Britain has been attacked by a senior US official for undermining progress on a global clampdown on tax avoidance by multinationals ahead of an international agreement to be published at the G20 talks in the autumn.
Efforts to establish standards that would prevent companies from shifting their profits across borders to avoid taxes are said to have amounted to a “collective failure” due, in part, to self-interested moves made by David Cameron’s government.
George Osborne said in 2013 that Britain was committed to making international tax rules fairer and the rules are due to be finalised this summer and published in October.
But US treasury official Robert Stacks has revealed deep frustration with the reality of Britain’s negotiating tactics, accusing the UK of behaving as if it was entitled “to more than the income from the assets, functions and risks actually in their jurisdiction”.
It is also claimed that Osborne’s desire to look tougher than Labour on tax avoidance by multinationals before the generalelection had seen the UK “go it alone” in establishing domestic legislation which undermined on-goinginternationalnegotiations.
The Observer has spoken to a senior official in the Organisation for Economic Co-operation and Development, given responsibility by the G20 for organising the talks on global agreements, who confirmed that some of the UK’s moves had been “unhelpful” and that UK diplomats had “pushed back” against initiatives, leading to less progress being made.
He said the talks had been an “extremely difficult conversation because there are 44 countries on an equal footing”, although he praised Cameron and Osborne for pioneering stronger rules in some key areas. There would be significant reforms from the negotiations, despite the problems.
An agreement was reached in June 2013 at the G8 talks hosted by the UK at Lough Erne, in Northern Ireland, to change international tax rules to prevent multinationals from engaging in cross-border tax avoidance. It was endorsed by the G20 world leaders in the St Petersburg Declaration of September 2013, which commissioned the OECD to develop proposals for these new rules. The final package is due to be presented to the G20 finance ministers on 8 October this year.However Stacks, a Treasury Deputy Assistant Secretary for International Tax Affairs said he had become “disturbed” by Britain’s decision to establish its own ‘diverted profit tax’ that would hit multinationals allegedly shielding profits from the UK exchequer with a 25% levy.
He said that in establishing such domestic legislation it made it impossible for the global talks to make significant progress in key areas.
Talking at an international tax conference, hosted by the OECD thinktank which has been given responsibility for convening talks on a global tax agreement, Stacks further claimed that the UK appeared to have irresponsibly responded to a need to out-manoeuvre Labour on tax avoidance putting “a spotlight on the degree to which political pressure can trump policy”.
A senior official within the OECD claimed that Stack’s “shouting” should not detract from some significant progress on country by country reporting on multinationals’ profits, and new guidelines on transfer pricing – the amount multinationals take out of profits channelled to tax havens for work allegedly carried out there.
However the source did confirm that the UK had strenuously resisted changes that would prevent the country from benefiting in full from its low corporation tax agenda.
In 2012 the UK government drastically amended its rules on the so-called Controlled Foreign Corporations (CFCs), in order to offer tax advantages for companies to choose to locate their headquarters in the UK.
Under such rules profits shifted to lower tax countries are liable to the tax rate in the home country of their parent company, with a credit for foreign taxes paid, reducing any incentive to use low-tax jurisdictions.
Three years ago the UK moved to a system which largely exempts foreign profits from UK taxation with the aim of attracting companies to base their parent entity in the UK.
One of the objectives of the recent talks has been to achieve multilateral adoption of CFC rules, which could benefit all countries.
A senior OECD official suggested that had not been possible, in part, because of the UK’s hardline position. He said: “There was a lot of push back on the issue of CFC from the UK.
“The UK has a pretty light approach on CFC but that is for countries to decide what they want to do there. We are providing models and best practices so that other countries can move towards them.”
He added: “It is true that the UK government has a very aggressive competition agenda in reducing corporation tax which lowered the CFC legislation … The UK’s diverted profit tax was also smart politics but it has not been helpful to us [either] because US business community has told the US government not to engage on this with us. That has been unhelpful – but it is in their prerogative to do that.”
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