Why is Osborne relaxing anti-tax haven abuse legislation?

Martin Hearson is a tax policy adviser at ActionAid UK

In an era of fiscal retrenchment, we all want our government to be tough on tax dodging, whether by businesses or rich individuals. The government understands that, which is why George Osborne’s budget included a £1 billion crackdown on tax avoidance. Yet, as documents released as part of a consultation yesterday confirm, the Treasury is proposing changes to some obscure corporate tax rules that will cost the Treasury almost as much – £840 million a year by 2015.

Tax-haven-flow-diagram ActionAid UK is concerned these changes could hurt developing countries much more, to the tune of as much as £4 billion. And we’re not alone. A former HMRC official who worked on taxing multinationals thinks these changes:

“…would give UK multinationals carte blanche to siphon profits from developing countries into the world’s tax avoidance hotspots.”

The government plans to relax a set of anti-tax haven abuse legislation known as Controlled Foreign Company (CFC) rules. The current rules force UK companies to pay full UK tax on many of their subsidiaries that are based in tax havens, where they would otherwise incur much lower tax rates. This deters multinational companies from shifting profits into these tax haven subsidiaries to avoid taxes.

Here’s how one of the proposed changes will work. Most multinational groups have finance companies, usually based in tax havens, whose function is to lend money to other group companies. The proposed change will mean that the UK’s CFC rules no longer apply to these companies.

This will allow companies to use a piece of tax avoidance called ‘thin capitalisation’: a huge loan is made from a tax haven finance company to a developing country company, and the interest payments that follow shift taxable profits out of the developing country and into the tax haven.

The government’s proposed reforms will make this a much more attractive tax dodge for UK multinationals, by lowering the tax bill levied by the UK on finance companies’ profits.

According to the consultation document (pdf) itself:

“…in most situations [the new exemption] will result in an effective UK corporation tax rate of 5.75 per cent.”

Developing countries, whose revenue authorities are less well-equipped to prevent tax dodges like thin capitalisation, will lose out, probably by more than the UK Exchequer. Despite our concerns, the Treasury has to date done no analysis of the impacts of the reforms on developing countries – something that Treasury minister David Gauke was grilled on for over an hour in a parliamentary committee meeting last month.

The government has rightly committed to protect overseas aid from the cuts. Yet if these reforms go through, there is a risk that we will be giving with one hand, and taking with another.

http://twitter.com/maximmanchester/status/86777440109740032 Max

RT @leftfootfwd: Why is Osborne relaxing anti-tax haven abuse legislation? http://bit.ly/igVuj9 asks @ActionAid's @MartinHearson
http://twitter.com/martinhearson/status/86778906341949440 Martin Hearson

Why is Osborne relaxing anti-tax haven abuse legislation? http://bit.ly/igVuj9 asks @ActionAid's @MartinHearson
http://twitter.com/paul_trembath/status/86778934947090432 Paul Trembath

Why is Osborne relaxing anti-tax haven abuse legislation? http://bit.ly/igVuj9 asks @ActionAid's @MartinHearson
http://twitter.com/philipcharnley/status/86779314829402113 Philip Charnley

Why is Osborne relaxing anti-tax haven abuse legislation? http://bit.ly/igVuj9 asks @ActionAid's @MartinHearson
http://twitter.com/lenarthur2/status/86779867336683520 Len Arthur

Why is Osborne relaxing anti-tax haven abuse legislation? http://bit.ly/igVuj9 asks @ActionAid's @MartinHearson
http://twitter.com/alexcobham/status/86780229292539904 Alex Cobham

Thin cap. Hm. RT @leftfootfwd Why is Osborne relaxing anti-tax haven abuse legislation? http://t.co/0YFCrd3 asks @ActionAid's @MartinHearson
http://twitter.com/benniblett/status/86780429906092032 Ben Niblett

Why is Osborne relaxing anti-tax haven abuse legislation? http://bit.ly/igVuj9 asks @ActionAid's @MartinHearson
http://twitter.com/annahthomas/status/86782144944418816 Anna Thomas

The govt says it's cracking down on tax avoidance – so why is it doing the opposite? asks @MartinHearson on LFF http://t.co/z9X6lWA
http://twitter.com/therightarticle/status/86784553410240513 Michael

Why is Osborne relaxing anti-tax haven abuse legislation? – http://tinyurl.com/6fwsut5
http://twitter.com/actionaid/status/86786495297499136 ActionAid

Why is Osborne relaxing anti-tax haven abuse legislation? http://bit.ly/igVuj9 asks @ActionAid's @MartinHearson
http://twitter.com/richardgarvie/status/86787872337838080 Richard Garvie

Why is Osborne relaxing anti-tax haven abuse legislation? http://bit.ly/igVuj9 asks @ActionAid's @MartinHearson
http://twitter.com/mcooke01/status/86798057995378688 Matthew Cooke

RT @leftfootfwd: Why is Osborne relaxing anti-tax haven abuse legislation? http://bit.ly/igVuj9 asks @ActionAid's @MartinHearson <- crooks
http://twitter.com/steveturner02/status/86837770676486144 steve turner

Why is Osborne relaxing anti-tax haven abuse legislation? – http://tinyurl.com/6fwsut5
Leon Wolfson

I was discussing this with an economist the other day, and he also thinks a lot of big multinats will use it to shear us like sheep. £840mil is conservative, pun intended.

Cameron is taking care of his own, no more, no less.
Leon Wolfson

Oops, also forgot to say – it also encourages them to move their other operations OUT of the UK!
http://twitter.com/rockythehamster/status/86901012748705792 Rocky Hamster

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mr. Sensible

All in this together?
http://twitter.com/samsoprano30/status/86934846143868929 Sam hussain

Why is Osborne relaxing anti-tax haven abuse legislation? – http://tinyurl.com/6fwsut5
http://twitter.com/june4th/status/87467804181270528 Noxi

RT @leftfootfwd: Why is Osborne relaxing anti-tax haven abuse legislation? http://bit.ly/igVuj9 asks @ActionAid's @MartinHearson
http://twitter.com/pyrmontvillage/status/87468516667699200 Pyrmontvillage

RT @leftfootfwd: Why is Osborne relaxing anti-tax haven abuse legislation? http://bit.ly/igVuj9 asks @ActionAid's @MartinHearson
http://twitter.com/burnleyuncut/status/87480034817875968 UK Uncut Burnley

RT @leftfootfwd: Why is Osborne relaxing anti-tax haven abuse legislation? http://bit.ly/igVuj9 asks @ActionAid's @MartinHearson
http://twitter.com/sheffuncut/status/87484172091928576 Bruno Bear

RT @leftfootfwd: Why is Osborne relaxing anti-tax haven abuse legislation? http://bit.ly/igVuj9 asks @ActionAid's @MartinHearson
http://twitter.com/amy_macc/status/89425037886627840 Amy MacConnachie

Why is Osborne relaxing anti-tax haven abuse legislation? http://bit.ly/igVuj9 asks @ActionAid's @MartinHearson
http://twitter.com/mraccountancy/status/89998330347798528 Nick Robinson

Why is Osborne relaxing anti-tax haven abuse legislation? – http://bit.ly/mjcSMT
http://cashadvancesus.com/ Emily Morgan

I’m not worried at all about the Brits they are the only EU nation that would survive in the next 5-7yr compared to the other EU nations Since thier Currency is still the Pound …What will happen is same that happening here in the US no employment and no LINES of Credits for Small business Now Mr Obama has been told that his 450 billion dollar will only employ 2000,000 people with a sallary of 200,000usd ..Now let do that math on this 200,000x 2000,000=400,000,000, in taxable income now at a flat rate if 10% = 40b now for every dollar that one person spend that about 2 mill of worth of money moving x 2mill= 4,000.000.000.000 of working economy money that can be re-taxes again then with that moving we then have to hired more people since we now have 4000,000.000,000 of moving money that will then be taxe again …hmmm now am not sure but i think his plan will make money aslong as we taxes every body and this is with out adding new taxes aslong as we pay taxes on all the income that original 450 billion we can bring back our economy
http://twitter.com/laurapares/status/155383756620955648 laura parés giménez

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