Five questions answered on the crackdown on tax avoidance

G20 finance ministers make an announcement.

G20 finance ministers meeting in Moscow today announced a global crackdown on tax arbitrage by multinational companies. We answer five questions on the proposed crackdown.

Why has this crackdown been launched?

It’s been announced in a bid to tackle base erosion and profit sharing by multinational firms and hopes to address recent sustained criticism of the low tax paid by firms such as Google, Amazon and Starbucks.

It’s hoped it will push up tax rates for firms that specifically arrange their tax affairs so they only pay a small amount. 

What’s the plan?

An action plan has been drawn up by Paris-based Organisation for Economic Co-operation and Development (OECD) for the G20. It sets out more than a dozen ideas to block gaps between national tax systems and tackle practices that artificially separate taxable income from the activity that generates it.

It includes proposals to tackle abuses of tax and to prevent tax avoidance by shifting intangibles between group companies.

It also aims to neutralise the impact of “hybrid” structures used to reduce billions of dollars of tax.

Other countries that are outside the OECD, such as China and India, will be invited to take part in the programme.

What will the outcome be?

This will depend on the co-operation of governments over the next two years, but it is largely hoped that “the golden age of ‘we don’t pay taxes anywhere’ is over,” as said by Pascal Saint-Amans, the top tax official at the OECD.

But this may not happen if commitments of business and governments dwindle.

What have the experts said?

Will Morris, chair of the BIAC’s tax committee, speaking to The Financial Times, said: “In some areas, the international tax system has not kept pace with globalisation and changing business models, and it is appropriate to look again at those areas and consider, based on all the evidence, whether any changes are required.”

What have the critics said about this initiative? 

A campaign group that pushes for tax reform, The Tax Justice Network, also speaking to the FT said:  “piecemeal recommendations for states to apply patches to the increasingly leaky international tax system...would be like trying to plug the holes in a sieve.”

Photograph: Getty Images

Heidi Vella is a features writer for Nridigital.com

Photo: Getty Images
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There are risks as well as opportunities ahead for George Osborne

The Chancellor is in a tight spot, but expect his political wiles to be on full display, says Spencer Thompson.

The most significant fiscal event of this parliament will take place in late November, when the Chancellor presents the spending review setting out his plans for funding government departments over the next four years. This week, across Whitehall and up and down the country, ministers, lobbyists, advocacy groups and town halls are busily finalising their pitches ahead of Friday’s deadline for submissions to the review

It is difficult to overstate the challenge faced by the Chancellor. Under his current spending forecast and planned protections for the NHS, schools, defence and international aid spending, other areas of government will need to be cut by 16.4 per cent in real terms between 2015/16 and 2019/20. Focusing on services spending outside of protected areas, the cumulative cut will reach 26.5 per cent. Despite this, the Chancellor nonetheless has significant room for manoeuvre.

Firstly, under plans unveiled at the budget, the government intends to expand capital investment significantly in both 2018-19 and 2019-20. Over the last parliament capital spending was cut by around a quarter, but between now and 2019-20 it will grow by almost 20 per cent. How this growth in spending should be distributed across departments and between investment projects should be at the heart of the spending review.

In a paper published on Monday, we highlighted three urgent priorities for any additional capital spending: re-balancing transport investment away from London and the greater South East towards the North of England, a £2bn per year boost in public spending on housebuilding, and £1bn of extra investment per year in energy efficiency improvements for fuel-poor households.

Secondly, despite the tough fiscal environment, the Chancellor has the scope to fund a range of areas of policy in dire need of extra resources. These include social care, where rising costs at a time of falling resources are set to generate a severe funding squeeze for local government, 16-19 education, where many 6th-form and FE colleges are at risk of great financial difficulty, and funding a guaranteed paid job for young people in long-term unemployment. Our paper suggests a range of options for how to put these and other areas of policy on a sustainable funding footing.

There is a political angle to this as well. The Conservatives are keen to be seen as a party representing all working people, as shown by the "blue-collar Conservatism" agenda. In addition, the spending review offers the Conservative party the opportunity to return to ‘Compassionate Conservatism’ as a going concern.  If they are truly serious about being seen in this light, this should be reflected in a social investment agenda pursued through the spending review that promotes employment and secures a future for public services outside the NHS and schools.

This will come at a cost, however. In our paper, we show how the Chancellor could fund our package of proposed policies without increasing the pain on other areas of government, while remaining consistent with the government’s fiscal rules that require him to reach a surplus on overall government borrowing by 2019-20. We do not agree that the Government needs to reach a surplus in that year. But given this target wont be scrapped ahead of the spending review, we suggest that he should target a slightly lower surplus in 2019/20 of £7bn, with the deficit the year before being £2bn higher. In addition, we propose several revenue-raising measures in line with recent government tax policy that together would unlock an additional £5bn of resource for government departments.

Make no mistake, this will be a tough settlement for government departments and for public services. But the Chancellor does have a range of options open as he plans the upcoming spending review. Expect his reputation as a highly political Chancellor to be on full display.

Spencer Thompson is economic analyst at IPPR