"Wake up and smell the coffee." There is a smell, but it isn't coffee

Following our blog yesterday on ActionAid's excellent report on how a rich multinational exploits international tax rules that are designed by the OECD and biased against poorer countries, we'd like to draw attention to one or two further points drawn out in articles surrounding this issue. One is from Richard Brooks' Observer comment article:

[Multinationals] are exploiting international tax law – written by richer northern nations under the auspices of the Organisation for Economic Cooperation and Development – that is biased against poorer countries.
. . . 
The rules of the game compel tax authorities to respect transactions such as the payment of interest, royalties and fees between companies within the same multinational group, even when the recipients are based in tax havens and the arrangements have little purpose beyond tax reduction.

That is something we have been saying for many years. It's an international scandal. Something else from Brooks' article, also worth noting.

"In the meantime political rhetoric such as David Cameron's Davos call for companies to "wake up and smell the coffee" stands as no more than a futile plea to the world's multinationals' better natures.

What will have an impact are George Osborne's relaxations of the UK's "controlled foreign companies" laws governing the diversion of corporate profits into tax havens. The changes are designed, a Treasury memo revealed, "so that [the laws] have a better fit with the way in which [multinational companies] structure their commercial operations…" That is, to facilitate "tax efficient supply chain management".

There is a smell coming from the Government's response to corporate tax dodging at the expense of the world's poor, but it's not coffee."

To understand some background to this, take a look at this submission by Brooks to the UK parliament concerning reform of something called CFC (controlled foreign companies) legislation. The details are mildly out of date now, but the substance isn't. The technical details are explained in brief, but it's the political background that we will repeat here. It isn't rocket science.

"9. CFC reform has been led by a "CFC Liaison Committee" comprising HMT and HMRC officials along with the tax directors of BP, AstraZeneca, International Power, RSA (Royal Sun Alliance) and HSBC. All stand to benefit substantially from relaxation of the CFC laws.

10. Reforms to be introduced in Finance Bill 2011, including the exemption for third country income described above, were developed by a working group comprising HMT and HMRC officials (four in total) plus tax directors from Anglo American plc, British American Tobacco plc, Xerox, IBM, Intercontinental Hotel Group plc, C&W plc, Rolls-Royce plc and Aviva plc. Again, all will benefit greatly from the changes developed by their group.

11. The same companies, plus others including Tesco, Diageo, Rio Tinto, Glaxosmithkline and many others are currently taking forward wider reforms under a further six working groups. [2] The group considering "monetary assets" includes the tax director of Vodafone, whose multi-billion pound tax avoidance using transactions covered by this very aspect of CFC law has been extensively reported by Private Eye.

12. The whole process has been overseen by a "tax and competitiveness group" comprising the finance or other directors of Vodafone Group plc, Diageo plc, RSA Insurance Group plc, GlaxoSmithKline plc, Rolls-Royce plc, General Electric Company, Ford Motor Company, Amey plc, Royal Dutch Shell plc plus the director of the business-funded Oxford University Centre for Business Taxation and the Director-General of the CBI. Again, the companies mentioned stand to gain significantly from the changes proposed.

13. Of course such "stakeholders" should be heard, but the structure of corporate tax policy making has left them far too influential.

This is how tax law is, regrettably, made. It's of course deemed to be too complicated for serious democratic processes, so they make these laws behind closed doors. The British government has made stirring and very apt statements about the evils of international tax avoidance. If it were serious about this, it would row back from these appalling developments.

Until it does so, Prime Minister Cameron speaks with forked tongue.