This year could bring majo–r changes in the international tax system. The G20 expects to reach an agreement on a multinational digital tax this summer, and the US treasury secretary, Janet Yellen, proposed last week that this could be the precursor to a minimum global rate of corporation tax. At the same time, the EU is planning a new transparency law that would compel multinationals to report the tax they pay in each member state.
But not every country is on board with such reforms. One state – the global leader in tax avoidance – actively resists a more effective global tax system: the United Kingdom.
Estimates from the Tax Justice Network suggest the UK, together with its Crown Dependencies and Overseas Territories, is responsible for 42 per cent of the $427bn in tax revenue that is lost globally to corporate and private tax avoidance. At $160bn per year, this is more than Britain spends on education and defence combined.
Much of this money is funnelled through three tiny Overseas Territories – Bermuda, the Cayman Islands and the British Virgin Islands, which occupy all three of the top positions in the Tax Justice Network’s 2020 Tax Haven Index. These three jurisdictions are thought to cost governments $101bn in taxes each year – 24 per cent of all public revenue lost to tax havens.
Multinational corporations use various means to report their profits in low-tax jurisdictions, rather than where they are actually earned. For instance, firms may force subsidiaries in high-tax areas to purchase goods or services at steeply inflated prices from subsidiaries in tax havens. Since corporation tax is levied on profits, shifting profits in this way can dramatically reduce a company’s tax bill.
This may be why, despite having a combined population smaller than that of Chelmsford (156,000), Bermuda, the Cayman Islands and the British Virgin Islands are together home to more than half a million companies.
Figures from GlobalData show that 29 per cent of top multinationals have at least one subsidiary in these islands, including a third or more of those based in the UK, US or China. The figure is even higher for firms based in financial services (37 per cent), or the oil and gas sector (45 per cent).
Some companies go further than others, setting up complex networks of offshore shell companies in order to minimise transparency. At least 198 multinationals have more than five registered subsidiaries in these three tax havens, while three American investment funds have more than 200.
By forcing multinationals to publish details of their economic activities and taxes paid in each jurisdiction, known as “country-by-country reporting”, the EU hopes to pry open such practices to public scrutiny. Meanwhile, Janet Yellen recently called for an international minimum corporate income tax – which could wipe out tax havens altogether.
Britain has resisted reform of the system, despite being one of its biggest losers. A recent study found that foreign multinationals in the UK report half as much in profits as otherwise similar domestic firms, which do not have easy access to profit-shifting techniques. A majority report no profits at all to the Treasury (51 per cent), compared to just 21 per cent of domestic firms.
Successive cuts to UK corporate income tax seem to have done little to solve the problem. Between 2000 and 2014, corporation tax fell from 30 to 21 per cent, yet the proportion of foreign multinationals reporting zero UK profits rose from 22 to 35 per cent.
The Treasury is currently thought to lose approximately £40bn a year to international tax avoidance, according to Tax Justice Network estimates, equivalent to 25 per cent of the annual education budget or £607 per UK resident.
These are just estimates the exact extent of tax avoidance is by design impossible to accurately measure. The Tax Justice Network’s estimates are based on aggregated country-by-country data on the activities and taxes of multinationals, released by the OECD for the first time last year.
“It’s not perfect, but it’s still better data than any of the data we had before,” says Alex Cobham, chief executive of the Tax Justice Network. “It’s come from the companies’ tax filings, so in theory there’s some audit standard. As a result, it’s a lot more robust than our previous best data, which was based on surveys.”
Notably absent from the data, however, is the UK. The government has collected country-by-country data on the taxes and activities of major UK multinationals, with the power to disclose these figures to the public, since 2016. Yet Britain has so far refused to honour its commitment to sharing these figures with the OECD and last year rowed back on its pledge to consider public disclosure at the company level.
With the EU now pushing ahead with such plans, however, the UK may be changing tack. A senior Treasury official recently hinted that the government was once again open to considering public disclosure of the company-level data.
Country-by-country reporting is not the only area in which the UK and EU are diverging on tax transparency, however. The Brexit deal committed Britain to maintaining the standards required of any OECD member, but not the more stringent standards set out in the EU’s Code of Conduct on Business Taxation.
Britain and the EU are also moving in opposite directions on the issue of free ports. These low-transparency, low-regulation, customs-free zones are known to create significant opportunities for tax avoidance, money laundering, smuggling and terrorist financing. For this reason, the EU has begun to fade them out across the bloc.
With Washington and Brussels now apparently determined to clamp down on international corporate tax avoidance, the UK’s intransigence risks undermining the efforts of its two most powerful allies and turning the country into an international pariah.