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.

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.

Secondments, democratic scrutiny and corporate tax

I’ve just been next door to the high court (a perk of being at the LSE!) to watch the UK Uncut Goldman Sachs judicial review. For all those who lament the quality of public debate on questions of corporate taxation, this is surely a desirable outcome: a painstaking debate through which the judiciary will decide who is right. Maybe it makes the case for putting corporate tax settlements in the public domain…but that’s another blog altogether.

What’s really reflected by the Goldman case is a debate about the integrity of the UK’s corporate tax policymaking and administration. At senior levels in both the Treasury and HMRC, civil servants mix with individuals from the top accounting firms and large businesses – on Treasury working groups, on the HMRC board, through secondments, not to mention Dave Hartnett’s acceptance of more corporate hospitality than any other civil servant. All these arrangements have been criticised by people outside the tax profession, while it seems Ministers, civil servants and tax practitioners – the ‘tax elite’ if you like – have closed ranks in defence.

All this sounds very much like what international relations theorists call an ‘epistemic community’. In the classic text on the subject, Peter Haas in 1992 defined epistemic communities based on the following criteria:

  1. a shared set of normative and principled beliefs which provide a value-based rationale for the social action of community members;
  2. shared causal beliefs, which are derived from their analysis of practices leading or contributing to a central set of problems in their domain and which then serve as the basis for elucidating the multiples linkages between possible policy actions and desired outcomes;
  3. shared notions of validity – that is, intersubjective, internally defined criteria for weighting and validating knowledge in the domain of their expertise; and
  4. a common policy enterprise – that is, a set of common practices associated with a set of problems to which their professional competence is directed, presumably out of the conviction that human welfare will be enhanced as a consequence.

I think it would be quite easy to identify all four for our ‘tax elite’ – although I’ll have to leave that for yet another blog post. The key point from the definition, however, is that an epistemic community is bound together by more than shared knowledge or profession: it also includes shared values and a worldview through which knowledge is filtered.

Epistemic communities are associated with the increasing influence that technical experts have in some areas of policymaking  (“consolidating bureaucratic power” as Haas has it). This is sometimes seen as undesirable, as it detaches policymaking from democratic accountability. And that hypothesis is my interest here.

Because the community’s self-perception is founded on ‘expertise’, any criticism of its actions – even by legislators themselves – is put down to ‘lack of understanding’. It becomes self-reinforcing. The most vocal members of the ‘tax elite’ regard most criticism as the product of commentators with a lack of understanding and/or an inherent anti-establishment, anti-corporate bias. Well yes, those elements do exist in many cases, but that doesn’t mean that there isn’t a grain of truth to anything the “tax muggles” say.

Un-PACking the secondments debate

For example, I don’t think the recent Public Accounts Committee report on the accountancy firms did a good job of analysing the issue of secondments from the Big 4 into government. Ben Saunders has quite a reasonable rant about it here. But I wonder if the tax elite would have been any more willing to accept the content of the PAC’s conclusions had they listened carefully to their witnesses, and then respectfully disagreed with them nonetheless.

In dismissing the PAC report, Mike Truman says that “[secondees’] role was to advise on the commercial implications of the proposals.” How can he be so sure? Maybe he took the word of his fellow ‘tax experts’ at KPMG on trust. I encountered a Treasury secondee from KPMG when I was lobbying on behalf of ActionAid, and I’m quite confident that he was much more implicated in the policymaking process than that, consistent with the claims on his LinkedIn page.

Also reflecting on the PAC report, Wendy Bradley argues that:

the accountancy and tax professions…think of themselves as professionals…that they are more like the barrister who can give objective advice to a party to a court case whether the person is innocent or guilty.  They certainly do not recognise themselves in the “poacher turned gamekeeper” that PAC perceives.

For me, the secondments issue is not about the Big 4 gaining inside knowledge of HMRC, but about information flow in the other direction. It turns on whether you think that there is a clear boundary between technical advice and lobbying. In the epistemic communities framework, no such boundary exists. According to Haas:

It is the political infiltration of an epistemic community into governing institutions which lays the groundwork for a broader acceptance of the community’s beliefs and ideas about the proper construction of social reality.

Richard Brooks’ new book argues that just such an infiltration has occurred in HMRC and the Treasury. If so, it’s not at all unreasonable to think that the beliefs, ideas and values that have emerged within a community that is paid for its ability to keep corporate tax bills low might diverge from those of the general public and of the legislature.

For example, here are Canadian tax professionals Brian Arnold and Larry Chapman, in an article that criticises much of the campaigning on Starbucks:

The role of tax professionals in assisting multinationals to avoid tax may require some serious soul-searching. Without our “creative” talents in manipulating legal relationships, complex legislation and tax treaties, this type of international tax avoidance would not be possible.

Wendy Bradley offers another example, the supposedly neutral value of tax “competitivity”:

Meanwhile the big glaring elephant in the room is the [government’s] commitment to a tax system which is “more competitive, simpler, greener and fairer”.  In Taxworld, a “competitive” tax rate is a lower tax rate – a rate which competes for business with other tax jurisdictions. Yes, it’s official coalition policy that, in the great multinational tax race, the UK should do its best to win the race to the bottom.

So what now?

I absolutely agree with all those bloggers who point the finger for much of this at parliament. As Wendy says:

The responsibility for the existence of tax legislation and for the quality of that legislation lies with the people who make it, with Parliament.

[…] each Budget [the Government] publish their proposals, consult on them, and then bring the legislation to Parliament along with a TIIN which tells you what the legislation does and why, how much it will raise and how much it will cost, and who will be affected.

Does Parliament ever look at them?

Do MPs ever challenge the legislation, and if they do, are any changes ever made?

That would make an interesting study, although I think we already know that on complex areas of corporate taxation the answer is no.

To help achieve a better political debate, Mike Truman and Heather Self advocate an “adopt an MP” scheme whereby tax professionals would provide “clear, dispassionate advice on the tax system”. Sounds great in theory, but the epistemic communities framework challenges the notion that such advice exists.

What I think is really needed is an open, honest exchange between the tax elite and the tax muggles. Yes it would help for the former to educate the latter on technical matters, but that should go hand in hand with discussion on the level of “normative and principled beliefs” about corporate tax. And on that, the tax profession might do well to adopt a little more humility.

Taxing internet companies: shutting the stable door after the horse has bolted?

I’ve just been reading a paper from 2006 entitled “The Rise of the OECD as Informal World Tax Organisation“. I’m not going to comment on its analysis of the OECD itself; what is interesting is its analysis of the case study of the OECD’s project on e-Commerce, which took place over a decade ago.

Its main conclusion has a a familiar-sounding ring to it:

Beginning with a 1996 U.S. Treasury Department discussion paper, national tax authorities issued reports that queried whether international e- commerce developments would lead to revenue losses or other adverse outcomes such as an increased use of tax havens for tax evasion or tax avoidance purposes. Tax observers similarly scrutinized whether traditional tax laws and principles would need to be reformed to take into account the new commercial environment. All of the sound and fury, however, has led to very little action at the national level.

It’s interesting, I think, to study this process at a time where once again there is a lot of “sound and fury”.
Continue reading

Why I don’t agree with UK Uncut’s critics

In this post, I’m going to let you into a little secret about tax avoidance campaigners. But I’ll come back to that in a bit.

In a week bookended by the Public Accounts Committee’s criticism of Starbucks, Amazon and Google, and UK Uncut’s planned action in Starbucks stores, the usual criticisms of ‘name and shame’ campaigns have been given an airing. Today I want to address a couple of them, to explain why I believe that the campaigns run by NGOs or by grassroots activists are valuable.

Continue reading

Starbucks et al: making sense of today’s news

Following the debate over today’s Public Accounts Committee report is difficult when everything is so blurred by simplification: it’s like Chinese whispers. But here are some thoughts based on what I think we know.

Continue reading