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23 August 2012

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.

By Chris Jordan

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.

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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?