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Chris Philp
I am sorry that that more attractive alternative did not present itself. However, it is of course an enormous pleasure to serve under your chairmanship, Dame Cheryl. I add my congratulations to my hon. Friend the Member for Harborough (Neil O'Brien) on securing the debate.
I am not sure I want to confess this in public, but I will: when this document, “Corporate tax and the digital economy: position paper update”, arrived in my inbox this month, I quivered with excitement because the topic is so important. I am delighted to see the Government, and particularly the Financial Secretary to the Treasury, my right hon. Friend the Member for Central Devon (Mel Stride), who I gather has been upgraded to be the Paymaster General as well—
Chris Philp
He is a man of many talents. I was delighted to see him taking the initiative in this important area.
It is worth saying that significant progress has been made in the past eight years, as some colleagues have mentioned. The country’s tax gap is at just 6%, down from 8% in 2010, and is the lowest among OECD countries, which is a very good thing. The amount of corporation tax that we have collected has gone up from about £35 billion to about £55 billion in the past eight years, despite the fact that, as my hon. Friend the Member for North East Hampshire (Mr Jayawardena) mentioned, the rate at which it is levied has gone down. That is all extremely welcome, and the Government are to be warmly commended for that progress.
It is, however, also true—I think this view commands widespread support—that a number of typically large multinational companies, often providing digital services, such as Google and Facebook, have succeeded in organising their affairs, fully in conformity with current international tax laws, such that they manage to argue that the substance of their economic activity takes place in very low-tax jurisdictions. Those jurisdictions are often in the Caribbean, and I suspect that they are not selected for their clement climate. That situation strikes me as fundamentally unfair and unreasonable. The Government have, of course, already taken a lead in the matter, via the base erosion and profit shifting initiative, including such things as limiting the deductibility of interest expense to 30% of earnings before interest, taxes, depreciation and amortisation. The UK Government led on that, and are to be strongly congratulated on it. However, there is scope to go significantly further.
It just does not seem right or fair that a company such as Google, with revenues in relation to UK customers in the order of £4 billion, pays virtually no tax by successfully arguing that the substance of its economic activity lies elsewhere. That is why I was so excited by the position paper update, published a few weeks ago. The approach laid out in the excellent position paper, which by the way I fully support, is a multilateral one of trying on an international basis to redefine economic activity to account for the value created by users. It is exactly the right thing to do, and I hope we are successful in that. However, I suspect that as with any multilateral enterprise, it will take time to get agreement with many other countries, particularly when some of the companies concerned will use their influence to try to slow things down and stymie progress. While it is certainly right to take a multilateral approach to changing the way we define economic activity, it is important to have a plan B that could be implemented much more quickly.
The position paper deals with that admirably. It discusses a tax on sales and, as hon. Members have said, the European Union is looking at that. I fully support that approach. A threshold of the kind that we have talked about, to exclude small and even medium-sized companies, is the right thing. The number that I heard mentioned—3% of sales—seems reasonable. A point that I want to make more for the 27 European countries than for us is that care should be taken to ensure that the EU does not use it as a pretext for retaining the tax receipts and developing a European Union treasury function for the first time. That will not, I think, concern us, but it might concern the other 27 members.
I advocate that if the European Union does not move quickly enough and implement the sales tax in a timely fashion—and by “timely” I mean that I hope it would happen in the next 12 to 24 months—the UK should take unilateral action. My hon. Friend the Member for North East Hampshire made a cautionary point about not making the UK uncompetitive, but of course the tax would be based not on where the company was domiciled but on where its sales occurred and where its users were. It would not be a disincentive to locating in the United Kingdom, either for permanent establishment or locus of incorporation. A sales tax or, indeed, a user tax would not violate the principle of competitiveness to which my hon. Friend rightly referred. We are generally speaking the second largest market for the companies in question, behind the United States of America. We are significantly larger than Germany because our economy tends to be rather more intensively digital. I do not think that, if we took unilateral action, Google or Facebook would suddenly refuse to do business in the United Kingdom. If they did, they would be pulling out of their second largest global market.
I suspect that unilateral action on a sales tax while we are a member of the European Union—and, I suspect, during the transition period up to December 2020—would probably be classed as VAT, or sufficiently similar to VAT to fall foul of European regulations. If we have to consider unilateral action, which I advocate and support, prior to our exit from the EU or the end of the transition period, something other than a sales tax would have to be considered. Something we might consider that would not fall foul of EU regulation on sales taxes and VAT would be a tax based on users. We might set a user-based tax of a certain pound amount per active user, for example. That would, again, apply only to the very largest companies with, perhaps, a UK turnover in excess of £100 million. That would make sure that they made a reasonable contribution before we managed to come up with a multilateral solution at global level or a sales tax at European level. It would, I think, be a good move. It would not undermine our competitiveness and it would mean that those companies were seen to make a fair contribution.
The proceeds of such a tax could usefully be applied in the area of business rates. Several colleagues have mentioned that, and I am sure that small businesses in all our constituencies have raised the issue of business rates with us. Of course, digital companies such as Google and Facebook—and even Amazon, because it operates from large warehouses in remote locations that do not have a high rateable value—pay little in business rates. They also pay little in corporation tax, although of course they pay their full share of payroll taxes. It is inherently rather unfair: local high street businesses pay their full share of business rates and corporation taxes. So some of the money raised by the digital tax, whatever form it might take, could be applied to offer business rate relief, particularly to smaller businesses—perhaps those with less than £28,000 a year of rateable value.
I should be interested to hear the Financial Secretary’s response to the one or two ideas that I have set out. Really, however, I want to express my strong and enthusiastic support for the course that he has laid out. It is a great pleasure to come here and support it.
The Financial Secretary to the Treasury (Mel Stride)
It is a pleasure to serve under your chairmanship, Dame Cheryl. It was a pleasure to hear the opening speech, because it was insightful, clear and well-structured and set out. Given that this is a highly technical subject, that was quite an achievement. It was also extremely thoughtful. It has been remarked by a number of hon. Members that there are quite a few of us on this side of the House. That is because we care deeply about issues such as tax. Traditionally, we like to see taxes as low as possible, as my hon. Friend the Member for Saffron Walden (Mrs Badenoch) rightly pointed out, but we also recognise that tax is important, because it provides the finances for vital public services—our national health service, our social care, our armed forces, our police, our teachers and so on. We also recognise, as several hon. Members have pointed out, that it is important in terms of fairness and of having a level playing field—particularly, in that context, for those hard-working small businesses that occupy our high streets, which have to pay their business rates, a tax which cannot be avoided whether a business is profitable or unprofitable. On this side of the House, we recognise the paramount importance of getting to grips with the issues we have been discussing today.
Hon. Members have, understandably, raised the issues of avoidance, evasion and non-compliance. Conservative Members have dealt at length on the great success we have had in that respect. We have raised or protected £175 billion since 2010. We have one of the lowest tax gaps in the world—the difference between what we could collect and actually do collect—at 6%. HMRC is doing a great job, by and large, in ensuring that those who are due to pay tax do indeed pay it.
It is important to point out, as several hon. Members have, that what we are discussing today is predominantly not about avoidance and evasion. That is an important distinction. Whatever we may feel about tech companies or internet-based businesses—and they do not always acquit themselves admirably—the accusation is not in any way that they are avoiding taxation, but simply that the current international tax regime does not effectively accommodate the way they generate value within the United Kingdom.
If this is not about avoidance, what exactly is it all about? It is about the way the current international tax regime assesses taxation and where corporation tax should fall due based on where the economic activity occurs. As my hon. Friend the Member for Harborough (Neil O’Brien) rightly pointed out, typically we would be looking at the factories, the employment of people, where the intellectual property lies and where the decisions around risk and investment in the business are taken. We know that for certain types of digital platform—typically, the search engines, the online marketplaces and the social media providers—a lot of the value is generated via the interaction between the end user and the platform itself. Therein rests the actual value. The question we then have to ask is how do we effectively address that situation and ensure that where businesses generate huge sums of profit within the United Kingdom, a fair share of corporation tax falls due to them.
We have already brought in a measure, announced in the autumn Budget, to tax the royalties that flow to intellectual property held in zero and low-tax jurisdictions. This is very much a front-foot approach to those digital-based businesses that are shifting profits out of the United Kingdom in tax terms. We are consulting on that and legislation will come forward in due course. We expect it to raise around £800 million by 2023. That is a significant sum. It is the kind of amount that could potentially be useful to ease the pressure on our high streets, as many have called for this afternoon.
The position paper last year and the March paper we just introduced by way of consultation were mentioned. In those papers, we have suggested that our preferred route is a globally negotiated deal with our partners in not just the European Union but the wider OECD. That is to ensure that any agreement works effectively, and that we avoid the problems associated with unilateral action, such as situations of double taxation between ourselves and countries that we trade with around the globe. However, in that paper we do set out an interim position.
I should make clear the Government’s intention that if we do not move forward at sufficient pace to put the appropriate measures in place, we will seriously consider an interim position—a unilateral move, which my hon. Friend the Member for Croydon South (Chris Philp) was keen to see. Under those circumstances, we would potentially look at a tax based on revenue, recognising that we do not want to capture market entrants or early-stage companies that may have some level of revenues and therefore fall to this type of tax, but which could be unprofitable at that stage of their development. This is where the whole issue of de minimis and thresholds comes in, which hon. Members have spoken about this afternoon.
In that context, it might be worth briefly referring to the proposals put forward by the European Union in its recent paper. As my hon. Friend the Member for Harborough pointed out, it has suggested that a 3% tax on revenues would be appropriate, raising about €5 billion, but that there should be a de minimis on the basis of those companies’ worldwide turnover and the level of taxable revenues that would fall due within the European Union. It also makes the point that it is important, within EU domestic tax legislation and the treaties between member states, that we have a definition of the concept of significant economic presence, which captures this idea of creating value in the way that I described. It also recognised the importance of going further and factoring in those definitions within the bilateral or multilateral trade agreements and tax treaties that we have with the rest of the world—with non-EU member states. That is to capture the fact that it is often companies outside of the EU that are transacting in this manner—many of those businesses are in the United States.
I will conclude by saying that we are very serious about this matter. I have a great deal of time and some affection for the shadow Minister, the hon. Member for Bootle (Peter Dowd), despite the red book that beats in his breast pocket as I address him. In response to him I have to say that it is this party, the Conservative party in government, that is doing something about this issue. It is not the Labour party that ever got on top of avoidance, evasion and non-compliance—just look at the 6% compared with the 8%-plus under Labour. We are the party that is bearing down on these issues.
My hon. Friend the Member for Harborough, who will wrap up the debate in a moment, has my personal assurance that we will continue to take this matter extremely seriously. We will press ahead with vigour on the basis that, ultimately, it is only fair to do so.