Tax (Developing Countries)

Debate between Lord Bruce of Bennachie and Roger Gale

Thursday 17th January 2013 Westminster Hall

[Sir Malcolm Bruce (Gordon) (LD)]

The Select Committee on International Development is extremely grateful for the opportunity to debate two of our reports. The first is on tax in developing countries, and the second is on Afghanistan. We think both issues are important, although they are obviously completely different in their scope.

The Committee has long recognised that when British taxpayers put substantial resources into supporting developing countries, it is important that those countries raise their own tax base so that we are effectively working in partnership to develop their economies and services. Of course we recognise that the tax base in poor countries is inevitably low, and that the last thing that many people on very low incomes need is to be harried for tax. Nevertheless, almost every country has a variety of ways in which money can legitimately and properly be raised from different aspects of its economy. I will first mention the internal issues affecting developing countries and the role that the UK Government can play in addressing them. Members of our Committee often hear, as a mark of frustration that in many developing countries, willingness to pay tax in the sector of the population who have the capacity to do so is rather low. It is difficult to set a good example if Presidents, Prime Ministers, MPs and leading business people make little or, in some cases, absolutely no contribution to their own Exchequer. Before we consider the international dimension, it is worth putting on record that the Committee says, right at the start, that we should ensure that people who can pay tax in their home countries do so. Performance is variable; I am not suggesting that all countries are the same or equally bad.

Of course, many non-governmental organisations and campaigners focus on tax paid by national and international corporations. I will certainly come to that, and it is extremely important, but equality of treatment seems relevant. If we are to say, as we should and must, that national and international corporations operating in developing countries should pay their full share of tax, it is helpful if, for example, the local directors of those companies also pay their share of tax, and that the approach is seen to be equitable.

Having said that, I want to consider the issues affecting the tax paid by corporations operating internationally, and to make it clear to the House that although we examined tax in developing countries worldwide, we took Zambia as our case study because we felt that it had a growing and diverse tax base, with which we could perhaps test what could be achieved. We had a good visit to Zambia, which I will discuss a little later.

We made numerous recommendations in our report. The Government did not readily accept all of them, but they did accept some, and there are some that we hope they will work on. Indeed, developments in our own domestic circumstances in recent weeks have sharpened the debate and perhaps given the British Government pause to think that some of our recommendations are just as relevant to the UK as to poorer developing countries.

We recommended that the Government introduce legislation, similar to the American Foreign Account Tax Compliance Act, that would require tax authorities automatically to exchange information regarding UK citizens and corporations. The Government did not accept that, saying that there were difficulties—although the US seems to have managed it—but I think that more recently they have softened their line a little.

A number of our recommendations were designed to improve information exchange and transparency. The problem for all tax authorities is that if they do not have basic information about what individuals or companies are earning, it is pretty difficult to tax them fairly or at all. The classic practice for international companies is to move their earnings around to where they can secure the lowest taxation impact, or none. A lot of that might be legitimate, in that international corporations have international transactions that are not really attributable anywhere, although they should be taxed somewhere.

However, when serious, very identifiable economic activity is plainly taking place in an economic jurisdiction but little or no tax is being paid, something is obviously not right. When we engaged with the Zambian authorities, particularly about the taxation of their minerals and especially their copper industry, we got into the nitty-gritty of that. The copper industry in Zambia has operated for about 70 years. It dates back to colonial times and has been under different ownership; at one point it was owned by the state Government of Zambia, who frankly did not make a very good fist of it and ended up losing money on the copper mines. The timing was not good, and the operational management was probably not good either, so the mines were subsequently returned to private ownership.

That has been a good thing for Zambia. Copper prices have risen, the tax base has risen and taxes are being paid, which is making a significant contribution, but there is a degree of frustration and unhappiness. The Zambian authorities feel that the full amount of tax that could or should be paid on the basis of the economic activity within Zambia is not being paid, mostly due to the practice of transfer pricing. Exploring the debate reinforced our view that transparency of information is key to getting the tax base right.

If I give an example of the extreme view, it is easy to understand the issue. If a company had a very large productive mine—an obviously profitable commodity—in a developing country but paid a substantial amount of tax, albeit on a low rate on earnings, in the Cayman Islands, most people would understand that the Cayman Islands is not rich in the minerals on which the company was being taxed and that that was therefore an inappropriate redistribution of the accounts. It becomes more complicated, of course, when companies have many operating bases and lots of different activities, but the principle is nevertheless the same. We are trying to ensure that companies pay a fair tax on the activities that they conduct in any given geographical area to the Government of that country. That is corporation or related tax.

Zambia has gone through numerous different ways of doing things. It had an excess profits tax and a variable corporation tax. We discovered that the problem with all those approaches was that the licences under which different mines operated had been issued at different times by different Governments on different terms, all allowing companies to claim tax breaks, loss offsetting and so on, which enabled them to pay little or no tax. The resolution to that situation, which has not been entirely popular with the industry but which we understand and broadly support, has been to move to a system of royalties, set at 6% of turnover based on the company’s declared tonnages, knowledge of the ore quality and the prices set per day on the London Metal Exchange. The net result of that for those companies that complain is that it is something that is easy for the Zambian authorities to administer. It might be rough justice, but companies must come up with a credible alternative, which they have not done, if they argue that there is a better way of doing it. It looks as though that is likely to lead to a steadily rising revenue base for Zambia. I conclude from that that, on the whole, Zambia emerges as a pretty good case study.

On the copper belt and copper production, we had an extremely good exchange with Ministers and civil servants in Lusaka about the rest of the tax base. There is a ready recognition that, as Zambia’s economy grows, it should not be totally reliant on copper for its public finances; it wants instead to expand the tax base. It was looking for advice and help on how to do that. In other words, what can they tax efficiently, fairly and not counter-productively and how far down the earnings scale is it sensible to go? Clearly, it is neither administratively sensible nor economically wise to tax people at the very bottom. That made us realise that there was scope for the UK Government to do a lot more in partnership with developing countries to enable them to improve their revenue-collecting capacity. I can quote examples—good and bad—where that is happening. I have already mentioned Zambia. We have evidence that similar success has been achieved in Tanzania where the dependence on UK and other forms of development assistance is falling as a proportion of its overall budget because its tax base is rising. It is absolutely true of Rwanda, which is spectacularly successful in this area.

Interestingly, the head of the revenue authority in Burundi, who was previously in Rwanda and who is a British national with a strong Irish connection, has demonstrated a singular capacity to raise the revenue base in Burundi, which is a very poor country. For the Minister’s benefit, let me say in passing that it remains stubbornly the view of the Committee that Burundi should continue to receive UK aid. Whether or not the decision to close down the programme was misjudged, the case for continuing it is strong, and we will continue to make it.

The Committee took evidence this morning on Pakistan, where the position is depressingly unsuccessful. I should probably first mention Afghanistan, which we will be debating later. Thanks largely, but not exclusively, to the support of the UK Government, the tax base in Afghanistan has risen from almost nothing—3%—to 11% in the last few years, and the potential to raise it further is clearly evident. I can promise my hon. Friend the Member for Mid Derbyshire (Pauline Latham), who was a bit disgruntled because she did not hear a lot of the presentation we were given, that the content was good in that it showed how much the revenue base had risen, how much more potential there was and how valuable the UK Government support was. All that was achieved by officials working inside the Ministry to help get a handle on the figures.

The revenue collection in Pakistan is under 10%, which is awful for a well established country. Although it is classified as a lower-middle income country, it is, none the less, a middle income country. Bluntly, the figures are such because the leaders of Pakistan do not believe that taxes are a club they wish to join. Some 80% of MPs and the President pay nothing, so the will to collect tax is almost non-existent. Obviously, the Committee must deliberate further, and we will take more evidence from the Secretary of State next week and then produce a report. We are likely to say that Pakistan cannot go on expecting to receive unconditionally the bounty of the international community while not addressing the issue. That is simply not morally acceptable, economically sensible or fair. I can predict that we will come out with something fairly hard on that issue.

My point is that collection can be improved, and where that is done, it makes a difference. Where it is not being done, it needs to be done. Much more transparency is needed and information should be published on a country-by-country basis. I urge the Prime Minister, through my hon. Friend the Minister, whom I am delighted to see in her position and whose response I look forward to hearing, to look into the matter. What has happened in the UK in the past few months has possibly sharpened the focus of the Government. We will be chairing the G8 and, in that context, we are told that taxation will be a central issue. However, I suggest to the Government that while it is understandable that such an issue is driven by a degree of public anger against companies such as Amazon and Starbucks—Starbucks has been shamed into changing its stance on this—it should be recognised that if it is a problem for us, it is a much bigger problem for very poor countries, which might have a very limited amount of economic activity that is controlled and owned by overseas companies. I urge the Government to ensure that in the process of trying to raise the commitment to get an international agreement on tax, the interests of poor and developing countries are given special attention.

It has been recognised that, at a time of recession when Governments are clearly struggling with deficits, the knowledge that tax, which could or should accrue to a country’s Exchequer, is not doing so perhaps causes more anger than it would in normal times. Of course it is right that companies that are operating within our jurisdiction should pay their fair share of taxes. Perhaps it is because we are hurting that developing countries will benefit from a policy initiative that might not otherwise have taken off. We should try to get an international agreement that all countries will ensure a standard of accounting that makes all the relevant information clearly available in the public domain, so that revenue authorities can fairly assess where tax should accrue and where it is liable.

In Zambia, we were told that quite a lot of information is available, but it is not quite as easily available to the ordinary Zambian. It is very easily available to any sophisticated westerner with a credit card, but a person with no access to computers or to credit and who does not understand the system has a very small chance of finding such information even though it is available to them. We need to improve that and make information more accessible.

We hope the Government will take on board our recommendations and think about them a little more. We agree, I think, on the capacity to do more. We have suggested that the Government consider a more proactive partnership with our own Revenue and Customs. Where appropriate, of course it should be collecting our taxes, but, where we can, we should second people or support the Revenue to work alongside revenue authorities in developing countries to build up their capacity for tax. It is in the interests of donors, the people in the country, and the international community to ensure that that happens. We hope and understand that the Government are actively considering that matter, but it would be good to hear from the Minister what progress is being made.

The issue of tax has clearly caught the imagination of some of the NGOs, who are making 2013 a big year for tax justice. I am not here to be the mouthpiece of Christian Aid or the NGO consortium, but I am happy to record their views. As it happens, a number of our constituents were visited by the Christian Aid bus over the summer. It certainly rolled up in my constituency—I wonder why! I had a good meeting with both local activists and senior NGO members, who very much welcomed our report. Perhaps not surprisingly, they focused very sharply on the corporate issues that I have been discussing. However, I said that they should not just target the international economic players; it was really important that they also joined the campaign to ensure that rich elites in developing countries accept their responsibilities, because the interconnection between the two is inescapable.

Christian Aid has said that it wants to tackle the issue, that it wants the Government to tackle the issue and that it wants to shine a light on it. It highlights information that may or may not be true, but the figures that are given are huge. It says that as much as £13 trillion of potential taxes are locked up and “hidden in tax havens”. Whether that is true or not—£13 trillion is an awful lot of money, so even if the true figure is half or just a fraction of that, it is significant.

Again, I do not put too much credence on the figures per se, but Christian Aid also talks about a figure of $160 billion annually that developing countries are losing in tax, which is far, far more than the entire flow of overseas development assistance to those countries. I am not suggesting that to solve that problem we can cut the development budget, but clearly there is not much point in handing out development aid if we are not getting access to the resources that should be credited to the countries concerned, which are entitled to them.

To conclude on this report on tax, I will talk about two simple things—certainly one of them is simple and the other is not as difficult as it perhaps has appeared before—that the Government could and should do. Actually, the Government are doing the first thing, and I just want to hear that they are doing more of it. That is making raising the tax base one of the key components of our bilateral programmes, particularly where we are engaged in-country, and putting real resource alongside the Governments with whom, we are working, both to get those Governments to show the political will to raise taxes and to give them the capacity—through revenue collection—to secure the revenue. The second thing is to be prepared to take a lead, I guess, and for the UK to be more transparent and to demonstrate, by example, that we can be more open. Certainly, we must also encourage international agreement to get as much transparency as possible.

I mentioned the subject of minerals earlier when I discussed Zambia. There was one particular issue that was raised with us that the Government did not reply to directly in responding to our report, which is membership of the extractive industries transparency initiative. The EITI was actually a UK Government idea; effectively, it was Tony Blair’s idea. It is a good idea, and the initiative has been signed up to by many countries, including developing countries, but it has not been signed up to by the UK. We understand that the argument against our signing is that it was not considered that the UK was mineral-rich. Well, I represent a constituency in the north-east of Scotland and I think that we are quite mineral-rich still, actually. Mineral extraction may not be a huge proportion of our GDP, but in absolute terms minerals are not an insignificant resource for us. However, that is almost beside the point, Mr Gale—Sir Roger. I beg your pardon. It happens to me all the time, and it happens to you, too.

I ask the Government to seriously consider signing up to the initiative, because it would demonstrate that we are serious about the issue, too. If the argument against our signing is that we do not have a huge mineral base, then it should not be very difficult for us to comply. As I say, however, the Government kind of avoided answering that particular question on the EITI. I do not know whether my hon. Friend the Minister is in a capacity to commit the Government to do something; if she is not, I hope that she will report our Committee’s view that signing up would be a good step for the Government to take.

With that, Sir Roger, I must say that I am grateful to the House for letting us have this opportunity to debate the issue. I genuinely commend the report. I think that it is about a very important part of what our development relationship with countries should be. We have made good progress, but there is a lot more that we can do.

[Sir Roger Gale (in the Chair)]

Thank you very much, Sir Malcolm. I think it is one-all—I owe you an apology as well.

I also apologise to Members for the fact that I had not really grasped the implications of there being two debates this afternoon with no time separation between them. I now propose to deal with that issue, and to explain what I think we will try to achieve.

There is no time limit on this first debate, but obviously there is a limit on the totality of time available in Westminster Hall today; the sitting must end at 4.30 pm. So it really is up to hon. Members to decide how they wish to split that time. I propose to call Mr Burden, Mrs Latham, Mr Stunell and Mr Lefroy, and then the Opposition Front Bencher and the Minister. I will then allow, as I think is traditional, a couple of minutes at the end if the Chair of the Committee wishes to wrap up the first part of the debate. However, we will treat this as two separate debates.

I suggest at this stage that although we do not know how we will run for time, the Opposition Front Bencher and the Minister might consider taking about 10 minutes each, if that is adequate.

I hope that is clear.