View from the Chair: Global Tax Reform is in Danger

Dame Margaret Hodge MP, Chair of the APPG on Anti-Corruption & Responsible Tax writes:

Last year I wrote in Red Box that we faced a corporate tax avoidance crisis. As the pandemic struck and British businesses struggled, the biggest companies deliberately shirked their responsibilities to pay their fair share. One year later, the dial has shifted: the tax world could be on the brink of change.

President Biden re-energised international talks to reform the way that multinational corporations are taxed and make the system fit for purpose in a digital world. While his cantankerous predecessor rejected negotiations at the level of the OECD, Biden has added impetus to the challenge of tackling corporate tax dodging.

Tax avoidance really matters. Most individuals and most companies pay unquestioningly and on time. But the richest and most powerful corporations deploy deliberately complex financial structures, shady networks of offshore subsidiaries and questionable accounting practices to avoid paying into the exchequer. We all suffer for it as tax coffers dwindle.

Digital companies are the worst culprits. The Fair Tax Foundation calculated that Amazon, Apple, Facebook, Google, Microsoft and Netflix have avoided $100 billion of tax globally in the past decade.

Let’s look at Amazon. Their accounts show that last year UK sales shot up 51 per cent to £19.4 billion. But because sales are booked in Luxembourg, their corporation tax contribution was only 0.1 per cent of turnover, hardly a fair slice of the profits they must have made.

The worst of this egregious behaviour could soon become a thing of the past. After sustained pressure from tax justice campaigners, the UK government cast aside its objections to reform and supported an agreement at the G7 in Cornwall. A further deal was struck last week at the OECD by 130 countries.

The deal has two parts: “pillar 1” will redistribute some tax paid by the very biggest companies to the jurisdictions where their sales occur. “Pillar 2” sets a new minimum global corporate tax rate of at least 15 per cent.

The deal’s first part is about taxing the digital economy while the second is designed to limit profit-shifting to tax havens. On the face of it these are historic reforms. Yet on closer inspection the deal is far from perfect and a long way from implementation.

On the upside, the deal represents a momentous shift on international tax arrangements. Never in my years of fighting tax avoidance did I think we would achieve an international agreement on tax reform. For too long the biggest corporations have acted with arrogance and impunity. Now we’re finally reclaiming our tax sovereignty and forcing some multinationals to pay more.

On the downside, however, the deal has serious pitfalls. A minimum tax rate of 15 per cent is simply too low. According to IPPR, at this rate the UK will only raise £7.9 billion.

Furthermore, research by Taxwatch suggests that the tech giants would find themselves paying less tax in the UK under the deal than they currently pay through our digital services tax. Meanwhile, the US stands to make billions from the deal as it is the “home” country for the big tech companies.

Initial proposals from Biden were for a 21 per cent rate and rumours suggest that our government strongly opposed this. If so, it calls into question whether Rishi Sunak really intends to raise our corporation tax rate to 25 per cent in 2023 or whether he is instead happy to see companies exploit loopholes to avoid the higher rate.

Another fatal flaw is the limited range of companies the deal catches. The bar for both parts of the deal has been set very high with different criteria around size, turnover and profitability. Pillar 1 excludes key sectors like financial services and extractive industries. These limitations do not just cut the tax take — they disproportionately affect the poorest developing nations.

There is still work to be done to make these reforms truly transformational. The original aim was to capture profits from the multinationals and tax them in the jurisdictions where the profits were earned. The further we move from this aim, the weaker the reforms become.

What could have been a once-in-a-generation moment for change is in danger of becoming a damp squib. The government must use every lever at its disposal to both strengthen the agreement and push for a more ambitious rate.

One thing they could immediately do that would help is to bring into effect a transparency measure that parliament passed into law in 2016 but has not yet been enacted. Public country-by-country reporting would allow us to see precisely where companies are earning their money and therefore where they should be paying their taxes. The EU is adopting this transparency measure and American legislation has just passed in favour too.

Finally, the chancellor must decide where next for Britain. We used to be a global leader on tax avoidance and financial crime but we have slipped from that pedestal. Britain and our offshore tax havens – the overseas territories and crown dependencies – have become global hubs for tax dodging and dirty money.

Do we want to regain our leadership role and restore our international reputation? Or is the chancellor more interested in perpetuating the race to the bottom?

(Originally written for Red Box in The Times)