Tax move 'to cost poor states £4bn'

George OsbornePlanned Treasury changes to tax rules on multinational companies will deprive governments in poor countries of as much as £4 billion a year in revenue, a development charity has warned.

ActionAid said that the relaxation of Controlled Foreign Company (CFC) rules, expected to be introduced in Chancellor George Osborne's March 21 Budget, will create a loophole allowing global businesses to dodge tax on the profits they make in the world's least developed states.
The Treasury's own calculations suggest that the UK could lose almost £1 billion a year from the change, said ActionAid.

However, the Treasury challenged the charity's figures, arguing that the method it had used to reach the £4 billion total was "overly simple". Any attempt to estimate the impact of changes in UK tax law on other countries in this way would require making so many assumptions that the result would not be sufficiently robust or accurate to be of value, said a source.

ActionAid called for an "urgent rethink" of Mr Osborne's plans on CFCs, as a poll found that a large majority of voters (79%) think the Government is not doing enough to tackle tax avoidance. The YouGov poll found that 72% of voters thought that companies that use legal loopholes to avoid tax bills in the UK or developing countries were behaving "irresponsibly".

Under existing CFC rules, if a multinational headquartered in the UK shifts its profits from anywhere in the world into a tax haven to lower its bills, the Treasury tops up the tax to bring it in line with the standard 23% rate payable here.

After the proposed reforms, this rule will apply only when profits are shifted directly from the UK into a tax haven abroad. ActionAid said this would make it much easier and more lucrative for companies to move profits out of developing countries and into tax havens, for instance by making large royalty payments to subsidiaries based in a low-tax jurisdiction.

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Tax move 'to cost poor states £4bn'

Most recently HM Revenue & Customs let Vodafone off the hook - for quite a sum. Vodafone paid out just £1.25 billion despite an original tax bill being closer to £8 billion (HMRC has always refused to reveal how much it thought the Vodafone final bill was). The episode was made even more shaming and painful because Vodafone was given several years to come good with the cash owed - even though it was sitting on a substantial cash pile at the time.

The Exchequer is estimated to have lost around £10 million to Goldman Sachs recently through an 'error' made by HMRC. The episode relates to an employee benefit trust run by Goldman allowing employees to take non-repayable loans that had no National Insurance contributions tied to them. HMRC did claw back the full amount from more than 20 businesses - but not Goldman. HMRC remains cagey about the details of the deal. Little HMRC accountability or transparency.

Huge problems with QinetiQ, the former Defence Evaluation and Research Agency, or DERA. A lack of clarity on contractual arrangements at the outset didn't help, allowing private equity company Carlyle to hammer the price down (why would you start negotiations when you didn't know the company's true value?). The Ministry of Defence behaved, it was said, like "an innocent at a table of card-sharps". Estimated cost to the taxpayer - £90 million. Huge sums were later made by QinetiQ management when the company listed.

The TaxPayers' Alliances estimates £2.7bn worth of taxpayer cash was wasted with a super-expensive 'National Programme for IT in the NHS'. The Department of Health, in the end, had very little to show for it as a consequence. Another example of poor management and a seemingly ingrained inability to provide taxpayers' with value for money.

"BT is paid £9 million to implement systems at each NHS site, even though the same systems have been purchased for under £2 million by NHS organisations outside the Programme", the Commons Public Accounts Committee noted.

Contentious. The Office for National Statistics estimated this has declined 3.4% since 1997, "with inputs increasing by 38%." The Centre for Economics and Business Research estimate that this inefficiency costs the taxpayer £58.4 billion a year.

Given the above record, are there any deals that the taxpayer has actually won out on? Not many, but the one successful project was the roll out of new Jobcentre Plus offices. It came in £314 million under budget, claims the Taxpayers' Alliance. A small cheer.


ActionAid campaign manager Martin Hearson said: "If the Government waters down these rules in the March Budget, it could inflict huge collateral damage on poor countries like Zambia, Ghana and Tanzania who desperately need that money to fund doctors, nurses and teachers and to ultimately help lift them out of poverty. And with a cost to the UK of £1 billion everyone loses out."

A Treasury spokeswoman said: "The Controlled Foreign Companies (CFC) rules are designed to protect the UK tax base from artificial diversion of profits. Similarly, other countries have CFC rules that are designed to protect their local tax bases.

"The best way to prevent tax avoidance in developing countries is by helping them to develop robust and stable tax systems which enable them to collect the tax they are owed. Through the Department for International Development and HM Revenue and Customs, the UK delivers targeted and effective support to make this happen."

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