After Brexit, the ‘rest of the world’ will include the UK. This could make it an attractive potential tax haven.Tax avoidance by multinational corporations costs the EU €50-70bn a year in lost revenue. In response, the EU has proposed legislation which will require organisations to disclose where they pay their taxes, allowing the public to call corporations to account for tax avoidance. Brexit puts this project in jeopardy.In January of this year the then UK chancellor, George Osborne, struck a controversial deal with Google, requiring the software company to pay the UK government £130m in back taxes, a figure experts criticised as insufficient.
Earlier this month, Mr Osborne announced his intention to cut the UK’s corporation tax rate to 15pc. In 2014, the head of one of the world’s largest banks told the BBC that the UK is the world’s “biggest, most developed tax haven”. Brexit exposes the risk that the UK will pursue this status.
In November 2015 the OECD agreed reforms designed to combat Base Erosion and Profit Shifting (BEPS), the shifting of profits to low corporation tax countries and tax havens. Currently, multinationals are not required to disclose where they pay their taxes, and aggressive tax planning leads to inconsistencies between indicative and effective tax rates in individual countries.
For example, Apple used tax planning to cut its Irish tax bill by over $850m between 2004 and 2008, while Starbucks paid no UK tax on UK sales of £400m in 2012.
The EU is implementing the OECD reforms through the Anti-Tax Avoidance Directive, to be formally adopted later this month.
The Directive enforces Country by Country Reporting (CbCR); the largest companies resident or operating in the EU must disclose to tax authorities the tax paid versus revenue generated in each country of operation.
This information must be shared between the relevant tax authorities, both EU and non-EU, who can then claim the tax due. The legislation will apply to companies with annual turnover over €750m, approximately 6,000 organisations, and is due to come into force in January 2019.
The EU also plans to take this legislation one step further, proposing that Country by Country Reporting be made public.
This would allow us, as customers, employees and communities, to see how much tax companies actually pay in the countries whose infrastructure they deploy. Making this information public would provide a control of sorts on the negotiation of potential “sweetheart deals” between tax authorities and corporations.
However, while these measures suggest that we are poised to enter a new era of transparency and fairness in corporate taxation, there are some important caveats, which Brexit has thrown into full relief.
Based on the EU’s current proposals for public Country by Country Reporting, non-EU Member States would be grouped together as the “rest of the world”, meaning that companies would be required to report only aggregated data on non-EU countries.
After Brexit, the “rest of the world” will include the UK. This could make the UK an attractive potential tax haven. As UK advocacy group Tax Research suggests, “in effect, the proposal creates an incentive to use non-EU profit-shifting havens instead of EU ones”. Furthermore, public CbCR is an EU initiative, not an OECD one.
The OECD does not plan to introduce it and, as the EU has acknowledged, most businesses are against this level of transparency. The UK has the largest number of FT500 companies in Europe – 121 – almost twice the number headquartered in Germany, the EU’s largest economy. Through Brexit, the EU will lose 24pc of its largest companies; the power of the EU to lobby for public CbCR will be weakened and that of business strengthened.
Ireland is also likely to find itself in a difficult position as the EU’s Anti-Tax Avoidance Package progresses in the coming year. By 2017 the EU will create a tax haven “blacklist” for non-EU countries that “refuse to comply with tax good governance standards”. EU members will then have to impose “common countermeasures” against these countries. Consider the consequences if the UK, our largest trading partner, was blacklisted.
The EU states that “effective taxation is heavily dependent on close co-ordination between Member States”. Brexit is fundamentally counter-intuitive to “close coordination” within Europe, both between countries and between companies and legislators.
To ensure fair and transparent payment of corporate taxes, we need legislation beyond the national level and we need a united EU. Brexit is a step in the wrong direction.