Calls for action on profit shifting

Lord Sikka (Lab) who secured the debate suggested that multinational corporations are annually diverting approximately $1.4 trillion into tax havens, resulting in a global tax revenue loss of $348 billion. He emphasised that over $329 billion of profit is shifted into the UK's Crown dependencies and overseas territories each year, causing a tax loss of $80 billion. He said: “This daylight robbery is facilitated by financial engineering and opacity from a rapacious tax abuse industry located in the UK and its global dependencies”.

To illustrate how profits are shifted, Lord Sikka provided a number of examples including companies like Starbucks, Microsoft, Google and Amazon which, he said, employ complex corporate networks to shift profits to low or no-tax jurisdictions, minimising their tax obligations in higher-tax countries.

“Profit shifting requires urgent attention”, warned Lord Sikka who also asked how the government

plan to give visibility to profit shifting. He stated that: “Some visibility can be provided by public country-by-country reporting, which would enable proper transparency on both the amount of taxes avoided by multinationals and how far the UK’s measures have been effective in tackling that”. Moreover, the Labour peer suggested, it would helpful if corporate tax returns are made publicly available so that it can be seen what kind of taxes are being ‘abused’. “That would empower the Public Accounts Committee to scrutinise those corporations and any sweetheart deals done by HMRC”, he said.

Baroness Coffey (Con), a qualified chartered management accountant, as well as a former deputy prime minister, made her maiden speech in the debate. She emphasised that transfer pricing delivers the necessary “compliance on taxation” and it can be a “valuable tool” for companies to become more efficient and bolster economic development in countries and communities. She endorsed the Organization for Economic Cooperation and Development (OECD) arm’s-length principle, arguing that it helps prevent anti-competitive behaviour for local businesses which otherwise could be “undercut by aggressive tax planning”.

Baroness Coffey stated that it is useful “to make sure that we keep up to date in having that level playing field around the world”, while also encouraging the government to focus on making the most of investment zones and freeports, as well as “stabilising tax legislation to give businesses certainty and confidence to invest”.

Lord Leigh of Hurley (Con), a chartered tax adviser, highlighted that the UK has implemented several legislative measures to address profit shifting by multinational companies and has adopted the OECD’s base erosion and profit shifting (BEPS) measures, including hybrid mismatching rules. These rules prevent unintended tax advantages from differences in tax treatment of entities or instruments between countries. He continued: “Then there is the UK corporate interest restriction, which limits the amount of tax relief that companies can claim on their net interest expenses to the higher of £2 million or 30% of EBITDA. It is a very powerful method of preventing private equity avoiding tax. Then there is the diverted profit tax, which was introduced in 2015. This targets profits artificially diverted from the UK, as it imposes a 25% tax on profits deemed to be diverted through schemes.”

The Conservative peer added that, with the US recently pulling out from both OECD’s pillars 1 and 2, this leaves the UK government “in a quandary”. Additionally, as US multinationals will no longer be forced to share information with non-US subsidiaries, this “makes pillar 2 compliance and in particular the understated profits rule tax—UPRT—almost impossible”, he suggested.

To conclude his remarks, Lord Leigh called on the government to have another look at the Digital Service Tax rules while recognising that there is “no political impetus to implement it”. Moreover, he raised another issue about HMRC having “no effective mechanism” for enforcing VAT on imports below £135 in value, and asked if the minister could “look at this urgent issue afresh”.

Lord Davies of Brixton (Lab) asked if the Treasury is considering steps such as strengthening HMRC’s enforcement of transfer pricing and also: “Is it considering the idea of withholding tax on intergroup payments and generally tightening its anti-enforcement rules”.

Meanwhile, Baroness Kramer (Lib Dem) referencing the recent accusations against the Russian oligarch Roman Abramovich, said: “It underscores how limited HMRC’s capability is to pursue large tax avoiders and their enablers”; she added that the tax gap is not “an adequate way” to try to analyse or to expose these problems.

Baroness Kramer asked the minister why country-by-country reporting had been dropped. On UPRT, she suggested that other countries would be too ‘scared’ to apply it to US-based companies for fear of “punitive tariffs”, emphasising that to address these issues collective actions are required. “My party has called for the government to seize the opportunity of a pan-Europe customs scheme as a mechanism which would perhaps help us pull together our relationship with the EU but then also engage with other allies around this issue,” she said.

Viscount Hanworth (Lab) also raised the Abramovich case, saying it had revealed two things: “The first is that there are plenty of people at hand in the City of London to advise on how to evade the British laws of taxation. The second is that those laws are weak and easily exploited… Our national interests have become subservient to the interests of the multinational corporations to an extent that is probably unprecedented in the developed world.”

The shadow minister, Baroness Neville-Rolfe, said that the previous Conservative government had made significant progress in tackling the transfer of businesses’ profits to low-tax and no-tax locations, for example through the Digital Services Tax. She recognised that corporation profit shifting represents a “serious problem” for UK economic interests but noted the attitude of the new US government. She warned of “the risk of costly tariffs if an accommodation cannot be found with the Trump Administration; in other words, the world has changed and we need to reflect how best to respond to this change”.

The Financial Secretary to the Treasury, Lord Livermore, emphasised that the government’s objective is to maintain an internationally competitive tax system, where “businesses pay their fair share of tax in the UK”.

On the government’s position on pillar 1 and the digital services tax, the minister explained that the government continues to support an agreement on pillar 1 and, as a temporary measure, the digital services tax. He said the government will liaise with the new US administration “to understand their concerns around the digital services tax and consider how these can be addressed in a way that preserves the policy objectives.”

The minister highlighted that the government are currently legislating for the final part of the pillar 2 agreement through the Finance Bill. He told peers that the undertaxed profits rule would ensure that firms cannot evade their responsibilities under the global minimum tax.

Responding to concerns raised by Lord Sikka, Baroness Kramer and Baroness Neville-Rolfe about US government executive orders relating to pillar 2, the minister said: “While I know that they would not expect me to give a running commentary on every executive order or decision made by President Trump and his Administration, the UK will of course be open to discussing concerns and ways to alleviate these in a way that upholds the policy aims of pillar 2. To reiterate… this is an international agreement signed by over 135 countries after many years of detailed negotiation. We believe it represents a fair approach to how countries compete for cross-border investment.”

Responding to country-by-country reporting concerns, the minister said that the government is a strong supporter of “greater tax transparency” and efforts to ensure that multinational groups are appropriately taxed in the jurisdictions in which they operate. He added while public country-by-country reporting could have a role to play in supporting those objectives, the government believe it is important that any action be co-ordinated at the international level to ensure that it is “comprehensive and consistent” and avoids competitive distortion.

Answering Lord Davies's question, Lord Livermore explained that the government plans include new proposals to close the offshore corporate tax gap. He said: “We will consult on lowering the thresholds for exemption from transfer pricing for medium-sized businesses to align with international peers, and we will seek views on introducing a requirement for businesses in scope of transfer pricing rules to report cross-border-related party transactions to HMRC.”