Tax dodging by foreign companies risks rendering aid pointless

The amount lost to foreign countries through tax dodging far outstrips the aid budget – and it could get worse.

From caravans, to pasties and grannies, the tax U-turns performed by the Government after the Budget last March have been well documented. But a much more fundamental shift in tax code, which will make it far easier for the biggest multinationals to make even greater use of tax havens has gone almost unnoticed.

Changes to obscure sounding Controlled Foreign Company (CFC) rules radically weaken the UK’s anti-tax haven abuse regime. Not only will they cost the UK almost £1 billion in lost revenues, ActionAid estimates they could also cost developing countries £4 billion a year.

Following a nine month investigation into the importance of tax revenues for developing countries, the cross-party International Development Select Committee are today calling on the Government to drop its CFC changes if a Treasury assessment finds that it will do harm.

Sir Malcolm Bruce MP, Chair of the Committee, argued that "it would be deeply unfortunate if the Government’s [aid] efforts were undermined by its own tax rules." A loss of £4bn is roughly half the British aid budget.

At present, the Treasury refuses to undertake an impact assessment – in spite of recommendations from IMF, World Bank and UN, alongside calls from thousands of ActionAid supporters around the country.

The International Development Committee (IDC) report also recognises the fundamental importance of helping developing countries to increase their own tax revenues, enabling them to put more teachers in schools and nurses in hospitals. Ultimately, improving their ability to collect tax will enable poor countries to end aid dependency.

The committee calls on the Department for International Development to give a higher priority to helping the developing world improve its tax base. Ministerial oversight is vital to ensure that future moves by the Treasury don’t come at the expense of some of the world’s poorest countries.

The report echoes the calls of tax justice campaigners for much greater transparency in the way both multinational companies and tax havens operate. In particular the report highlights the need for the Treasury to press the Channel Islands and the Isle of Man to make the financial accounts of subsidiary companies registered there publicly available.

The OECD currently estimates that developing countries lose three times more to tax havens than they receive in aid each year. Any measures which help prevent this vast out-flow of vital resources could have a transformative effect on the lives of millions of poor people.

The challenge to Government laid down by the IDC is clear. The question is – will they listen?

Uncanny Valley: George Osborne and Mitt Romney spoke during the latter's visit to Britain. Photograph: Getty Images

Chris Jordan is a Tax Justice Campaigner for ActionAid

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The Autumn Statement proved it – we need a real alternative to austerity, now

Theresa May’s Tories have missed their chance to rescue the British economy.

After six wasted years of failed Conservative austerity measures, Philip Hammond had the opportunity last month in the Autumn Statement to change course and put in place the economic policies that would deliver greater prosperity, and make sure it was fairly shared.

Instead, he chose to continue with cuts to public services and in-work benefits while failing to deliver the scale of investment needed to secure future prosperity. The sense of betrayal is palpable.

The headline figures are grim. An analysis by the Institute for Fiscal Studies shows that real wages will not recover their 2008 levels even after 2020. The Tories are overseeing a lost decade in earnings that is, in the words Paul Johnson, the director of the IFS, “dreadful” and unprecedented in modern British history.

Meanwhile, the Treasury’s own analysis shows the cuts falling hardest on the poorest 30 per cent of the population. The Office for Budget Responsibility has reported that it expects a £122bn worsening in the public finances over the next five years. Of this, less than half – £59bn – is due to the Tories’ shambolic handling of Brexit. Most of the rest is thanks to their mishandling of the domestic economy.

 

Time to invest

The Tories may think that those people who are “just about managing” are an electoral demographic, but for Labour they are our friends, neighbours and the people we represent. People in all walks of life needed something better from this government, but the Autumn Statement was a betrayal of the hopes that they tried to raise beforehand.

Because the Tories cut when they should have invested, we now have a fundamentally weak economy that is unprepared for the challenges of Brexit. Low investment has meant that instead of installing new machinery, or building the new infrastructure that would support productive high-wage jobs, we have an economy that is more and more dependent on low-productivity, low-paid work. Every hour worked in the US, Germany or France produces on average a third more than an hour of work here.

Labour has different priorities. We will deliver the necessary investment in infrastructure and research funding, and back it up with an industrial strategy that can sustain well-paid, secure jobs in the industries of the future such as renewables. We will fight for Britain’s continued tariff-free access to the single market. We will reverse the tax giveaways to the mega-rich and the giant companies, instead using the money to make sure the NHS and our education system are properly funded. In 2020 we will introduce a real living wage, expected to be £10 an hour, to make sure every job pays a wage you can actually live on. And we will rebuild and transform our economy so no one and no community is left behind.

 

May’s missing alternative

This week, the Bank of England governor, Mark Carney, gave an important speech in which he hit the proverbial nail on the head. He was completely right to point out that societies need to redistribute the gains from trade and technology, and to educate and empower their citizens. We are going through a lost decade of earnings growth, as Carney highlights, and the crisis of productivity will not be solved without major government investment, backed up by an industrial strategy that can deliver growth.

Labour in government is committed to tackling the challenges of rising inequality, low wage growth, and driving up Britain’s productivity growth. But it is becoming clearer each day since Theresa May became Prime Minister that she, like her predecessor, has no credible solutions to the challenges our economy faces.

 

Crisis in Italy

The Italian people have decisively rejected the changes to their constitution proposed by Prime Minister Matteo Renzi, with nearly 60 per cent voting No. The Italian economy has not grown for close to two decades. A succession of governments has attempted to introduce free-market policies, including slashing pensions and undermining rights at work, but these have had little impact.

Renzi wanted extra powers to push through more free-market reforms, but he has now resigned after encountering opposition from across the Italian political spectrum. The absence of growth has left Italian banks with €360bn of loans that are not being repaid. Usually, these debts would be written off, but Italian banks lack the reserves to be able to absorb the losses. They need outside assistance to survive.

 

Bail in or bail out

The oldest bank in the world, Monte dei Paschi di Siena, needs €5bn before the end of the year if it is to avoid collapse. Renzi had arranged a financing deal but this is now under threat. Under new EU rules, governments are not allowed to bail out banks, like in the 2008 crisis. This is intended to protect taxpayers. Instead, bank investors are supposed to take a loss through a “bail-in”.

Unusually, however, Italian bank investors are not only big financial institutions such as insurance companies, but ordinary households. One-third of all Italian bank bonds are held by households, so a bail-in would hit them hard. And should Italy’s banks fail, the danger is that investors will pull money out of banks across Europe, causing further failures. British banks have been reducing their investments in Italy, but concerned UK regulators have asked recently for details of their exposure.

John McDonnell is the shadow chancellor


John McDonnell is Labour MP for Hayes and Harlington and has been shadow chancellor since September 2015. 

This article first appeared in the 08 December 2016 issue of the New Statesman, Brexit to Trump