Low and No-Tax Jurisdictions

Lord Sikka Excerpts

Thursday 30th January 2025 Lords Chamber

Moved by

[Lord Sikka]

That this House takes note of the tax implications of corporations shifting profits to low and no-tax jurisdictions.

[Lord Sikka (Lab)]

My Lords, I begin by welcoming the noble Baroness, Lady Coffey, to this House. I really look forward to hearing her maiden speech.

It is a good time to talk about profit shifting, as the US is tearing up tax treaties and the OECD’s base erosion and profit shifting—BEPS—project has stalled. HMRC states that since 2010 some £500 billion of tax has not been collected. A methodological annexe issued by HMRC, dated 20 June 2024, states:

“Some forms of base erosion and profit shifting (BEPS) are included in the tax gap where they represent tax loss that we can address under UK law. The tax gap does not include BEPS arrangements that cannot be addressed under UK law and that will be tackled multilaterally through the OECD”.


Basically, HMRC does not really know how much profit is shifted out of the UK and what the related tax losses are.

Multinational corporations are shifting annual profits of around $1.4 trillion into tax havens, causing Governments around the world to lose $348 billion a year in direct tax revenue. I am sure the Minister will be able to tell us how much the UK is losing. Over $329 billion of profit is shifted into the UK’s Crown dependencies and overseas territories by multinational corporations every year, causing a tax loss of $80 billion.

This daylight robbery is facilitated by financial engineering and opacity from a rapacious tax abuse industry located in the UK and its global dependencies. The Criminal Finances Act 2017 was introduced to tackle corporate tax evasion but, to the best of my knowledge, to date no one has been charged or prosecuted under it. So how exactly are profits shifted? I have a couple of examples.

Consider the case of BHS, which collapsed in 2016. I declare an interest as an adviser to the Work and Pensions Committee during its investigation into BHS. Lady Green, spouse of the chief executive, held 98% of its shares. In 2001, BHS sold some of its properties for £106 million to Carmen Properties Ltd, a company based in Jersey and under the sole control of Lady Green. The properties were then immediately leased back to BHS in England. Between 2002 and 2015, BHS paid £153 million in rent to the company in Jersey. These rents were tax-deductible expenses in the UK and reduced the tax liabilities of BHS. The rents booked in Jersey were not taxed because the profits were not made on the island. The profits of Carmen, the Jersey-based company, were then paid as dividends to Lady Green, who resided in Monaco, which levies no income tax at all.

Through this related-party transaction, BHS was able to manufacture a tax-deductible expense and reduce its tax liability. Lady Green received dividends on which no tax was paid in the UK or anywhere else. This type of financial engineering is not uncommon and the resulting losses do not form part of HMRC’s tax gap numbers, which are grossly understated. Governments can easily check the leakage of tax revenues by deducting tax at source from dividends, interest and other payments to entities in low and zero tax-rated jurisdictions. If the recipient can show that he or she paid the tax on the transaction elsewhere then the tax withheld can be refunded, but successive Governments have made no effort to curb this sort of tax avoidance.

My second example relates to the use of affiliates and subsidiaries in low or no-tax jurisdictions to shift profits. Starbucks, Microsoft, Google, Amazon, oil, gas and numerous other entities use complex corporate networks to shift profits. Apple’s profits are parked mostly in Jersey, where it really has no physical presence. Transnational corporations have huge opportunities for profit shifting and tax abuse. A microchip company has its product designed in country A, manufactured in B, tested in C and patented in D, and has its marketing rights located in E. Determining the cost, profits and allocation to each country is highly problematic.

Companies adjust their import and export prices and shift profits, especially as around 60% of world trade is internal to companies. The OECD’s transfer pricing rules require the use of arm’s-length prices, but in the absence of active independent markets such prices are almost impossible to ascertain. The top 500 companies in the world control around 70% of world trade; 80% of global sales of coffee are attributed to just three multinational corporations; and two companies control 40% of the global commercial seed market. Around 10 companies dominate the global pharmaceutical industry, four dominate the agricultural commodities market and around 14 dominate global auto manufacturing. This gives them huge opportunities for profit shifting and tax abuse.

I will illustrate this with an example relating to bananas. I am sure that all noble Lords have had bananas and have wondered where exactly most of the UK’s bananas come from. The UK’s bananas come from an island that does not grow any bananas and which no banana-laden ship has ever visited—that is, Jersey. Companies such as Chiquita, Dole, Fresh Del Monte, Fyffes and Geest control banana production in west Africa and Latin America, but all the paperwork is routed through Jersey.

For bananas selling for £1 in a UK supermarket, 13p goes to the growing country, of which 10.5p is for the cost of production, 1.5p is for labour and 1p is profit. After that, the games begin: 8p goes to a purchasing network located in the Caymans, within the same group of companies; 8p goes to a Luxembourg subsidiary for providing financial services, including interest payments on intragroup loans; 4p goes to Ireland for the use of a brand name; 4p goes to the Isle of Man for providing insurance; 6p goes to Jersey for management services; and 17p goes to Bermuda for providing a distribution network, even though no ship ever visits there.

By the time the bananas are unloaded in the UK, the 13p-worth of bananas magically has a cost of 60p and is sold in the supermarket for £1. The supermarket incurs costs in selling those bananas and will eventually declare a profit of 2p, which if taxed at the rate of 25% will yield half a penny for the Chancellor, out of the £1 that the customer has spent. So 47p of the profit made from UK customers is booked in low or no-tax jurisdictions and those profits are not taxed anywhere in the world. These numbers do not form part of HMRC’s tax gap calculation. Almost every multinational company is engaged in this type of profit shifting and tax abuse. I used to work for an oil company; another day I can maybe give the House examples of what the oil companies get up to.

Profit shifting requires urgent attention. The Companies Act 2006 does not require company accounts to provide any information about profits shifted. Accounts are totally opaque. Can the Minister say what plans the Government have to give visibility to profit shifting? Some visibility can be provided by public country-by-country reporting, which would enable proper transparency on both the amount of taxes avoided by multinationals and how far the UK’s measures have been effective in tackling that.

Section 122 of the Finance Act 2015 contained a requirement for multinationals operating in the UK to publish a public country-by-country report. But the legislation was never implemented and was subsequently repealed by the Finance (No. 2) Act 2023. The UK is now way behind other countries. The EU and Australia now require companies to make these disclosures through public country-by-country reporting. Can the Minister explain why the UK shuns tax transparency?

The UK Government have signed up to the OECD global tax deal, requiring a 15% minimum effective tax rate on multinational corporate profits, but President Trump has withdrawn from that agreement and threatened sanctions against Governments which levy 15% minimum tax on US companies operating in their countries. There is a way forward in the UN framework convention on international tax co-operation, but, unfortunately, last November the UK Government voted against it. It would be helpful to know what their strategy is.

Finally, it would be helpful if corporate tax returns are made publicly available, so that we can all see how they are shifting profits and what kind of taxes are being abused. That would empower the Public Accounts Committee to scrutinise those corporations and any sweetheart deals done by HMRC. I beg to move.

--- Later in debate ---

[Lord Sikka (Lab)]

My Lords, I thank the noble Baroness, Lady Coffey, for her excellent speech. I look forward to interacting with her in the months and years to come. I also thank all other noble Lords for their contributions. I think this issue will become more, acute because successive Governments have shifted profits away from corporations to what I call normal people. They have been given the choice: either pay more for crumbling services or lose hard-won social rights completely. Therefore, the way we treat corporations and corporate power will become a vital issue for debate.

Transfer pricing rules are now broken, because world trade is dominated by a handful of companies, as I indicated earlier. Numerous actors are dominated by very few companies, which means arm’s-length prices are almost impossible to find. Some noble Lords may have noted that the BRICS countries, especially Brazil, and others have developed their own way of applying arm’s-length prices because companies have been abusing them. That is also worth looking at.

I am sure there will be lots of reflection on the various contributions, but my final point is that a UK resident company is liable to pay UK corporation tax on its global profits, subject to tax treaties and double taxation agreements—in other words, giving benefit after credit for the taxes paid somewhere else. If those companies’ profits are not taxed anywhere that means the UK Government can tax them, but I have not come across any example of where any Government have actually done so, so there are billions of pounds waiting to be collected. Perhaps in the next debate—I might try my luck next year—we can have this point clarified. Once again, I thank all noble Lords.

Motion agreed.