How A Shift In UK Tax Law Could Cost Developing Countries £4bn

August 24th, 2012

The United Kingdom is shifting some tax laws to make it easier for multinational corporations to avoid taxes via tax havens, through vehicles known as Controlled Foreign Corporations (CFCs). These vehicles are commonly used in the United States, and elsewhere, to shift profits to low tax jurisdictions. They are a legal way of pretending you made more where you did not. You would think that any smart country would be moving toward stricter laws to prevent the use of tax havens for profit shifting and corporate tax avoidance, but that’s not the most important part of the law’s impact.

Frequent Task Force blog contributors ActionAid have estimated that the biggest victim of the change could be developing countries:

ActionAid told the Commons committee that the changes could deprive developing countries of £4bn in revenues.

In a written submission to the committee, the charity called on the government to heed a call by the IMF, the OECD and the World Bank to assess the impact of such tax changes.

The charity wrote: “ActionAid is concerned that the proposals will eliminate a significant deterrent that discourages UK-based companies from shifting profits from developing countries to tax havens.

“We estimate that the reforms may cost developing countries as much as £4bn and have urged the treasury and DFID to conduct their own spillover analysis, as recommended by the international organisations. No such analysis has been undertaken.”

ActionAid cited the UK-based brewer SABMiller, maker of Peroni and Grolsch beers, which has shifted an estimated £100m of profits from subsidiaries in developing countries to tax havens.

What would happen is actually pretty simple. Under current law, the UK taxes worldwide corporate income for UK-based companies. While the system has a lot of flaws, it does succeed better than many other countries in taxing multinational profits. In order to prevent double taxation of the same income, the UK offers a credit for taxes paid in other jurisdictions. So, if, for example, Vodafone makes a profit in a developing country, like India, and it avoids paying the tax there, it would still have to pay up in the United Kingdom. So, its incentive to avoid taxes in the developing country is decreased. By changing rules for CFCs, the incentives shift, and UK-based companies will start avoiding tax both in the UK and the developing countries in which they operate.

I’d be very interested to hear analysis, using the same logic, of what kind of tax revenue the U.S. system of corporate profit shifting and endless deferral is causing developing countries to lose out on. I’d bet that its a whole lot more than £4bn.

Written by EJ Fagan

Follow @FinTrCo