Legislative scrutiny of tax treaties: compare and contrast the UK and US

Here’s an interesting chart. Do you notice anyone missing? Interestingly, the United States is considerably less keen on signing tax treaties with developing countries than you might expect, given the amount of investment from it to, well, most places. Its only treaty with the whole of sub-Saharan Africa is with South Africa. When I looked in the wikileaks cables (of which more another day) it’s clear that many more developing countries want tax treaties with the US than get them.

Countries with the most tax treaties with developing countries

Source: IBFD data

I can think of a number of reasons for this. Perhaps colonial ties have bumped up the number of treaties signed by countries such as France and the UK. Perhaps the US system of deferral encourages the use of intermediate jurisdictions to structure investments, which in turn reduces the demand for direct bilateral agreements. When I asked people who know about what goes inside the US Treasury, they tend to cite limited civil service capacity as the main constraint, but I don’t get the feeling that the US has a lot less capacity than anywhere else.

The other thing I’ve heard, which sounds more plausible (or at least more interesting), is that in the US, tax treaties have to be ratified by a two-thirds majority of the Senate, and that can be a rocky ride. There are currently several treaties pending, Senator Rand Paul having made an issue out of the US-Swiss treaty. The Senate has been known to reject elements of tax treaties, including for example anti-abuse clauses in treaties with Italy and Slovakia. You can see the level of detailed examination in this report of the Senate Foreign Relations Committee.

It’s not just the US, however: the French senate rejected a proposed tax treaty with Panama a few years ago. This level of control must surely drive treaty negotiators mad, and I can quite imagine it acting as a brake on negotiations (though not, it seems, in France, which is at the top of the chart above). But surely it’s in everyone’s interests for the legislature to interrogate international tax instruments before they become law, rather than afterwards, as has happened with the Public Accounts Committee in the UK?

Well, speaking of the UK, I took a quick look at what happens here. Tax treaties are first scrutinised by the House of Commons’ delegated legislation committee, before being passed without a debate in the full house. So what does that scrutiny committee do? It turns out they have a nice little chat and then everyone votes in favour. For example, how long did it spend on 29 November 2010 considering six treaties with Belgium, the Cayman Islands, Georgia, Germany, Hong Kong and Malaysia? 25 minutes. Hungary, Armenia, Brazil, Ethiopia, and China on 1 November 2011? 25 minutes. Bahrain, Barbados, Singapore, Switzerland and Liechtenstein on 5 November 2012? 28 minutes.

In all cases, the treaties are passed with cross party consensus, perhaps in part because many were negotiated when Labour were in power. To be fair, there is a small amount of probing. When the treaty with Switzerland is discussed, a couple of backbenchers raise tax avoidance issues, while not at any point appearing to question the treaty itself. And there is this exchange during the 2011 session:

The Exchequer Secretary to the Treasury (Mr David Gauke): […] The hon. Gentleman raises a number of detailed questions. Let me try to address them as best I can. His first question is part of the tradition of these debates, which is to ask how much will be saved and what the financial benefit is of these agreements. It is part of the tradition, because it is a question that I asked on several occasions, and, whoever has been standing in the Minister’s position, the answer has consistently been the same: it is not possible to give a precise number for the revenue effects of these agreements—or indeed of other double taxation agreements. The overall cost or benefit of an agreement is a function of the income flows between the two countries, and the agreement itself is likely to change both the volume and nature of those flows by encouraging cross-border investment. It can be somewhat difficult to make any predictions about the impact of any one agreement.

Clearly, there is consensus on the point that it is in the UK’s interest to have an extended number of double taxation agreements, and the fact that we have such an advanced set of agreements is one of the advantages that the UK offers to international—multinational—businesses, but, as I say, it is not possible to identify particular sums.

Owen Smith: I fully accept the Minister’s point about the difficulty of prospectively projecting precise revenues, but does he feel that taken together these agreements—the Chinese one in particular—are revenue-positive for the UK?

Mr Gauke: I can go so far as to say that, in the round, these agreements are beneficial to the UK as a place to do business, and that that in itself has revenue advantages, but it is difficult to say whether each individual agreement works out revenue-positive or negative. In truth, it is not a zero-sum game. As with all international trade, there are advantages to being an open, outward-looking economy and to trading with other countries. The UK will benefit from being able to do that, and our advanced set of double taxation agreements will play a role in it.

And that’s the end of the matter. From this brief survey, I can’t tell whether this rather lacklustre scrutiny in parliament is a temporary blip, whether the Labour party are being a particularly compliant opposition, or whether this is how it has always been.

It is, however, more than occurs in many developing countries, where tax treaties can often be ratified by the executive without any legislative approval. That includes India, whose parliament has been powerless to change the controversial treaty with Mauritius. And even in countries where there is a vote, the tax officials I’ve spoken to say it usually descends into mud-slinging about all kinds of tax issues. After all, this is technical stuff that would require MPs to do a lot of homework, and is unlikely to catch the public imagination.

Getting the right balance is tricky. But tax treaties are not just arcane bits of bureaucracy, they’re actual tax policy, setting the tax rates paid by taxpayers and thus affecting the amount of public revenue available, as well as tax equity issues. And that deserves a proper scrutiny.

The government adopted tax campaigners’ rhetoric at the G8, but much of the status quo is still intact

Here’s my post on the LSE Politics & Public Policy blog.

The Enough Food for Everyone If campaign – successor to Make Poverty History – has succeeded in making tax haven secrecy the centrepiece issue of public debate around the G8 summit, which closed yesterday in Eniskillen. It also chalked up a genuine success, in pushing the UK’s overseas territories to join a multilateral initiative to share tax information.

But what emerged from the summit itself (and indeed, what David Cameron proposed ahead of it) was a set of ten ‘principles’, with no concrete commitments beyond endorsement of developments already taking place through the G20 and OECD. “The public argument for a crackdown on tax-dodging has been won but the political battle remains,” said the IF campaign. This outcome is not illogical, because competency on tax most definitely resides with those other organisations, rather than the G8. Indeed, some of the developing countries in the G20 would likely bristle if asked to implement a decision taken by the G8.

Over the past few days, it became increasingly difficult to distinguish the campaigners’ messages from those coming out of the government. This demonstrates a real success on the part of campaigners in shifting the public debate. As Melanie Ward, of development charity ActionAid and the IF campaign, wrote yesterday, “at points it was bizarre watching David Cameron, the UK prime minister, use language that could have been written by those working in development agencies.”

The fight against tax haven secrecy was portrayed as Cameron’s personal mission in much of the media coverage, not least a Guardian interview on the eve of the summit. “The PM appears increasingly isolated in his bid for a tax evasion clampdown as world leaders hold talks at the G8 summit” said Sky News.

But the adoption of campaign rhetoric by politicians comes with risks, too. I’ve argued before that in the tax debate, it’s very easy for governments to say one thing in public and do another behind the scenes. The political yield for Cameron from the media portrayal of his global leadership on tax evasion will have been significant, and yet as campaigners have been saying, nothing agreed at the G8 is in itself likely to make a big difference to tax haven secrecy or to developing countries. In particular, there was no commitment to making public registers showing the beneficial ownership of companies, to help track down offshore income.

This puts me in mind of a couple of other headline-grabbing international summits. In 2009, Gordon Brown hosted the London G20 summit in the midst of the financial crisis. That summit has been back in the news because of the allegations of espionage, but there was something interesting in the Guardian’s account of how Brown did achieve a breakthrough:

“The key to Brown’s approach was to build up momentum before the summit behind the stimulus he and the newly elected Barack Obama favoured. The European participants met in February 2009 in Berlin in an attempt to reconcile their internal differences. Brown also travelled further afield to the US, Brazil, Argentina and Chile in the days immediately leading up to the summit to build up a loose coalition behind the stimulus plan.”

It’s not at all clear that the government invested in any similar preparatory work ahead of this G8 summit, despite it being such a difficult area. At a public meeting organised by the IF campaign last month, Treasury Minister David Gauke refused to set out the government’s position on any of the campaign’s proposals. Those favouring conspiracy theories might suggest that the failure to reach agreement could have been built into the strategy: much of the status quo is still intact, but the maximum political benefits from appearing to challenge it have been reaped.

On that crucial test of a register of beneficial ownership, for example, the UK has said it will lead by example, but the example is pretty lukewarm. It relies on Companies House, which admits it is incapable of enforcing existing transparency requirements. Meanwhile the issue of public transparency of the register is kicked into the long grass of a consultation.

Another summit this reminds me of is the last G8 hosted by the UK, at Gleneagles in 2005. The unprecedented Make Poverty History mobilisation called for Tony Blair and Gordon Brown to use the summit to push reforms in three areas: aid, debt and trade. That summit is remembered as a partial success: Bob Geldof famously gave the G8 “10 out of 10 on aid, eight out of 10 on debt,” though he seemed to forget about trade.

On that occasion, Blair and Brown got the media fillip they wanted, lauded as the “Lennon and McCartney” of global development by Bono. And while that summit undoubtedly was a watershed moment on aid, many of the promises later unravelled. In an evaluation published earlier this year, Oxfam concluded that, while “the G8′s $50 billion aid promise acted as a catalyst to significantly boost total aid levels…it is true that it’s not all been good news. The G8′s collective $50 billion promise was missed by around US$20 billion at the 2010 deadline, and European countries remain remarkably off-track for meeting their collective promise to the 0.7% GNI target by 2015.”

Time will tell whether the G8 ‘principles’ from Eniskillen will meet the same fate.

Putting a price on the reputation risk from tax avoidance

What are the reputational consequences of perceived corporate tax avoidance? That’s the question that introduces today’s “Tax and Reputation Forum,” organised by the Oxford Centre for Business Taxation and friends. (It’s at King’s College London, so after the High Court the other week, I’m beginning to think that Aldwych is the centre of tax news!)

The event could not be better timed, and I’m hoping to see the tax profession’s criticisms of the UK parliament’s Public Accounts Committee debated directly with its Chair, Margaret Hodge. It will also be interested to observe where Treasury minister David Gauke positions himself: in front of a mostly business audience, will he be closer to his pre-Starbucks “government and business have to work together to combat the public’s misunderstanding about tax avoidance” messaging, or his bosses’ more recent “this is outrageous and we won’t stand for it” tone?

The conference blurb talks about “perceived tax avoidance”, which is understandable. You’d expect that a risk assessment for potential media coverage would be based on how people might interpret the information in the public domain, not on the underlying tax structure, which may be obscured in the accounts. But what if companies also had to contend with private information from within the tax function coming into the public domain?

Last week the Public Accounts Committee talked about evidence from “whistleblowers”, people from outside the tax function who felt that their day to day experience contradicted how the company’s affairs were described for tax purposes. That doesn’t move us beyond the issue of “perceived” versus “actual” tax avoidance.

But what about a whistleblower from inside the tax function? That appears to be what’s happened in today’s Guardian story about Marks & Spencer. The quote below, form a leaked email, is interesting in two regards. First, because it shows correspondence in a company about the value of a tax saving versus the potential cost of reputational damage from it. Second, because the email appears to have been leaked by someone within M&S:

Given that it was developed as a means to avoid UK corporation tax when it stood at 26% it now seems appropriate to reassess this. Corporation tax will be 21% by next year. Does this not render many of the advantages of having an Irish company obsolete?

From a tax management perspective there may have been advantages in avoiding the UK 26% tax rate but the process and IT overhead with the additional VAT complexity may negate these advantages. Needless to say there is also the reputational damage to M&S should it be seen to be avoiding UK tax in the current climate, as seen with recent examples such as Starbucks [and] Amazon.

I wonder if this phenomenon could really narrow the gap between the public debate on “perceived” tax avoidance, and the internal discussions about “real” avoidance.

The recent ActionAid survey [pdf] gives a nod to G4S for its “explicit reference to [internal] whistle-blowing over tax concerns.” Maybe more companies will choose to put in place a safety valve like this for employees, to try to prevent information spilling out into the public domain.

Companies are behaving in precisely the way that our international tax system incentivises them to behave

This is my post published on the LSE Politics and Policy blog last week, written before the corporation tax announcement in the budget. It went down a storm with the UK Independence Party’s Financial Services spokesman:

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