Budget changes to tax haven rules could cost poor countries 4 billion pounds

Wed, 23 Mar 2011 00:00 GMT

Source: member // ActionAid

Corporate tax reforms to be announced in today's Budget could cost developing countries up to £4bn, ActionAid said today.

The Treasury is relaxing a piece of anti-tax haven abuse legislation, the Controlled Foreign Company (CFC) rules, which apply to foreign subsidiaries of UK multinationals.

But ActionAid fears the changes will make it easier for UK companies to avoid tax in poor countries in Africa and elsewhere.

Martin Hearson, tax policy analyst at ActionAid, said: "Relaxing these anti-avoidance rules will give British companies the green light to avoid tax in developing countries. It will open up the floodgates to tax dodging that could cost the world's poorest countries up to £4 billion - that's equivalent to almost half of the UK's annual aid budget.

"This is money that developing countries should be using to become less dependent upon aid. These changes risk undermining the good work the government has done in ring-fencing the international aid budget."

CFC rules are designed to prevent companies using tax havens to dodge their tax bills, for example where brand royalty payments are being used to shift profits from high to low-tax jurisdictions. The current rules apply to tax dodging by UK companies, no matter where in the world the taxes are being dodged.

They work by forcing UK companies to pay full UK tax on certain subsidiaries even though they may be based in tax havens. This is an effective deterrent to multinational companies shifting profits into tax havens, as well as a money-spinner for the Treasury.

ActionAid says that by removing this deterrent, the new rules could lead to a huge increase in tax avoidance in developing countries.

UK companies will also have their foreign branches (as opposed to subsidiaries) exempted from UK tax, giving around £100m to large banks and finance companies - a figure many experts believe to be a massive underestimate.

ActionAid's Hearson said: "We know the government hasn't looked at how this is going to effect developing countries. We'd like to see a full assessment of the changes, and work with developing countries to build the capacity of their tax officials to stem the tide of losses from tax dodging."