Tax (Developing Countries)

Richard Burden Excerpts

Thursday 17th January 2013 Westminster Hall

[Richard Burden (Birmingham, Northfield) (Lab)]

Thank you for calling me to speak, Sir Roger. As always, it is a pleasure to serve under your chairmanship, and I will address another knight to say that it is a pleasure to follow the right hon. Member for Gordon (Sir Malcolm Bruce), who is the Chair of our Committee.

The report that we are debating now is, as all our reports have been so far, the product of a cross-party consensus. There is a huge amount of cross-party agreement on the Select Committee about the importance of, and the issues raised by, the subject of this report—tax in developing countries.

A few months ago, Birmingham was one of the cities and towns that were visited by the Christian Aid bus for tax justice, and I was pleased to join a number of local faith leaders, activists, local NGOs and others in welcoming it. It was good to see people from the constituency there as well. They were concerned that, as the Chair of our Committee has already mentioned, Christian Aid estimates that there could be up to $160 billion annually in taxes that developing countries arguably should be receiving but are not. Whether or not that figure is precisely right, the money involved is big. In short, it can mean the difference between children going to school or not, hospitals and clinics being built or not, and jobs and opportunities being created or not.

There are all sorts of reasons for those missing tax billions, and all sorts of issues raised by them. However, if we are going to tackle this issue, transparency is absolutely the key to doing so; the Committee was also united in that respect. If there are companies that are playing off financial rules and prices in one country against those in another, there is a problem if we do not know about that situation and we will not be able to tackle the issue. If we then “stir in” the use of tax havens, in which NGOs have estimated that up to $13 trillion is stored, we are talking about big, big money.

In relation to tax havens, some people say, and it has been put to our Committee, that they can be an efficient use of money, to ensure that money that is raised can then be used and moved around productively to create jobs and opportunities, and in some cases to boost services, in developing countries. That is okay, but when tax havens are a means of avoiding obligations it is a very different thing indeed.

In just a little while, I will say something about global rules and especially about the need for transparency. Before I do so, however, I will say a word or two about the context, which the Chair of our Committee has already referred to. It is really important that the development that takes place is sustainable.

I am fully behind the UK’s commitment—it is a cross-party commitment—to stick to the 0.7% target on aid; as I say, I am fully behind it. However, in the long term the future of development will become, and should become, less and less about aid, and more and more about ensuring that developing countries have the means and the ability to sustain economies of their own. That must mean that there are tax systems and tax laws that work. In addition, it certainly means that, as the Chair of our Committee said, the leadership of those countries themselves accept an obligation to pay tax—the evidence from Pakistan in that regard is very concerning—and it also means that they need assistance. The UK has been active, and I welcome the Government’s contribution to this, in giving assistance to develop tax systems and so on, providing the kind of capacity-building and technical assistance that can be so very important.

However, we cannot avoid the fact that it is important that those countries still receive the tax that should be morally due to them. That should be an important matter not only for people who are interested in development, such as everyone in Westminster Hall today, but also for some of the media commentators and critics of the 0.7% target. That is because, when it comes down to it, if people are aid-sceptics then it has to be even more important for them that they should be tax justice enthusiasts if the problems of this world are going to be addressed. The issue is important to developing countries, but as the Chair of our Committee said, it is also important for us domestically. Tax dodging by major companies not only depletes developing countries’ resources but has an impact here.

Our report, which is some months old now, was welcomed by the NGO community—by those interested in development. I do not think that I am letting any secret out of the bag, though, by saying that on hearing that the International Development Committee had produced a report, many people across the country probably did not rush to open it up and read it—it passed a lot of them by. The debate on tax justice and morality, however, has been transformed, as the Chair of our Committee mentioned, by the recent high-profile cases of Starbucks, Amazon and others. All credit to the Public Accounts Committee and its Chair, my right hon. Friend the Member for Barking (Margaret Hodge), for bringing the issue so firmly into the public focus and highlighting that this is the tip of a very large iceberg of creative accounting in the multinational corporate world, which is less than creative as far as the public good is concerned, in the UK and in the developing world.

None of us likes to pay tax, and approaches to taxation and tax policy divide parties, but there is now greater recognition than I ever remember that taxation holds society together, globally as well as in the UK, regardless of any differences between parties on tax-raising mechanisms—on what works and what does not. The consensus that a tax system that works has to be in place, and that the corporate great and good have an obligation under such a system that is equal to that of ordinary citizens, is greater than I can remember it being for a long time.

Against that background, I am a little disappointed that the Government did not go a bit further in accepting some of our recommendations. Given that the climate surrounding the matter has changed a lot since the report was published, I hope that over the coming months the Government will review some of their responses to the report, particularly when the Prime Minister himself has said that taxation should be a major focus of the forthcoming G8.

I have a few questions for the Minister, and I hope that she will be able to help us with them today. The first is about automatic information exchange. Our Committee recommended that it would be useful for the UK to adopt something like the system in the United States, where there is the Foreign Account Tax Compliance Act. The Government have said no to that so far, stating that it would not work. That is a point of view, but I have difficulty marrying it with the Government’s now saying that something like that would be a good idea in relation to Crown dependencies and overseas territories. If that sort of thing can be done with them—and I would welcome that—why is it so difficult to do it more widely?

Regarding what works, the Committee recommended country-by-country reporting. This is not rocket science. It is multinational companies reporting, on a country-by-country basis, the names of all the companies belonging to them in each country, along with their financial performance and tax liability, the costs and net book value of their fixed assets and the details of their gross and net assets in each country. That is a really important starting point for getting transparency that works. The Government say that they do not consider that possible either, but I do not follow their logic. They seem to be saying that, at European Union level, they support the mandatory reporting of most of those kinds of things in relation to the extractive industries and forestry, and I agree with that, but why, therefore, can they not go that little bit further and do what our Committee recommended? I just do not understand the Government’s logic here. Can the Minister explain it? Unless we have that kind of information flowing through on a country-by-country basis, how in practical terms will we ever know what is going on with transfer pricing?

My third question is about something that the Chair of the Committee mentioned. The extractive industries transparency initiative is a good thing, as is the fact that the Government welcome the strategy review that is taking place, but would we not have a bit more credibility if we said that we were prepared to join the initiative ourselves, particularly as it was our idea in the first place?

My fourth question is about co-ordination in Government. Taxation is, rightly, normally the province of the Treasury, but we know from the fact that this debate is happening—that we have produced our report and the Government’s response has come in—that it is also something in which the Department for International Development has a big role. However, it is not always clear to me, and to many others, how far different Departments are in step with each other and how much co-ordination and discussion goes on. Will the Minister comment on the extent and, without breaching any confidences, the nature of any discussions that have taken place between DFID and the Treasury about the draft Finance Bill? As far as DFID policy is concerned, has there been any response to the requests—from a lot of places now, in the UK and elsewhere—for provisions to be included in our domestic tax legislation that would assist developing countries to collect taxes?

My fifth question, which is also on Government co-ordination, is: how far, across government, is there engagement with the wider community? Draft Finance Bills and tax systems and so on can seem dry, but the public interest is now greater than ever. Is the Minister prepared to consider or, even better, to commit to some kind of cross-Whitehall consultation with civil society and outside tax experts on proposals for the G8 in relation to tax?

My final question is about clarity. The Committee, along with a number of people outside, have been saying that there needs to be a Minister with responsibility for tax and development in a clearer way than has existed so far. The Government have been fairly silent on whether our recommendations on that matter are a good idea or not such a good idea, so I ask the Minister, would that be a good idea? If the answer is no, what is the alternative, if we are to provide greater clarity across Government on tax and development?

I place on record my thanks to my colleagues and everyone else involved with the Committee for their work. The report has been warmly received outside this place. We were a bit ahead of the game in highlighting the issue’s importance. Some of what we said in the report has been borne out by events since publication, so I hope the Government will go a little further by responding more positively to some of the specific recommendations than they did in their original response.

--- Later in debate ---

[The Parliamentary Under-Secretary of State for International Development (Lynne Featherstone)]

It is a pleasure to serve under your chairmanship this afternoon, Sir Roger. I thank and congratulate my right hon. Friend the Member for Gordon (Sir Malcolm Bruce) on securing this important debate. I also thank him and the International Development Committee for providing a wide-ranging and thought-provoking report. Finally, I thank all those who provided evidence to the inquiry, which included representatives of business, leading academics and non-governmental organisations. Many points have been raised, and I will address as many as possible in the time left to me, but I want so make some general comments.

I agree with the Committee on the significant role that effective tax systems play in helping developing countries to increase their national prosperity and reducing aid dependency, so I welcome the broader parliamentary debate on the issue. Taxation is at the heart of what the Prime Minister described as the golden thread of development. As has been said, helping developing countries to mobilise domestic resources offers the only sustainable alternative to aid for the funding of public services. At the same time, taxation is an important part of governance and state building. It builds the relationship between citizens and the Government, making states more effective. Fair and transparent tax collection promotes social cohesion, shapes Government legitimacy, promotes accountability of Governments to tax-paying citizens, and stimulates effective state administration and good public financial management.

Taxation is a very important part of economic policy, for growth, trade, investment and private sector development, as well as for meeting environmental challenges. The coalition Government are committed to supporting developing countries to access sustainable sources of revenue and to collect the tax that they are due.

My right hon. Friend the Member for Hazel Grove (Andrew Stunell) asked if not this, what is the most fruitful way? That could be applied to many issues raised today. Apart from international negotiations and conferences, the most fruitful way this country can work with and help Governments across the developing world on this issue is through our world-respected and professional technical assistance on tax. We are lucky in this country, because we have Her Majesty’s Treasury to tell us how to do things. The rest of the world is not so fortunate and that expertise—[Interruption.] Why are people murmuring laughter at our being so fortunate? It is one of our principal talents and skills, and we can offer the world that expertise and really make a difference. I will come on to Zambia in a minute, because as my right hon. Friend the Member for Gordon said, there has been a huge achievement in terms of tax revenue collection, but there are also some holes in the system.

The IDC’s report acknowledged the value of support that the UK provides to revenue authorities. DFID’s work with partner countries on tax includes 48 tax programmes across 20 countries, totalling around £20 million a year. Our support is focused on where we can make the most difference and get the best results for our developing country partners. As several hon. Members have mentioned, we also need to deliver the best value for money for UK taxpayers. Most of DFID’s work on tax is at a country level. Projects are managed by staff who live and work in the country, which means that projects can be responsive and demand-led. Tax projects may focus specifically on strengthening revenue collection or on broader objectives, such as public financial management reform or public sector reform.

In Afghanistan, which my right hon. Friend touched on, from 2007 to 2012 we helped increase tax revenues from 4% of GDP to 11.6%, helping the Afghan Government to finance the delivery of basic services. Last month, the Secretary of State for International Development was in Afghanistan, extending that support to the Afghanistan Revenue Department until 2016 with the aim of increasing revenue collection to 15%. In Ethiopia, HMRC’s support to the Ethiopian Revenues and Customs Authority, together with other support, helped to reduce average customs clearance times: for example, low-risk imports went from seven days to 10 minutes, and exports from eight hours to 15 minutes. Those are huge barriers to have removed. In Rwanda, the UK helped to provide the laws and regulation under which the Rwanda Revenue Authority was established, and the office building and management systems. The authority reached a point at which it was collecting the full £24 million of DFID’s 10-year support programme every three weeks, and its effectiveness has been an important factor in Rwanda’s impressive record on development performance.

Building capacity of revenue authorities is important and, as other hon. Members have said, so is ensuring revenues are spent effectively. We do that in a number of ways. We recognise the importance and value of transparency in tackling tax evasion. The global issues referred to in the report have been getting more attention, and are rising up the agenda. Although not good, it has been helpful to see those corporate moves that meant that the large companies referred to in this debate paid so little in this country over a number of years. That has made the issue of how corporations use tax systems in different countries to move around their profits more understandable to the wider public, and that is a great motivator. The Prime Minister has put tax evasion and avoidance right at the top of the agenda for the G8 and is focusing on fixing the issue here, too.

I want to address some specific issues that have been raised. A number of hon. Members raised the issue of the EITI. In terms of our membership, the UK is a real supporter of the EITI, and first thought of it, but we did not implement it in the past because the IMF did not consider us resource rich. Greater transparency in the extractive sector will be an important focus of the UK’s G8 presidency in 2013. As others have said, the UK can hardly call on other countries to implement the EITI or live up to high standards if we are not prepared to do so ourselves. That is why the Prime Minister called for an urgent review of the UK’s position on EITI. We expect that review to be concluded by the end of January. We provide support to the EITI International Secretariat and the EITI multi-donor trust fund, which provides technical assistance to implementing countries and represents the UK on the EITI board. Our bilateral programmes support EITI candidacy and/or implementation: for example, in the Democratic Republic of the Congo, Nigeria, Afghanistan and Burma.

[Mr Charles Walker in the Chair]

At the moment, a decision has not been taken on the publication process of the EITI review, but the broadening of the scope was also raised. The Government welcome the review of the EITI that is under way to develop a broader standard for consideration by the EITI board, with a view to possible introduction in 2014. The UK is an active participant in the strategy review, which is a multi-stakeholder process, considering a wide range of proposals that could be included in a revised standard. As was raised by my hon. Friend the Member for Mid Derbyshire (Pauline Latham), the proposals include disclosure of contracts, more disaggregated reporting of data and background on the sector, among other things.

A number of hon. Members raised FATCA, or the US Foreign Account Tax Compliance Act. The Government are fully committed to tackling tax evasion. As we stated in the Government response to the Committee, we do not regard the unilateral introduction of a version of the US FATCA in all its glory—so to speak—in the UK as the means to achieve automatic information exchange, because FATCA is unilateral and extraterritorial in its approach. For example, it imposes severe withholding taxes on those that do not comply. While I cannot elaborate at this point on the significant difficulties that have been created for the US as well as the companies affected by its implementation, I am happy to undertake to write to my right hon. Friend the Member for Hazel Grove on that issue.

That said, as hon. Members may be aware, the Government have signed an agreement with the United States of America. It is the first of its kind and it will significantly increase the amount of information automatically exchanged between both countries. As announced at the autumn statement, the Government see that as testing a new international standard in tax transparency. Obviously, when we see how that goes, the Government will look to conclude similar agreements with other jurisdictions. The UK and the Isle of Man have jointly announced our intentions to conclude an enhanced automatic tax information exchange agreement, based on the UK-US FATCA agreement. We are also in similar discussions with the other Crown dependencies and the overseas territories. The Government commend the great leadership of the Isle of Man in this area. The G20, of course, is committed to strengthening tax transparency and the exchange of information.

[Richard Burden]

I am grateful to the Minister for giving way. If I understand her correctly—I hope she will tell me if I have got this wrong—in terms of the outline agreements that are being reached with the United States and the work that is being done in relation to overseas territories, are the Government saying that they see those as a kind of pilot scheme for a more extensive automatic transfer of information? If so, that sounds like a good thing. If not, there is still a gap. What about the wider application of automatic transfer of information?

[Lynne Featherstone]

I thank the hon. Gentleman for his intervention. I cannot give him the comfort that he seeks that it is the Government’s intention, if what he refers to works, to extend it right across the world, but we are extending it and looking at it. If it provides a good model, we will obviously look at it again to see what application it might have in which jurisdictions.

My right hon. Friend the Member for Gordon raised the issue of Pakistan. I believe that hon. Members may have taken representations or evidence this morning. I understand that that is a real issue, because Pakistan has one of the lowest rates of tax collection, averaging only 10% of GDP in recent years. An improved tax regime is the key priority for DFID in Pakistan. The importance of improving Pakistan’s tax-to-GDP ratio is raised regularly in our engagement with senior Government representatives there, as it is by the IMF and other donors. We raise it; the issue is trying to get an effect and a change in the circumstances there. DFID is involved in strategic dialogue about the World Bank’s support on revenue at federal level and also contributes analytical work—for example, on the political economy of tax reform. We are supporting wider public financial management reform in some provinces. That includes the strengthening of revenue policy. This is a major issue, on which we are putting a lot of emphasis.

There was frustration about the willingness of elites to pay tax in developing countries. It is true: the elites are very reluctant to pay. How can we expect everyone else to be paying tax in a country if the elites are not setting an example? As an example, I refer to what DFID has done in Burundi. As ever, I hear what my right hon. Friend says about the Select Committee’s view on Burundi. He has made that case both publicly and privately on many occasions. However, there is the recent example of DFID supporting the Office Burundais des Recettes. A public outcry has led to MPs and Ministers paying tax for the first time. It is something if one can raise the issue to the point at which there is a public voice about the accountability of the Government in terms of setting the prime example. My right hon. Friend made the point that if Prime Ministers and MPs do not pay their taxes, it is pretty hard to say to the rest of the country and to the elites, “You should be paying tax.”

I do not want to go on for too long. The Chair has changed—it is a great pleasure to speak under your chairmanship, Mr Walker—and my right hon. Friend the Member for Gordon must introduce the second debate. However, I want to address a couple of things. One issue that was raised quite often was the Starbucks effect and what we are doing in this country about that. The Government are taking significant steps to ensure that everyone, including multinational companies, pays their fair share of tax. The response is twofold. There is support for international action. Alongside France and Germany, we are providing additional resources to the OECD to speed up the international efforts on dealing with profit shifting by multinationals and erosion of the corporate tax base at global level. The OECD will deliver a progress report to the G20 in February 2013 on actions to tackle base erosion and profit shifting.

There is also further investment in HMRC. HMRC will expand its risk assessment capability across the large business sector and increase its specialist transfer pricing resources to speed up its work to identify and challenge multinationals’ transfer pricing arrangements. The Government relentlessly challenge those that persist in avoiding tax and have recovered £29 billion of additional revenues from large businesses in the last six years, including £4.1 billion in the last four years from transfer inquiries alone.

A number of hon. Members raised the issues brought up by Christian Aid and ActionAid in relation to the costs of evasion and avoidance. As has been discussed, the estimates are numerically disputed, but the bigger point is that, despite suggestions that the estimates of tax evasion and avoidance have been agreed by the OECD, the figures have not been endorsed by any of the OECD’s committees. The key point is that evasion and avoidance are undoubtedly significant challenges for developing countries and that the Government are committed to providing support, but as I have said, tax capacity building and technical assistance are the primary issues.

I want to deal with the country-to-country reporting model or rather the broader one, not the one that is being considered for the EU directive, which is for the smaller view. The big ask is the model whereby all multinationals disclose information that goes beyond payments to Governments. This model has been discussed in the OECD task force on tax and development without any consensus being reached on its merits. The Government believe that the case has not been made for the effectiveness of this model in achieving its objectives while minimising costs to business. It is not being called for by developing countries, but the Government do agree that many developing countries do need to improve their ability to assess transfer pricing risk and detect abusive profit shifting and that other options, such as the transfer pricing transaction schedule described in recommendation 7, could offer more proportionate and effective help.

A number of hon. Members raised the issue of a DFID Minister for tax. I have to say, as my right hon. Friend the Member for Hazel Grove rightly predicted I would, that the development impact of UK tax and fiscal policy is a collective responsibility for all members of Government. DFID, the Treasury and HMRC all work together. [Laughter.] Did my right hon. Friend read my brief? However, the UK is committed to helping developing countries to build robust, fair and sustainable domestic taxation systems and, having listened to what was said, I propose to consider the proposal that was made for an inter-ministerial group. I will take that away with me. I am not promising anything, but I want to look at how that is referenced. There are many discussions across Government. Her Majesty’s Treasury is everywhere across Government, as I am sure hon. Members in this room are well aware, but if what was proposed would be a productive way forward, I am certainly prepared to look at it in the future.

The last issue that I will address, because I have gone over my time slightly, is the request by the International Development Committee on scaling up. The report acknowledges the value of technical assistance provided by DFID and HMRC to national revenue authorities in developing countries and recommends that work in this area is scaled up. I agree completely. I have been in post for four months now and have been looking at this issue. Tax is high on the agenda. It is high on the agenda for the G8. It seems to me that the most successful and most useful thing that we have done as a Government in terms of enabling developing countries to operate is to enable them to be the masters of their tax collection and their tax systems.

I was in Zambia, too, and Zambia did fail some of the tests set by the IDC in terms of the provision of information. We are looking at that. But in Zambia, I did meet representatives of the audit committee, the public accounts committee and the Office of Public Prosecutions. All of them are taking on this agenda in a way that I have not seen in many places. There really is a desire for them to collect the revenue and for us to help them—enable them—to do that and do it well.

I am sorry that I have not addressed all the points that were made. There is unanimity across this room and, indeed, everywhere that it is important to deal with tax avoidance and tax evasion not just because that would enable countries to fund their own public services and to begin to achieve separation in terms of aid dependency, but because there is moral rectitude in paying one’s fair share. In this country, as others have said, we stand proudly on our commitment to 0.7% of GDP in a political environment that is challenging; there have been attacks on us for that. We have to show that every penny counts and every taxpayer pound is spent wisely. One of the ways in which we do that best is by helping to ensure that tax revenues can be collected across the world. Those who travel across the world and talk to the Governments of the world and civil society across the world will know that the position is variable across the world. We are making progress, but there is still progress to be made.

I thank all Members for their contributions. I thank the Committee again for drawing attention to this subject and for recognising the valuable work the UK is doing. The IDC has made a valuable contribution to the new shape of our programme for tax.