Charity: New corporate tax loophole will cost poor countries £4bn

PLANNED TREASURY changes to tax rules for multinational companies will cost governments in poor countries up to £4 billion a year in revenue, a development charity has warned.

In a report ActionAid said that the relaxation of Controlled Foreign Company (CFC) rules, expected to be introduced in the Budget on March 21, will create a loophole allowing global businesses to avoid tax on the profits they make in the world’s poorest countries.

The Treasury has estimated that the UK could lose almost £1 billion a year from the change, ActionAid said.

Under current CFC rules, if a multinational headquartered in the UK moves its profits from anywhere in the world into a tax haven to lower its tax bills, the Treasury tops up the tax to bring it in line with the UK standard rate of corporation tax of 25%.

After the proposed reforms, however, this rule will apply only when profits are shifted from the UK into a tax haven abroad. This will make it much easier and more lucrative for companies to shift their profits out of developing countries and into tax havens, Action Aid said.

The charity called for the government to “urgently rethink” its plans to change CFC rules as a poll found that 79% of UK voters think the government is not doing enough to tackle tax avoidance.

The YouGov poll also found that 72% of voters thought that companies that use legal loopholes to avoid tax bills in the UK or developing countries were behaving “irresponsibly”.

The Treasury said that Action Aid’s calculation of £4bn in lost revenue was “overly simple”.

“The government is fully committed to tackling both tax avoidance and evasion,” the Treasury said in a statement. “At the last Budget, we announced a package of measures closing down tax loopholes to bring in around £1 billion a year.

“The CFC rules are designed to protect the UK tax base from artificial diversion of profits. Similarly, other countries have CFC rules that are designed to protect their local tax bases. The best way to prevent tax avoidance in developing countries is by helping them to develop robust and stable tax systems which enable them to collect the tax they are owed. Through DfID [Department for International Development} and HMRC, the UK delivers targeted and effective support to make this happen.”