Tax Avoidance and Multinational Companies

Richard Bacon Excerpts

Wednesday 3rd February 2016 Commons Chamber

[Mr Gauke]

I will deal directly with the issue of transparency in a moment.

On the issue of how our international tax system works, I have explained that it is based on economic activity. However, I would be the first to say that that international tax system needs to be brought into the modern world. That is the very reason why the UK has led the way on the base erosion and profit-shifting process. We should also be aware that there are particular issues with the US tax system, which is failing to tax intellectual property developed in the US in the way that it should.

I gave the example of video games companies. However, I recognise that there are many cases that are much more complex, and where it is not so easy to identify where the economic activity takes place. There is an issue about where multinational companies allocate their profits and where they identify economic activity as taking place. There is a need to address that, which is why we need tax rules that genuinely reflect where economic activity takes place, to ensure that profits are aligned with it. However, that is a very different matter from making big claims about profits from sales and saying that those sales profits have to be taxed where the sales take place. That is the misunderstanding I wish to address.

[Mr Richard Bacon (South Norfolk) (Con)]

The Minister is right, of course, that these issues are sometimes very complicated. However, sometimes there are loopholes that are exploited. Will he identify some of the loopholes closed by this Government that were opened by the previous Labour Government?

[Mr Gauke]

There is a whole host I could draw attention to, but in the interests of time, I will not run through that lengthy list. I have it here, and there are quite a number of cases—there are 40 I can identify straightaway—where there were loopholes, and we have tried to address that.

The diverted profits tax—I will come back to this again in detail in a moment—is designed to ensure that, where companies divert their profits away from the UK, and where the economic activity is happening in the UK, we get some of the tax yield.

--- Later in debate ---

[Roger Mullin]

Many people throughout Britain will think that the hon. Gentleman has made a very fair point. That is why I have been arguing that we must have a proper investigation and why, perhaps in the longer run, we need to do something about greater transparency. It will be very difficult for us to bring a proper critique to bear if we do not get such clarification.

It must, of course, be admitted that this is not a new phenomenon. I first became aware of concerns about multinationals paying their fair share of UK taxes back in the early 1970s, when I briefly worked for the multinational IBM, and I am aware of concerns predating that. This has not been going on for just one or two years; Governments have not been able to resolve this issue satisfactorily for decades, which emphasises its complexity. The issue has been around for a long time, regardless of whether this country had a Labour or Tory Government and regardless of which parties formed Governments in many other countries.

I remember that the concerns back in the early 1970s were about what was called “transfer pricing”. For example, a company could buy a handle from a parent company in another country and charge an exorbitant fee for it, which allowed them easily to transfer profits from one area to another. I would be the first to admit that there have been moves to tighten up many such matters since the 1970s, but it remains a fundamental problem to this day. Corporation tax seems to be very susceptible to avoidance by multinational corporations because of the way in which they can, quite legally, operate.

[Mr Bacon]

The Public Accounts Committee found that HMRC as a whole had only 65 specialists in transfer pricing, which was about the same as each of the big four accounting firms. Does the hon. Gentleman welcome this Government’s introduction of more transfer pricing specialists in HMRC?

[Mr Deputy Speaker (Mr Lindsay Hoyle)]

Order. May I say to hon. Members who wish to speak but are now making interventions that I assume they will not mind if they go to the bottom of the list because they have almost used up their time?

--- Later in debate ---

[Mr Richard Bacon (South Norfolk) (Con)]

I will be brief.

The hon. Member for Wythenshawe and Sale East (Mike Kane) said that paying corporation tax was an optional extra. If he is right—and there are some good arguments for why he might be right—it is because of the unbridled complexity of the system. I used to carry a number in my head: I thought that the tax code was 11,000 pages long. However, when I went to a Public Accounts Committee tax conference organised by the right hon. Member for Barking (Dame Margaret Hodge)—the Dame Professor Lady right hon. Member for Barking—I discovered that it was 17,000 pages long, and I was told on the radio yesterday that the figure might now be nearer 20,000.

If we made the Bible 10 times longer, we would not expect there to be less work for theologians. We need to sort this out. Complexity is not always avoidable in a mature economy, but there are steps that can be taken to make the code simpler. The Office of Tax Simplification examined 155 different tax reliefs and recommended that 47 should be abolished—43 actually were abolished—but over the same period, the Government of the day introduced 134 new reliefs. According to the Office of Tax Simplification, that produced a total of 1,140. Incidentally, HMRC had thought that there were only 398, which shows how extraordinarily complex the system has become.

That is the central problem, and it needs to be tackled. If a system that can only be dealt with by a high priestly caste is combined with a global economy, a country will get what we have got. It was this Government who introduced the idea of an Office of Tax Simplification, and it is this Government who are starting to do something about flattening and simplifying the tax system.

There is also the question of the cost of tax reliefs, which is sometimes much higher than HMRC expects. When the right hon. Member for Barking was the films Minister, for very good reasons she introduced a film tax credit. She was then horrified to discover that, using the law of the land, some very clever entrepreneurs and accountants were going around doing things which bore some relation to UK film activity, but perhaps too tangentially for the right hon. Lady’s taste. Much of what had been done was found by the courts to be within the law, and ended up costing HMRC, and taxpayers, hundreds of millions of pounds more than had been expected.

This Government are starting to tackle the problem. They have not made all the progress that they need to make, because this is a very big problem indeed, but at least they are starting to tackle it. The last Government did not collect the tax, but this Government are moving in the right direction, and I commend them for what they are doing.