Developing Countries: Impact of Multinational Companies’ Financial Practices and UK Tax Policies

Baroness Royall of Blaisdon Excerpts

Tuesday 11th December 2012 Lords Chamber

[Baroness Royall of Blaisdon]

My Lords, I, too, offer my congratulations to the right reverend Prelate the Bishop of Derby on the superb timing of this important debate and on his excellent introduction, with which I agreed.

In recent weeks, high-profile cases of multinationals avoiding taxes have attracted real anger, both from the public and politicians. When families and businesses are squeezed and living standards are falling, it is right that we expect everyone to pay their fair share. Corporate citizenship is a good concept. While we should not taint all businesses with the same brush—most of our businesses make a significant contribution to the UK economy—this phenomenon is not restricted to a few multinationals. According to ActionAid, of the 100 biggest FTSE companies, 98 use tax havens. This suggests that tax avoidance is a systematic feature of the way in which many large companies operate, rather than an occasional one-off.

Tax avoidance has a devastating effect on developing countries. As noble Lords have said, the OECD estimates that developing countries lose three times more to tax havens than they receive in aid. This has the effect of depriving developing countries of a much-needed, sustainable source of revenue, taking money away from essential services, restricting growth and preventing Governments investing in crucial infrastructure. Tax avoidance must be at the centre of future aid policy. Indeed, in its report published in August, the International Development Select Committee stated:

“Tax is an issue of fundamental importance for development. If developing countries are to escape from aid dependency, and from poverty more broadly, it is imperative that their revenue authorities are able to collect taxes effectively”.

An expanded tax-revenue base is one of the only ways for developing country Governments to develop a sustainable source of revenue to deliver social programmes and target poverty and inequality. Of course, as has been said, poverty and instability go hand in hand too often.

The successor to MDGs, and to the future of development must be values-led, with the goal of tackling inequality at its heart, and this must include tax avoidance. Labour in Government made progress on this issue but not enough. For example, in 2002 we launched the extractives industries transparency initiative, which has been mentioned and which promotes revenue transparency at a local level, but much more needs to be done. We pledged in our 2010 manifesto to take further action and we are now launching an anticorruption review with the Mo Ibrahim Foundation to build a strategy that will aim to deliver a strong, global anticorruption coalition.

The Finance Bill 2012 introduced a relaxation of the Government’s anti tax haven laws; the so-called controlled foreign companies rules. Under the current rules, if a UK company reports profits in countries with lower corporate tax rates than the UK, the UK Government can impose an extra tax charge on the company to make up the difference. Under the revised rules, however, the UK will only be able to impose this extra charge if the profits have been moved out of the UK. Profits moved out of a developing country and into tax havens will no longer incur the charge, providing a greater incentive for companies to shift profits into tax havens. This move was strongly criticised by a number of NGOs, as allowing multinationals to avoid paying taxes in developing countries.

In its recent report, Tax in Developing Countries: Increasing Resources for Development, the International Development Select Committee stated that the revised rules,

“will incentivise multinational corporations to shift profits into tax havens. This is likely to have a significant detrimental impact on the tax revenues of developing countries”.

The committee recommended that,

“the Government should conduct … an analysis of the likely financial impact”,

of the CFC rules on developing countries and, depending on the outcome, should consider dropping its proposals. However, the Government rejected this recommendation on the grounds that the measures were intended to benefit the UK economy and that such an assessment would not be feasible.

During the passage of the Finance Bill, Labour urged the Government to reconsider changes to the CFC rules and tabled an amendment but the Government pushed ahead—despite advice to the contrary from NGOs, the IMF, the OECD and the World Bank. Will the Government urgently review the CFC rules? Could the Minister also tell the House what the Government are doing now, following the lost opportunity of the Finance Bill, to promote responsible capitalism?

Tax avoidance is a moral and an economic issue. With the G8 and the discussion about the new MDGs, there is an excellent opportunity to bring this issue to the fore and find a global solution. I would strongly urge the Government to take heed of the wise advice given this evening and stand up for social justice and responsible capitalism, at home and abroad.