-needed revenue."

He added: “We recognise that the government is taking the lead in pursuing international agreement to reduce tax avoidance but it is unclear whether these reforms can be achieved in two years. We have therefore made a number of recommendations for specific reforms the government should consider on its own to deal with abuses."

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