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Don’t dodge the issue, we need to crack down on tax avoidance

30 January 2015

By Billy HIll, LCID Membership Officer

Love it or loathe it, tax is the life-blood for public services across the world. For me, the money sourced from UK tax-payers has given me a great education, covered the cost of my nasty definitely-not-dancing-related broken ankle last year, and gets me to work every morning by way of public roads. Now I’m a University graduate in my first job, I’m pleased to be contributing to a system that has served me well.

Like 30 million other Brits, the PAYE system automatically takes a certain chunk from my salary each month. However, for some, it’s a different story. Tax avoidance has become global issue splashed across every national newspaper. Today, hundreds of millions of pounds being in hidden anonymous companies, widely dispersed through legal loopholes, and, according to recent estimates, over £2trillion in tax havens.

Dodging tax is big business with UK businesses withholding over £30billion each year according to tax authority estimates. So it probably comes as no surprise that, according to Oxfam’s new wealth report, that in the US more companies engaged lobbyists to work on federal budget and tax issues than any other issue.

But it’s not just every British citizens who suffer from this avoidance, it’s causing untold harm across distant continents. Rapid economic growth across the continent of Africa has attracted a wealth of British business and, with it, a certain amount of tax avoidance. This abuse of the system diverts money from key life-saving public services and investment in infrastructure, into the pockets of wealthy individuals. In 2011, rich countries raised 34.1% of their GDP in taxes while low-income countries raised on average only 13%. Chiefly, this has been caused by multinational companies’ sophisticated manipulations of their company accounts that divert cash.

Malawi is a classic point in case. A hub for agricultural trade with products including tobacco, sugarcane, and cotton, the country has faced significant hurdles in attempting to raise tax from foreign trade. According to the ONE Campaign, if companies paid their tax in Malawi, government revenues could increase by 50%, which is roughly the same amount that the country receives in international aid (11.7% of GDP).

It’s a similar story in Ghana where SABMiller, the world’s second largest beer company who include Grolsch and Peroni in their portfolio, have been shifting their profits out of the continent into offshore tax havens. The ActionAid report claims the business, whose headquarters are in the UK, has avoided £20m of taxes in Africa and India every year – enough money to educate a quarter-of-a-million African children.

But, aside from all this doom and gloom, there are some pretty simple steps we can take to make sure that the UK business is in order. One of those steps is to make it harder for companies to dodge UK taxes and make sure they’re not getting unjustified tax breaks. A common example of UK breaks are “tax holidays.” These temporary drops in taxation are used to encourage foreign investment and trading. Nevertheless, these are often unnecessary incentives as companies look for more concrete reasons for investing such as decent infrastructure and a stable political system.

Another key point is ensuring that UK tax rules don’t incentivise companies to avoid tax in developing countries. The UK has already created a set of rules for Controlled Foreign Companies (or CFC’s if you’re using Twitter) which stop companies, who are controlled by a UK resident in a foreign    company, from reducing UK tax by diverting profits to tax shelters. But more can be done. Glencore, an Anglo-Swiss corporate, has been repeatedly criticised for its dealings across the developing world including accusations of local tax dodging in Zambian mines, an allegation they have consistently denied.

Unearthing dodgy deals and making sure tax systems are transparent is also hugely important in clamping down on avoidance. This is especially true for the developing world where citizens often don’t have access to the information about who owns companies and where offshore tax evasion money is going. By making information public and promoting schemes such as the Automatic Information Exchange (a 2012 initiative which allows tax authorities to gain access to foreign business’ accounts), the opportunity to spot high-risk cases becomes much easier.

But away from all the detailed policy and big words, there’s a basic point to be made: tax is not just a financial obligation, but a moral one. It is the rent we pay to use public services like the NHS, public roads, and our education system. Tax avoidance deprives citizens around the world from fully-funded basic services, and the UK can play a great role in tackling this exploitation.

That’s LCID are backing a new campaign by 16 NGO’s (including Oxfam, Christian Aid, and the National Union of Students) are demanding an end to tax dodging in the UK with the introduction a Tax Dodging Bill. The campaign calls on government to amend their tax systems to prevent tax avoidance, cut down on tax breaks, and avoid incentivising companies that avoid tax in developing countries. It’s vital that we restore trust in our tax system and highlight the good that public services can do, here and around the world. Indeed, the UK must play a key role in making sure that our system is transparent and effective.

LCID will be doing what we can to support this important campaign and we urge you to do so too.

 

 

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