Tax and development aid: Would you commit 0.7% of your tax expertise?

The OECD hosted a discussion on tax and development on 5 May, with contributions from business, government and NGOs. You can watch the broadcast here and I’ve Storified a few of the key points (I didn’t manage to see the whole thing).

There was an interesting exchange between Zeinab Badawi and Alan McLean, who is executive vice president, taxation and corporate structure at Royal Dutch Shell plc (Netherlands) and a vice chair of the taxation and fiscal policy committee at the business and industry advisory committee (BIAC) to the OECD.

Much of the discussion had focused on capacity-building in developing countries. McLean noted that BIAC provides technical assistance to Tax Inspectors Without Borders, and the OECD’s latest edition of “Better Policies for Development” sets out a number of capacity building programmes involving the OECD and others.

Badawi posed a question submitted by a viewer: “Could business commit 0.7% of their tax expertise to developing country governments to boost their tax take?”

McLean replied: “I think business is happy to do whatever it takes to ensure that tax capacity in developing countries is accelerated and grown to the level that’s required for [their tax systems] to operate effectively … that’s the majority of business. Whether that’s 0.7%, I’ll [suggest that it should be] what’s relevant and appropriate in the circumstances and context of any particular country.”

We’ve heard much about the UK government providing “expert advice to drive up tax revenues” but less about business involvement in “educating tax administrations about multinational business models”.

Chris Lenon, a former chairman of BIAC’s tax committee, said last month that his successor Will Morris “doesn’t seem to be getting much support from business in making this type of initiative work”.

Lenon had heard “suggestions that business couldn’t fund people to participate and should consider webcasts to developing countries”.

He added: “I’m not sure how many developing country tax administrations use webcasts? What they clearly do want is an interaction with business … So this is all very sad as this initiative has the potential to bridge the gulf of misunderstanding between tax authorities and business.”

Understanding between tax authorities and business will develop, Lenon said, if business does engage. “The answer that this is too expensive doesn’t pass the laugh test.”

There was a lot of talk about capacity building at the OECD forum. But multinationals, some of which have reaped huge benefits from the gaps in the current, outdated international tax system, should be playing an active role in helping to improve understanding among tax officials in developing countries.

Other concerns have been raised about the OECD’s BEPS project. According to Winnie Byanyima, executive director of Oxfam International, said OECD’s negotiations “have failed so far to include any developing countries in the process on an equal footing”. I have not seen the OECD’s to response to that claim. But it would not make any sense to exclude developing countries from negotiations about major reforms intended to protect those countries and help them to grow their tax base.

Update: Oxfam’s claim remained unanswered, according to Catherine Olier of Oxfam’s EU Office.

‘Fair to middling’: My report on the Fair Tax Mark debate (Taxation)

Richard Murphy is hoping to release a draft “international version” of the Fair Tax Mark (FTM) for discussion by June, he told Taxation at the end of an informative and constructive debate hosted at the London office of Mazars, the international accountancy firm.

Murphy revealed that some FTSE 100 companies had enquired about applying for the FTM, and there was “very definitely” interest among their FTSE 350 counterparts. Not as many smaller companies as expected had come forward.

Opening the debate, Tim Davies, head of tax at Mazars, suggested that the issues of tax transparency and tax avoidance were likely to be “on everyone’s agenda” for some time.

Read more at taxation.co.uk. This article is free to view until 24 April.

Tax transparency alone will not restore trust, warns ICAEW (Tax Journal)

ICAEW’s Tax Faculty has warned that a widespread belief that some businesses can pay less than their fair share of tax can undermine confidence in the tax system. An eight-page paper titled ‘Taxing corporate profits: hard choices’ had not been published on the ICAEW website as Tax Journal went to press, but its author Andrew Gambier posted a link on Twitter on 20 December.

‘Low tax morale damages public finances,’ the paper said, adding that there were ‘good practical reasons’ for taxing company profits. The OECD’s project on base erosion and profit shifting sought to ‘ensure that all business profits are taxed somewhere’. Read more on the Tax Journal website.

Taxing multinationals: Are MPs expecting too much of HMRC?

Today’s Commons public accounts committee report criticises HMRC’s record on taxation of multinationals, but a key element of the report is really addressing an important issue of tax policy that is being tackled at international level.

The PAC suggested in October that HMRC should estimate the tax that would be payable if the international system for taxing the profits of multinationals was reformed.

HMRC defines the UK tax gap (which it estimates each year) by reference to the tax that would be paid if everyone complied with the letter of the law and HMRC’s interpretation of Parliament’s intention in setting the law. Responding to today’s report, HMRC insisted that it can only measure non-compliance with existing law.

Jim Harra, giving evidence for HMRC at a PAC hearing in October, said:

“[HMRC’s estimate of the tax gap] does not include a measure of how much additional tax might be collected if you changed the policy.”

HMRC can and does advise ministers on tax policy, but policy objectives are set by ministers and MPs vote on new tax law and changes to existing law.

Today’s report appears to understate the importance of the current OECD-led initiative to close gaps in the international tax system.

The OECD said last February that such gaps give multinationals an unfair competitive advantage over smaller businesses and “hurt investment, growth and employment”.

Its action plan to tackle “base erosion and profit shifting”, approved by G20 ministers in the summer, listed 15 specific actions to “give governments the domestic and international instruments to prevent corporations from paying little or no taxes”.

One area being addressed is “excessive deductible payments such as interest” – and it is widely recognised that the UK’s tax relief for interest is relatively generous.

The PAC report claimed that HMRC’s tax gap estimate “represents only a fraction of the amount that the public might expect to be payable”.

But what does the public expect? If the OECD’s ambitious project works, some multinationals may well pay more UK corporation tax, but others may pay less.

Now, at least, the PAC seems to have recognised that HMRC can do little at this stage to assess the impact of what may be a major reform of international corporate tax:

“When there are firm plans to change international tax laws to tackle avoidance, HMRC should use this intelligence to assess how much additional tax revenue the changes would generate within the UK.”

These are important issues. But is the PAC the right forum? Its own statement describing its role says this:

“The committee does not consider the formulation or merits of policy (which fall within the scope of departmental select committees); rather it focuses on value-for-money criteria which are based on economy, effectiveness and efficiency.”

Double counting in the UK tax gap debate

Last June the National Fraud Authority estimated fraud against the public sector at £20bn a year, including £14bn lost to tax fraud (see page 8).

This was based (see page 14) on HMRC’s estimate of the 2010/11 tax gap. The NFA said at page 53:

“For calculating an estimate of tax fraud it is assumed that the underlying behaviours described as ‘evasion’, ‘the hidden economy’ and ‘criminal attacks’ represent fraud. It is estimated that these behaviours accounted for £14bn [of the estimated tax gap of £32bn] in 2010/11.”

Clearly, the NFA’s £14bn is included in the tax gap figure.

Two months ago HMRC estimated the tax gap for 2011/12 at £35bn and revised its estimate for 2010/11 to £34bn.

This week the Commons public accounts committee reported that: “[Taxpayer] losses due to fraud and error are worryingly high. It is staggering that, in one year, the public sector was defrauded of over £20bn and the tax gap rose to £35bn.”

Can you see the problem here? When the committee puts it like that, are you inclined to add the two figures together? Well, yesterday this happened …

The Times had this:

Watchdog: taxpayers losing out on £55bn

Sky News had this:

Govt Losing A ‘Staggering’ £55bn A Year In Taxes

The tax fraud figure has been counted twice, as Heather Self and others have pointed out.

Calum Fuller at Accountancy Age took this up with the PAC, whose response was that “three sets of figures are prepared for different audiences at different times with different bases, including both actuals and estimates and there is a degree of overlap between all three with no single figure currently prepared to present a unified view”.

The PAC report called on the Treasury to come up with a better way to present “cross-government figures” within the Whole of Government Accounts, which can be used “to show the impact of the government’s counter-loss activities”.

The tax debate would benefit from more light and less heat. This sort of confusion doesn’t help, and the PAC’s report and press release could have been much clearer.