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Rushanara Ali (Bethnal Green and Bow) (Lab)
I congratulate the Chair of the International Development Committee, the right hon. Member for Gordon (Sir Malcolm Bruce), on opening the debate. I commend the work of the Committee members on this important report and its insights into and contribution to the subject of tax in developing countries. The Opposition very much welcome the nature of the report and its hard-hitting recommendations. Alongside the recommendations already adopted by the Government, we hope that the Minister and her colleagues will look hard and closely at the others discussed by hon. Members, including my hon. Friend the Member for Birmingham, Northfield (Richard Burden), which have the potential to make a significant contribution if furthered by the UK Government.
Government Members and my hon. Friend have highlighted in the debate and through their work in the Committee and elsewhere that tax and public finance are the backbone of governance, state-building and effectiveness in any society. They are a vital component of public accountability and democracy. If the international community can do one thing to transform positively the politics and governance of developing countries, enabling them to become self-sufficient, it is to support efforts to collect the correct tax revenue and to ensure that it is spent properly, free from corruption.
The right hon. Member for Gordon mentioned a number of examples of progress being made thanks to investment over a number of years by DFID and others. Countries such as Rwanda and Tanzania, among others, give us signs of hope about how much progress can be made if we make the right investments and help with capacity building, supporting those countries to make the transformative changes to build their states and systems so as to be able to generate the kind of revenues to which they are entitled but which are currently being lost. As made clear by the Committee, we can therefore genuinely look forward to the opportunity for developing countries to be much less dependent on aid, which is surely in the best interests of the countries concerned, as well as of those countries contributing to the aid budget. It would not mean that developing countries will not need our support, but it would mean that they become more independent and self-sufficient, which is exactly what people in those countries want. Our duty is to ensure that we make the contribution and the changes, and to show the leadership required to enable that to happen.
A legitimate and accountable system for tax revenue is therefore critical to alleviating poverty, which my hon. Friend the Member for Birmingham, Northfield highlighted eloquently in his speech. He also spoke highly of the contributions of campaigning organisations such as Christian Aid, and I want to mention the campaign efforts of ActionAid, which has done a great deal of work with political parties across the board and with the Committee.
The report points out that in excess of $13 trillion may be hidden in tax havens and that the estimated cost to developing countries per annum is likely to be around £160 billion, a figure far exceeding the global aid budget. Imagine what could be achieved if that money was available to deal with global poverty.
I want to focus on a number of themes, some of which have already been discussed. I shall pick out three key recommendations of the Committee. I want to discuss controlled foreign companies and the Government’s response to the Committee’s recommendation of UK candidateship of the extractive industries transparency initiative. Hon. Members have raised both issues, but I have a few questions. The third area is the Government’s response to the Committee’s recommendation on the Commonwealth Development Corporation.
The report addresses the Government’s relaxation of their anti-tax-haven law—the controlled foreign companies rules. As my hon. Friend said, the Prime Minister demanded bold steps from his fellow G8 leaders when the UK took over its presidency. He pledged that the UK chairmanship would, among other things, focus on tackling tax dodging. However, the current reforms to CFC rules do not meet the Government’s rhetoric. Although we appreciate the need to reform those rules to provide certainty and an attractive climate for businesses based in the UK, there are, as the report and hon. Members here today pointed out, real concerns among Members of Parliament and organisations that campaign on the issue that that will lead to a setback and damage the prospect of developing countries being able to raise the sort of revenue that they have raised in the past.
Action Aid said of the changes that
“a significant deterrent that discourages UK-based companies from shifting profits from developing countries to tax havens”
will be lost and estimates that reforms may cost developing countries as much as £4 billion. If that is true, as many have indicated is likely, it is a scandal that the Government will preside over the change, and shameful that they will not consider the matter and take on board the Committee’s recommendation to carry out the impact assessment. That recommendation was also made by my party during discussion of the 2012 Finance Bill when an amendment was tabled to ask the Government to reconsider.
Will the Minister work with her colleagues in the Treasury and consider the matter again? As hon. Members have said today, the climate is right, and the opportunity exists—the British public are becoming increasingly aware of the dangers and immorality of tax avoidance as well as tax evasion—for the Minister to work with her colleagues to ensure that the change does not damage prospects for people in developing countries and that the loss of revenue does not happen. The sum is £4 billion, although the Government dispute that, but even if it is less it is a significant sum, which could make a difference to some of the poorest people in some of the poorest countries in the world.
The hon. Member for Mid Derbyshire (Pauline Latham) raised the important issue of the EITI, and I want to reiterate her point. Given the leadership role taken by the former Labour Secretary of State, Clare Short, and others—the British Government are recognised as having achieved this important development—it is right and it is time that the Government signed up to the EITI. We would show not only that we were the initiator, but that successive Governments have led by example, and this seems to be an opportune time to do so. Will the Minister work with her colleagues to reconsider the recommendation, and move from disagreeing to agreeing?
The right hon. Member for Hazel Grove (Andrew Stunell) referred to a key recommendation on CDCs, and it is clear that there are inconsistencies in what the Government are saying. Surely it is more appropriate and sensible to put serious weight behind transparency, and this is an important way in which to do so. Will the Minister say whether the Government will reconsider? The issue is tied in with country-by-country reporting by multinationals, not only in the extractive industries, but multinationals generally. Many are increasingly under public scrutiny for some of their actions, which people believe are unethical, and are attempting to improve their behaviour. The Government should show leadership, and one way of doing so is to increase country-by-country reporting and transparency. I hope that the Minister will look at the matter again, consider the views represented in the Chamber and expressed by the Select Committee, and rethink the Government’s position.
To reiterate a point that others have made, this issue is critical, but some people will say that it is not the most—
Rushanara Ali
The Minister used the word, and I will not repeat it. The issue is significant. If we get it right, tax and revenue raising for development will be a major contribution. It is not a magic bullet, but if there were something close to one, this is it. The Select Committee’s contribution in pulling the evidence together and highlighting the scope for action comes at an important moment. The public are leading the debate through their campaigning in the domestic arena, and people are increasingly recognising the immorality of tax evasion and avoidance, and this is an opportunity for the Minister and her Government to consider how to close those tax loopholes and to ensure that countries receive the revenue that is generated but that they are losing. The Government must provide the necessary support to make that happen. I hope that she will take on board the questions and issues that have been raised today.
The Parliamentary Under-Secretary of State for International Development (Lynne Featherstone)
It is a pleasure to serve under your chairmanship this afternoon, Sir Roger. I thank and congratulate my right hon. Friend the Member for Gordon (Sir Malcolm Bruce) on securing this important debate. I also thank him and the International Development Committee for providing a wide-ranging and thought-provoking report. Finally, I thank all those who provided evidence to the inquiry, which included representatives of business, leading academics and non-governmental organisations. Many points have been raised, and I will address as many as possible in the time left to me, but I want so make some general comments.
I agree with the Committee on the significant role that effective tax systems play in helping developing countries to increase their national prosperity and reducing aid dependency, so I welcome the broader parliamentary debate on the issue. Taxation is at the heart of what the Prime Minister described as the golden thread of development. As has been said, helping developing countries to mobilise domestic resources offers the only sustainable alternative to aid for the funding of public services. At the same time, taxation is an important part of governance and state building. It builds the relationship between citizens and the Government, making states more effective. Fair and transparent tax collection promotes social cohesion, shapes Government legitimacy, promotes accountability of Governments to tax-paying citizens, and stimulates effective state administration and good public financial management.
Taxation is a very important part of economic policy, for growth, trade, investment and private sector development, as well as for meeting environmental challenges. The coalition Government are committed to supporting developing countries to access sustainable sources of revenue and to collect the tax that they are due.
My right hon. Friend the Member for Hazel Grove (Andrew Stunell) asked if not this, what is the most fruitful way? That could be applied to many issues raised today. Apart from international negotiations and conferences, the most fruitful way this country can work with and help Governments across the developing world on this issue is through our world-respected and professional technical assistance on tax. We are lucky in this country, because we have Her Majesty’s Treasury to tell us how to do things. The rest of the world is not so fortunate and that expertise—[Interruption.] Why are people murmuring laughter at our being so fortunate? It is one of our principal talents and skills, and we can offer the world that expertise and really make a difference. I will come on to Zambia in a minute, because as my right hon. Friend the Member for Gordon said, there has been a huge achievement in terms of tax revenue collection, but there are also some holes in the system.
The IDC’s report acknowledged the value of support that the UK provides to revenue authorities. DFID’s work with partner countries on tax includes 48 tax programmes across 20 countries, totalling around £20 million a year. Our support is focused on where we can make the most difference and get the best results for our developing country partners. As several hon. Members have mentioned, we also need to deliver the best value for money for UK taxpayers. Most of DFID’s work on tax is at a country level. Projects are managed by staff who live and work in the country, which means that projects can be responsive and demand-led. Tax projects may focus specifically on strengthening revenue collection or on broader objectives, such as public financial management reform or public sector reform.
In Afghanistan, which my right hon. Friend touched on, from 2007 to 2012 we helped increase tax revenues from 4% of GDP to 11.6%, helping the Afghan Government to finance the delivery of basic services. Last month, the Secretary of State for International Development was in Afghanistan, extending that support to the Afghanistan Revenue Department until 2016 with the aim of increasing revenue collection to 15%. In Ethiopia, HMRC’s support to the Ethiopian Revenues and Customs Authority, together with other support, helped to reduce average customs clearance times: for example, low-risk imports went from seven days to 10 minutes, and exports from eight hours to 15 minutes. Those are huge barriers to have removed. In Rwanda, the UK helped to provide the laws and regulation under which the Rwanda Revenue Authority was established, and the office building and management systems. The authority reached a point at which it was collecting the full £24 million of DFID’s 10-year support programme every three weeks, and its effectiveness has been an important factor in Rwanda’s impressive record on development performance.
Building capacity of revenue authorities is important and, as other hon. Members have said, so is ensuring revenues are spent effectively. We do that in a number of ways. We recognise the importance and value of transparency in tackling tax evasion. The global issues referred to in the report have been getting more attention, and are rising up the agenda. Although not good, it has been helpful to see those corporate moves that meant that the large companies referred to in this debate paid so little in this country over a number of years. That has made the issue of how corporations use tax systems in different countries to move around their profits more understandable to the wider public, and that is a great motivator. The Prime Minister has put tax evasion and avoidance right at the top of the agenda for the G8 and is focusing on fixing the issue here, too.
I want to address some specific issues that have been raised. A number of hon. Members raised the issue of the EITI. In terms of our membership, the UK is a real supporter of the EITI, and first thought of it, but we did not implement it in the past because the IMF did not consider us resource rich. Greater transparency in the extractive sector will be an important focus of the UK’s G8 presidency in 2013. As others have said, the UK can hardly call on other countries to implement the EITI or live up to high standards if we are not prepared to do so ourselves. That is why the Prime Minister called for an urgent review of the UK’s position on EITI. We expect that review to be concluded by the end of January. We provide support to the EITI International Secretariat and the EITI multi-donor trust fund, which provides technical assistance to implementing countries and represents the UK on the EITI board. Our bilateral programmes support EITI candidacy and/or implementation: for example, in the Democratic Republic of the Congo, Nigeria, Afghanistan and Burma.
[Mr Charles Walker in the Chair]
At the moment, a decision has not been taken on the publication process of the EITI review, but the broadening of the scope was also raised. The Government welcome the review of the EITI that is under way to develop a broader standard for consideration by the EITI board, with a view to possible introduction in 2014. The UK is an active participant in the strategy review, which is a multi-stakeholder process, considering a wide range of proposals that could be included in a revised standard. As was raised by my hon. Friend the Member for Mid Derbyshire (Pauline Latham), the proposals include disclosure of contracts, more disaggregated reporting of data and background on the sector, among other things.
A number of hon. Members raised FATCA, or the US Foreign Account Tax Compliance Act. The Government are fully committed to tackling tax evasion. As we stated in the Government response to the Committee, we do not regard the unilateral introduction of a version of the US FATCA in all its glory—so to speak—in the UK as the means to achieve automatic information exchange, because FATCA is unilateral and extraterritorial in its approach. For example, it imposes severe withholding taxes on those that do not comply. While I cannot elaborate at this point on the significant difficulties that have been created for the US as well as the companies affected by its implementation, I am happy to undertake to write to my right hon. Friend the Member for Hazel Grove on that issue.
That said, as hon. Members may be aware, the Government have signed an agreement with the United States of America. It is the first of its kind and it will significantly increase the amount of information automatically exchanged between both countries. As announced at the autumn statement, the Government see that as testing a new international standard in tax transparency. Obviously, when we see how that goes, the Government will look to conclude similar agreements with other jurisdictions. The UK and the Isle of Man have jointly announced our intentions to conclude an enhanced automatic tax information exchange agreement, based on the UK-US FATCA agreement. We are also in similar discussions with the other Crown dependencies and the overseas territories. The Government commend the great leadership of the Isle of Man in this area. The G20, of course, is committed to strengthening tax transparency and the exchange of information.
Richard Burden
I am grateful to the Minister for giving way. If I understand her correctly—I hope she will tell me if I have got this wrong—in terms of the outline agreements that are being reached with the United States and the work that is being done in relation to overseas territories, are the Government saying that they see those as a kind of pilot scheme for a more extensive automatic transfer of information? If so, that sounds like a good thing. If not, there is still a gap. What about the wider application of automatic transfer of information?
Lynne Featherstone
I thank the hon. Gentleman for his intervention. I cannot give him the comfort that he seeks that it is the Government’s intention, if what he refers to works, to extend it right across the world, but we are extending it and looking at it. If it provides a good model, we will obviously look at it again to see what application it might have in which jurisdictions.
My right hon. Friend the Member for Gordon raised the issue of Pakistan. I believe that hon. Members may have taken representations or evidence this morning. I understand that that is a real issue, because Pakistan has one of the lowest rates of tax collection, averaging only 10% of GDP in recent years. An improved tax regime is the key priority for DFID in Pakistan. The importance of improving Pakistan’s tax-to-GDP ratio is raised regularly in our engagement with senior Government representatives there, as it is by the IMF and other donors. We raise it; the issue is trying to get an effect and a change in the circumstances there. DFID is involved in strategic dialogue about the World Bank’s support on revenue at federal level and also contributes analytical work—for example, on the political economy of tax reform. We are supporting wider public financial management reform in some provinces. That includes the strengthening of revenue policy. This is a major issue, on which we are putting a lot of emphasis.
There was frustration about the willingness of elites to pay tax in developing countries. It is true: the elites are very reluctant to pay. How can we expect everyone else to be paying tax in a country if the elites are not setting an example? As an example, I refer to what DFID has done in Burundi. As ever, I hear what my right hon. Friend says about the Select Committee’s view on Burundi. He has made that case both publicly and privately on many occasions. However, there is the recent example of DFID supporting the Office Burundais des Recettes. A public outcry has led to MPs and Ministers paying tax for the first time. It is something if one can raise the issue to the point at which there is a public voice about the accountability of the Government in terms of setting the prime example. My right hon. Friend made the point that if Prime Ministers and MPs do not pay their taxes, it is pretty hard to say to the rest of the country and to the elites, “You should be paying tax.”
I do not want to go on for too long. The Chair has changed—it is a great pleasure to speak under your chairmanship, Mr Walker—and my right hon. Friend the Member for Gordon must introduce the second debate. However, I want to address a couple of things. One issue that was raised quite often was the Starbucks effect and what we are doing in this country about that. The Government are taking significant steps to ensure that everyone, including multinational companies, pays their fair share of tax. The response is twofold. There is support for international action. Alongside France and Germany, we are providing additional resources to the OECD to speed up the international efforts on dealing with profit shifting by multinationals and erosion of the corporate tax base at global level. The OECD will deliver a progress report to the G20 in February 2013 on actions to tackle base erosion and profit shifting.
There is also further investment in HMRC. HMRC will expand its risk assessment capability across the large business sector and increase its specialist transfer pricing resources to speed up its work to identify and challenge multinationals’ transfer pricing arrangements. The Government relentlessly challenge those that persist in avoiding tax and have recovered £29 billion of additional revenues from large businesses in the last six years, including £4.1 billion in the last four years from transfer inquiries alone.
A number of hon. Members raised the issues brought up by Christian Aid and ActionAid in relation to the costs of evasion and avoidance. As has been discussed, the estimates are numerically disputed, but the bigger point is that, despite suggestions that the estimates of tax evasion and avoidance have been agreed by the OECD, the figures have not been endorsed by any of the OECD’s committees. The key point is that evasion and avoidance are undoubtedly significant challenges for developing countries and that the Government are committed to providing support, but as I have said, tax capacity building and technical assistance are the primary issues.
I want to deal with the country-to-country reporting model or rather the broader one, not the one that is being considered for the EU directive, which is for the smaller view. The big ask is the model whereby all multinationals disclose information that goes beyond payments to Governments. This model has been discussed in the OECD task force on tax and development without any consensus being reached on its merits. The Government believe that the case has not been made for the effectiveness of this model in achieving its objectives while minimising costs to business. It is not being called for by developing countries, but the Government do agree that many developing countries do need to improve their ability to assess transfer pricing risk and detect abusive profit shifting and that other options, such as the transfer pricing transaction schedule described in recommendation 7, could offer more proportionate and effective help.
A number of hon. Members raised the issue of a DFID Minister for tax. I have to say, as my right hon. Friend the Member for Hazel Grove rightly predicted I would, that the development impact of UK tax and fiscal policy is a collective responsibility for all members of Government. DFID, the Treasury and HMRC all work together. [Laughter.] Did my right hon. Friend read my brief? However, the UK is committed to helping developing countries to build robust, fair and sustainable domestic taxation systems and, having listened to what was said, I propose to consider the proposal that was made for an inter-ministerial group. I will take that away with me. I am not promising anything, but I want to look at how that is referenced. There are many discussions across Government. Her Majesty’s Treasury is everywhere across Government, as I am sure hon. Members in this room are well aware, but if what was proposed would be a productive way forward, I am certainly prepared to look at it in the future.
The last issue that I will address, because I have gone over my time slightly, is the request by the International Development Committee on scaling up. The report acknowledges the value of technical assistance provided by DFID and HMRC to national revenue authorities in developing countries and recommends that work in this area is scaled up. I agree completely. I have been in post for four months now and have been looking at this issue. Tax is high on the agenda. It is high on the agenda for the G8. It seems to me that the most successful and most useful thing that we have done as a Government in terms of enabling developing countries to operate is to enable them to be the masters of their tax collection and their tax systems.
I was in Zambia, too, and Zambia did fail some of the tests set by the IDC in terms of the provision of information. We are looking at that. But in Zambia, I did meet representatives of the audit committee, the public accounts committee and the Office of Public Prosecutions. All of them are taking on this agenda in a way that I have not seen in many places. There really is a desire for them to collect the revenue and for us to help them—enable them—to do that and do it well.
I am sorry that I have not addressed all the points that were made. There is unanimity across this room and, indeed, everywhere that it is important to deal with tax avoidance and tax evasion not just because that would enable countries to fund their own public services and to begin to achieve separation in terms of aid dependency, but because there is moral rectitude in paying one’s fair share. In this country, as others have said, we stand proudly on our commitment to 0.7% of GDP in a political environment that is challenging; there have been attacks on us for that. We have to show that every penny counts and every taxpayer pound is spent wisely. One of the ways in which we do that best is by helping to ensure that tax revenues can be collected across the world. Those who travel across the world and talk to the Governments of the world and civil society across the world will know that the position is variable across the world. We are making progress, but there is still progress to be made.
I thank all Members for their contributions. I thank the Committee again for drawing attention to this subject and for recognising the valuable work the UK is doing. The IDC has made a valuable contribution to the new shape of our programme for tax.
Mr Charles Walker (in the Chair)
Order. May I ask Sir Malcolm Bruce to respond briefly to this debate and then to move seamlessly into his opening remarks for the next debate?