Making tax policy post-Brexit: an international perspective

I returned to my old Westminster haunts this week to take part in a seminar run by the All-Party Parliamentary Group on Responsible Tax. This was the group’s second session on tax and Brexit, with the theme “Making tax policy post-Brexit”. Dame Margaret Hodge, who chairs the APPG, led the proceedings and fellow-panellists were Nicky Morgan MP (Chair of Treasury Committee), Frank Field MP (Chair of Work and Pensions Committee), and Matt Ellis of Deloitte. This blog reproduces my own contribution to the seminar.

 

My comments focus on the general, cross-cutting issue of tax avoidance. Tackling tax avoidance requires international cooperation, and it’s important for the UK not only to continue working with international partners on the issue, but to remain at the forefront of this work post-Brexit.

Tax avoidance and the EU

Ironically, in the last couple of years the EU has started to get its act together on combatting tax avoidance – just at the point when the UK has decided to leave.

The EU Anti-Tax Avoidance Directives (generally known as “ATAD”) were agreed in 2016 and 2017. They build on work done at the OECD to tackle aggressive tax planning, or “profit-shifting”, by multinationals. The directives ensure that EU countries are early adopters of the OECD principles and that they adopt them in a broadly consistent way. They also go further than the OECD in some areas.

The European Commission’s statement on ATAD emphasised the importance of coordinated international action to tackle tax avoidance:

“Aggressive Tax Planning is a global problem, which requires European and international solutions. Many Member States now recognise that unilateral action is insufficient. There is a large degree of consensus that a coordinated response is needed to the problem of aggressive tax planning – to ensure competition on a level playing field on tax matters.”  (From EC communication to European Parliament & Council on ATAD, January 2016)

To put this in historical context, it’s worth remembering that this robust stance from the EU on tax avoidance is relatively new. If we look back at ECJ decisions over the last 20 years, we get a rather different flavour. The following quote is typical (emphasis mine):

“The need to prevent the reduction of tax revenue is not one of the grounds listed in Art46(1)EC or a matter of overriding general interest which would justify a restriction on a freedom introduced by the Treaty.”  (From ECJ judgment in Cadbury Schweppes case, September 2006)

ATAD shows how the mood has changed. The EU now recognises the reality: that efforts to tackle aggressive tax planning by multinationals have to be pursued at an international level, by cooperation and coordination between nation states. A unilateral approach by individual countries is doomed to failure, as tax will simply slip between the cracks of the individual national tax systems.

UK as thought leaders

The UK itself has recognised this by taking a strong lead in international efforts at OECD. An independent paper from the Oxford Business Tax Centre described the UK as one of the “thought leaders” of the OECD’s work to address profit-shifting by multinationals.

In an EU context, the UK has not generally been at the forefront of promoting tax measures, given the strongly held view that direct tax is and should remain a Member State competence. But the UK govt did support ATAD, which would not have been adopted without unanimous support within the European Council.

While the directive is due to take effect in January 2019, just before we leave, the UK is already well on the way to adopting most of the measures within it.  And of course the UK was able to influence, from inside the EU tent, the way in which the proposals developed.

Looking to the future

What indications do we have of the government’s plans for the post-Brexit direction of policy on tax avoidance and international cooperation?

Over the last 18 months there have been mixed signals.

Perhaps the low point was a year ago when the Chancellor made ominous threats in an interview with a German newspaper – hinting at a possible move towards a low-tax, low-regulation economy, sometimes referred to as the “Singapore model”.

The Chancellor has since appeared to step back from this. For example, in July he told the French press that the UK’s economic model would remain recognisably “European”. More recently there have also been some specific positive signals of the UK government’s intent.

As part of the November Budget package, HM Treasury published a paper on Corporate Tax and the Digital Economy. It included a clear commitment from the government to the continuing importance of international, and indeed European, cooperation to find multilateral solutions:

“The government believes that the report [of the OECD Task Force on the Digital Economy] needs to put forward bold multilateral solutions that build on the discussions taking place within the European Union, and help to ensure a more sustainable corporation tax framework for the future.”  (From HM Treasury Position Paper, November 2017)

Another positive sign of the future direction came in December, when the Chancellor joined with fellow European finance ministers in writing to the US treasury secretary, to express serious concerns about the proposed package of tax changes in the US (which have now been passed by congress).

It was good to see UK joining in a united European front on this issue, as this has not always been the approach in relation to recent developments in the US.

US tax changes reinforce the need for cooperation in Europe

It’s also worth pausing for a moment on the US tax changes as they provide a concrete example that reinforces the points I’ve been making.

The US changes are likely to pose significant challenges for European and other OECD countries. There are, firstly, issues about whether the new US tax regime is compliant with international tax treaties and with WTO rules. These have been widely commented on.

But there are also big questions around the likely impact on tax planning by multinationals, with potential knock-on impacts for governments and tax authorities around the world.

For the last 20 years or more, global tax planning has been driven by the quirks of the US tax system. While the US system was in dire need of reform, some of the changes take it in unexpected directions, and move away from accepted international norms.

The new rules will undoubtedly trigger behavioural shifts by multinationals, some of which may be long-term and difficult to predict. I see it as a shift in the tectonic plates of global tax planning. It will be imperative for the UK to work closely with European partners, both on tax policy and tax administration, and likely over many years, in order to monitor and respond to this shift.

To sum up …

This is of course just one example of the challenges ahead. To address those challenges, and protect UK tax revenues, the UK must continue to play a leading role in international tax cooperation post-Brexit.

There are some positive signs that the government wishes to maintain this role. But it’s a message that bears repeating – clearly, consistently and unequivocally.

We will of course no longer have direct influence on EU developments. That means UK will have to work even harder, within forums such as OECD and perhaps on a more ad hoc multilateral basis with our European partners, to make sure we retain our clout in global efforts against tax avoidance.

 

 


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