From 'Difficult Friend' to BFF: UK's Role in Global Tax System Must Be Part of Post-Brexit Reinvention

04/08/2016 17:10 | Updated 04 August 2016

London's iconic Trafalgar Square was transformed into an interactive, tropical tax haven to increase pressure on world leaders to clamp down on tax dodging

MPs have today published a damning report which strikes a blow at the idea that we're on course to fix the broken global tax system.

The scourge of corporate tax avoidance hurts rich and poor countries alike but, as with so many things, it is often the poorest people who pay the heaviest price. Developing countries are estimated to lose US$200 billion a year to corporate tax avoidance. It is the poorest women and children who are hardest hit when schools and hospitals are starved of the funding they need.

World leaders have spent the last few years making bold promises to sort out the problem. In 2015 this gave birth to the so-called 'Base Erosion and Profit Shifting' ('BEPS') package of global reforms. The way some people spoke of it, you would imagine this raft of new measures was to be the solution to all global ills.

A more sober analysis is delivered by the cross-party group of MPs, chaired by Margaret Hodge MP, which gathered evidence on these much-vaunted proposals from experts on all sides of the debate. Their conclusion?

"BEPS has fallen short of creating the fair global system needed to combat global tax avoidance."

In fact they describe the reforms as a "sticking plaster". Doesn't quite sound like the promised panacea, does it?

What went wrong?

The proposals represent, as the report says, "international consensus on the development of new global tax rules and ... major progress in gaining cross-country agreement on sharing tax information". It all sounds very promising. So what went wrong?

The negotiations were led by rich country clubs (the OECD and G20), whose membership doesn't extend to any of the developing countries which suffer most from the broken global tax system. Unsurprisingly the package was not designed with their needs in mind, and hence does not even try to address many of the issues which concern them most.

One of the most important of these is how taxing rights are divvied up between the country where a company does business (usually the poorer one) and the country where the company has its headquarters (usually the richer one). Often this favours the richer country. BEPS includes nothing on this critical problem.

Another problem lies in the weakness of some of the recommendations. Transparency is vital to fixing this problem. As they say, sunlight is the best disinfectant. So, while it's good BEPS will introduce country-by-country reporting for the first time - companies will have to report profits and taxes paid in each country where they operate - this is greatly undermined by the fact the requirement will only apply to the very largest companies (turnover above €750m per year) and the information will never be published. Campaigners around the world, and especially in poorer countries, will remain reliant on whistleblowers (think Panama Papers) to bring dodgy dealings into the light.

And finally, some countries have been less than up front about what they have been calling for behind closed doors. The MPs' report calls the UK government a 'difficult friend', leading on tax avoidance reforms in public while undermining the effectiveness of the same proposals behind the scenes. In particular the report highlights that it was difficult to agree stronger recommendations on anti-tax haven rules (CFC rules) due to "push back... from the UK".

The new Prime Minister has emphasised that she will not be a showman politician, and we should judge her by her deeds not her words. So how will her approach to the thorny issue of tax - which still gives rise to great ire in voters - differ from that of her predecessor?

Committing to implement public country-by-country reporting; supporting efforts to bring developing countries into global reform processes on an equal footing; and ensuring that the UK's tax policy does not harm developing countries would all be excellent ways of demonstrating she means business.

Global tax conversations are littered with acronyms - G20, G8, OECD, CFC, PCBCR, DTT to name but a few. It may seem a crowded market but in light of the UK's "difficult friend" moniker I would suggest there is space for Theresa May to introduce one more: BFF.

In the wake of the EU referendum the UK is revising its relationship with the world. We could use a few friends. Taking on a new role as the torchbearer for global tax reform could win us more than a few.