Low and No-Tax Jurisdictions

Baroness Kramer Excerpts

Thursday 30th January 2025 Lords Chamber

[Baroness Kramer (LD)]

My Lords, first, I welcome the noble Baroness, Lady Coffey. She made a fascinating maiden speech; I thank her for it. Her interest may be in bins, but by speaking in this debate, she has, either voluntarily or involuntarily, joined the society of financial geeks who speak about tax issues in this House. I am the least expert of them, so I am glad that she has now joined the cast.

I thank the noble Lord, Lord Sikka, for obtaining this debate; it is very timely and important. He helped us all by explaining base erosion and profit shifting— BEPS—which is, in essence, the use of artificial transactions to shift profits into tax havens or lower-tax jurisdictions and avoid the taxes that would otherwise have been payable in the country where the profits arose. At the global level, the OECD estimates that, annually, some 4% to 10% of global corporate tax revenue is lost through BEPS. The Tax Justice Network alleges that the losses are almost double the OECD estimate and that a network of British Crown dependencies and overseas territories is responsible for some 23% of those losses.

Discussions of Crown dependencies and overseas territories are for another day—there is a very complex debate to be had—but I point to the experience that the noble Viscount, Lord Hanworth, referred to: the exposure yesterday of the Abramovich tax avoidance scandal. It was exposed publicly by a group known as Cyprus Confidential. It underscores how limited HMRC’s capability is to pursue large tax avoiders and their enablers. I join the noble Lord, Lord Davies, in asking: what kind of remedies could be put in place? As the noble Lord, Lord Sikka, said, we could use a great deal more clarity on what exactly is being lost to the UK; the tax gap is not an adequate way to try to analyse or to expose this set of problems.

We need to take some credit here in the UK, because under different Governments we have sought to join international efforts to tackle BEPS. In many ways, we have been a leading voice in developing the OECD’s two-pillar strategy, which is supported by 135 countries and jurisdictions. Under it, pillar 1 would reallocate part of the profits of the largest and most profitable multinationals from where they “earn income” under accounting rules to where they “sell” products and services. Pillar 2 would impose a 15% minimum tax on the global corporate profits of multinationals with over €750 million in turnover based on the residence of the corporation. The OECD estimates that, by implementing pillar 2, global tax paid by the world’s biggest multinationals would increase by $192 billion per year.

Although multinationals in a number of sectors use profit shifting—the noble Viscount, Lord Hanworth, talked about the motor industry—the sector of most concern, by far, is the technology sector, which has so many tools to use in profit shifting. Frankly, here we are primarily talking about US-based corporations. I looked at the actions that the UK has taken. As the noble Lord, Lord Leigh, said, in 2015 there was the diverted profits tax; it did not raise a lot of money, but it led to some changes in behaviour. I join the noble Lord, Lord Sikka, in asking: why has country-by-country reporting ended up getting dropped? Perhaps the Minister can help us with that.

In 2020, the UK implemented a digital service tax of 2%, reflecting its concern that foreign—again, primarily US—technology multinationals were profit shifting to reduce their UK tax bill. The DST raised £678 million for the Treasury last year, predominantly from Google, Amazon and Apple. The tax also provides a more level playing field for UK-based technology firms. As the noble Lord, Lord Leigh, said, it is described as a temporary measure until pillar 1 is completed, which, I think, is why attention has not been paid to it. I join him in suggesting that it is time that the Government looked at the DST, to see if it could be enhanced in ways that would better represent both the loss of gross revenue and the unevenness of the playing field.

To enact pillar 2, the UK introduced in 2024 a multinational top-up tax—MTT—and a domestic top-up tax, DTT. The Finance Bill, which is now making its way through Parliament and which we will receive although we will be unable to amend it, is intended to complete the UK legislation for pillar 2 by introducing the undertaxed profits rule, UTPR. This is the bit with teeth. As the noble Lord, Lord Leigh, said, it is estimated to bring in about £2.8 billion a year.

There is a real question, as far as I understand, about when this will be implemented, once the legislation is passed. Can the Minister give us some clarifications on the date? There are growing concerns that, potentially, it could be kicked into the long grass. The problem is, as we can all anticipate, the arrival of President Trump. He very clearly said that the OECD agreement on BEPS has

“no force … in the United States”.

It has withdrawn from all the relevant treaties, but this is a far stronger statement.

In November, the FT printed an article entitled

“Trump win puts global corporate tax deal ‘in peril’”.

It suggested that countries would be too scared to apply UTPR to US-based companies for fear of punitive tariffs. Indeed, the big tech companies, which have the US President’s ear, as we all know, have said very clearly through their lobby groups that they plan to use trade negotiations to push back strongly against even the UK’s existing 2% digital services tax.

To add another complication to all this, in a rapidly changing world, we have cryptocurrency. I regard cryptocurrency basically as pyramid schemes masquerading as technology, but they can certainly provide a mechanism for bad actors who want to carry out any kind of tax avoidance, including profit shifting. I am interested to know how this changes the thinking of the Government and HMRC in trying to keep a grip on the profit-shifting strategies that are increasingly employed.

One thing I would suggest is that it is time to make sure that we link up with potential allies who are also willing to stand firm against base erosion and profit shifting. We know it is the EU; I suspect it is also Canada and Japan, and there should be others. My party has called for the Government to seize the opportunity of a pan-Europe customs scheme as a mechanism which would perhaps help us pull together our relationship with the EU but then also engage with other allies around this issue. I ask the Minister: are we in discussion with others who share our worldview on how we keep alive the strategy to end base erosion and profit shifting in this new Trump era? This really has to be done collectively, because it is one of those areas where we either hang together or, frankly, we hang separately.