Tax: Avoidance and Evasion

Baroness Kramer Excerpts

Tuesday 13th September 2016 Lords Chamber

[Lord Tugendhat (Con)]

My Lords, I begin by congratulating my noble friend on his constructive and imaginative suggestions. One great virtue of the House of Lords is that it brings to bear expert opinion on a variety of complex subjects. The speech that we have just heard by my noble friend is a very good example of what somebody who has spent a lifetime in a particular field can bring to the legislative process. I look forward to hearing what my noble friend the Minister has to say in response.

I cannot resist pointing out that in this discussion about what steps the Government are taking to mitigate tax avoidance and eliminate tax evasion in the United Kingdom, not a single Back-Bencher in the Labour Party or the Liberal Democrats has chosen to contribute. It is only Conservative speakers—apart from the Front-Benchers, of course—who have anything to say on that subject. That is something worthy of note.

[Baroness Kramer (LD)]

I point out to the noble Lord that we have just had a debate on the Finance Bill in which not a single Conservative Back-Bencher spoke. I suggest that he is a little more careful when he decides that finger-pointing is appropriate.

[Lord Tugendhat]

That is a very good riposte, on which I congratulate the noble Baroness, but the two subjects are quite different. My point simply is that we have this very interesting subject for debate, and her colleagues—and she has a great many of them; the Liberal Democrat Party is absurdly overrepresented—do not seem to find it of particular interest. That was my only point, but I accept her earlier criticism.

From a Conservative point of view, we feel that if the Prime Minister’s comments and undertakings about creating a society fairer for all are to carry conviction, it is very important that the issue of tax evasion and tax avoidance should receive a very high priority. It is something on which the last Prime Minister and the previous Chancellor of the Exchequer had strong words to say, but not enough action was taken—and I hope very much that in the May Government we will see more action more quickly on this front.

The introduction of a criminal offence for firms which do not stop staff facilitating tax evasion will certainly be a good place to start. Evasion can arise not just because a company wishes to evade tax but also because executives want to earn bonuses. Their bosses see the beneficial result of their imaginative actions and do not look too closely at what is happening, with the result that the company’s tax burden is reduced without anybody having taken responsibility at the highest level. The aim must be to deter not just companies but also individual executives from seeking to evade tax or avoid it beyond a reasonable level, as my noble friend was discussing.

The House will be aware of the charges currently being brought against former senior Tesco executives for fraud by abuse of position and false accounting. It is very hard for the authorities to go for Tesco itself unless the former CEO himself is charged. Will the Minister say what the position would be in an analogous case involving tax evasion, so far as the Government’s plans are concerned? Once those plans have been published, would individual executives find themselves at risk, as well as a company?

I have another question for the Minister. Will he give us an indication of the Government’s view of the European Commission’s demand that Apple should repay the Irish Government some €13 billion in uncollected taxes? I know that the Commission’s action raises many delicate issues of international law and state aid, as well as tax. I am also aware that the Government may well be reluctant to take up a position or intervene in an issue that involves the European Commission on the one hand and the Irish Government on the other. However, whatever else the Commission’s action does, it shows how a large multinational corporation can set up arrangements that enable it to avoid paying vast sums of tax. I say, “avoid”, because there was nothing illegal in Ireland about what Apple was doing. It is the Commission which is challenging it on the grounds of state aid, rather than tax.

Apple is, of course, only one of a great many companies that have shown similar imagination, not just in Ireland but elsewhere. The Commission’s move may or may not be the best way of tackling this problem; I am not an expert and I have no idea whether it is or not. However, I applaud the Commission because, whether or not it is the best way, it does actually seek to tackle a long-standing scandal that Governments, including our own, have so far evaded. The Commission has, as it were, thrown the ball into the line-out and it is now for Governments to determine how best to handle it. It is very important that we get an idea of what the British Government’s view on this matter is. The Commission has also demonstrated that there comes a point at which evasion and avoidance become virtually indistinguishable. The line between them has become so blurred because there does not seem to be any liability on the part of Apple to pay tax anywhere at all.

Finally, I point out that, whether or not we are in the European Union, this is a problem that can only be tackled by Governments on a co-ordinated basis. The United States is not going to lead on this issue because its own multinational companies can bring pressure to bear in Washington, as Apple has very effectively demonstrated and as the American Government’s response to the Commission’s actions shows. Therefore, in the countries where multinational companies operate, only the EU can effectively challenge these companies. The individual member states—or individual states, as we will not be a member for much longer—do not have the clout to do so. I hope the Minister can assure the House that, as we negotiate our way out of the European Union, this is an issue on which we will work as closely as possible with the EU institutions and other member states. It is in our national interest to do so and it will be a test of whether we put our national interest or dogma first.

--- Later in debate ---

[Baroness Kramer (LD)]

My Lords, at the bottom of all this is surely the issue of fairness. If individuals pay their taxes because they wish to pay for living in a civilised society, surely that is the obligation of businesses as well. That is at the heart of what we are discussing today. We have often seen in recent years businesses failing to recognise the importance of that contribution to the society in which they thrive, employ and make their money. Some small local businesses that many of us know can find themselves paying, through business rates and taxes, money to support public services and other parts of our society knowing that a business rival in the same activity—a small bookshop may regard Amazon as its major rival—could be a multinational or global company that can use a whole variety of mechanisms to eliminate, essentially, most of its tax bill. Clearly, that has to be grossly unfair.

We must recognise that the structure of our businesses today is tending in a direction that enables and facilitates moving profits around the globe in a way that is extremely difficult to constrain. That particularly accrues now to things such as brand name and intellectual property and not to physical assets, which if we look back just a few years would have been far more typical. As we move into a world where artificial intelligence and machine learning will increase the capacity to set intellectual property anywhere in the world, even though manufacturing or services are delivered quite separately, this capacity to manoeuvre profits around becomes a problem that we must tackle.

I was heartened by the speech by the noble Lord, Lord Lupton, and his talk of shareholder responsibility because that has to be key to the future. He is right that where there is the possibility of bringing consumer pressure—the Starbucks case being the obvious example—a company can be persuaded that it is necessary to change its behaviour or it will lose its sales. But many of our companies are not consumer facing. They are somewhere in a chain that covers a whole variety of activities, whether in manufacturing or services, and we have to tackle them as well. They cannot be allowed to take the view that they can enjoy all the benefits of being in the UK, or in any other society, and not pay their fair share.

That brings me to a couple of points. There was a time some years ago when this issue was ripe and I proposed then that we really need something that would allow for the naming and shaming of companies that are not necessarily paying their fair share of profits, perhaps through a not-for-profit organisation or a website with a kite mark. We need to get the message out to the consumer and the general public, and indeed it would be something that shareholders would take significant notice of.

There has been quite a lot of talk about the GAAR. In the very early days it was extremely limited, but I think that the Government are now becoming much more willing to extend their use of it, which has to be a move in the right direction. However, we need to recognise that the GAAR is about anti-abuse. Many people think that it is an anti-avoidance measure; it is not. Picking up on the point made by the noble Lord, Lord Flight, we are dealing with some very grey areas in which companies now focus their tax minimisation strategies. It would be worth taking another look at the GAAR to see whether it could be expanded to cover some of those grey areas, because the line between avoidance and abuse is a fine and difficult one. I believe that we ought to be on the front foot in terms of trying to tackle that issue.

Obviously the work being done by the OECD and the G20 with BEPS is making a significant difference. This country is playing an important role in that, in particular on transfer pricing policy. It has been agreed in the Finance Bill that HMRC will be given the power to require companies to report both their level of sales or activity in the UK and the taxes that they pay in different countries. That is a significant step forward.

But for a lot of the time when we talk about tax policy, we do not discuss what can sometimes be the trade-off between tax avoidance and tax levels. There is an assumption that if taxes are high, avoidance will be greater, but we need to recognise that it can work in the other direction as well. When we focus on trying to row to the bottom and have the lowest taxes in the developing world, we naturally end up becoming a tax haven. That is what has happened with Luxembourg, Ireland and a number of other countries. The goal of very low taxes for what people would describe as reasons that make up part of the domestic framework has consequences, and I believe that Christine Lagarde is right to say that if we end up in a race to the bottom, we will all end up at the bottom. It is a short-term strategy and we need to recognise that constant tax cutting can itself generate tax avoidance.

I would also like us to pay attention to developing countries, which are often the greatest victims of tax avoidance. They do not have the capacity that we do to enforce against large multinationals, which can easily move from one country to another, so we need to make sure that we lend them our support. To that effect, I would ask the Government to take a look at our own UK tax treaties with a number of developing countries—an issue I was talking about with representatives from ActionAid. Many of our tax treaties with developing countries were signed during the colonial era and they are very restrictive about the taxes that can be levied on UK companies. That is an area where we could be leading by example. Indeed, developing countries, while they are invited to comment on the BEPS process and the work being done by the OECD and the G20, are not at the centre of it. If we look to the future, these countries will be vital to the overall global economy, so anything we can do to draw them much more actively into that process would be very good.

In closing, I would ask the Government to consider a process that we as Liberal Democrats are taking on. Business taxes as they have been in the recent past are not really fit for purpose for business as it is today and for how it is shaping for the future. As I said earlier, value is very much now attached to intellectual property and brand. Those are extremely mobile and can be moved from one country to another. Many companies, even quite small ones, are global in their reach. It is not just vast multinationals; small companies are genuinely global. That is part of the structure that makes sense for them.

Many companies are now part of what is called the sharing economy—Uber might be a good example. Distortions come into the picture because, in a sense, you have what looks like a very small company. For example, Uber does not own a single taxi or have a single driver as an employee, just as Airbnb, which is essentially a global hotelier business, does not own a single hotel room or employ a single hotel manager or cleaner. These new kinds of structures do not lend themselves to the traditional shape of business tax. It is time to look at this. As I said, we asked Vince Cable and an expert panel to go back to the beginning and start again with a blank piece of paper, looking at how you would structure taxes on business today so that we achieve what I think everybody here asked for—genuine fairness.

Only with that does business have the moral authority to speak to consumers, to its neighbours and to individuals, and to drive forward our economies in the future.