Making tax policy post-Brexit: An international perspective

This week, I took part in a seminar run by the All-Party Parliamentary Group (APPG) on Responsible Tax. This was the group’s second session on tax and Brexit, with the theme “Making tax policy post-Brexit”. Margaret Hodge MP, who chairs the APPG, led the proceedings and fellow-panellists were Nicky Morgan MP (Chair of Treasury Committee), Frank Field MP (Chair of Work and Pensions Committee), and Matt Ellis of Deloitte.

My comments at the seminar focused on the general, cross-cutting issue of tax avoidance. Tackling tax avoidance requires international cooperation, and it’s important for the UK not only to continue working with international partners on the issue, but to remain at the forefront of this work post-Brexit.

Tax avoidance and the EU

Ironically, in the last couple of years the EU has started to get its act together on combating tax avoidance – just at the point when the UK has decided to leave.

The EU Anti-Tax Avoidance Directives (ATAD) were agreed in 2016 and 2017. They build on the work done at the OECD to tackle aggressive tax planning, or “profit-shifting”, by multinationals. The directives ensure that EU countries are early adopters of the OECD principles and that they adopt them in a broadly consistent way. They also go further than the OECD in some areas.

The European Commission’s 2016 statement on ATAD emphasises the importance of coordinated international action to tackle tax avoidance:

“Aggressive tax planning is a global problem, which requires European and international solutions. Many Member States now recognise that unilateral action is insufficient. There is a large degree of consensus that a coordinated response is needed to the problem of aggressive tax planning – to ensure competition on a level playing field on tax matters.” (From EC communication to European Parliament and Council on ATAD, January 2016.)

To put this in historical context, it’s worth remembering that this robust stance from the EU on tax avoidance is relatively new. If we look back at European Court of Justice (ECJ) decisions over the last 20 years, we get a rather different flavour. The following quote is typical (emphasis mine):

“The need to prevent the reduction of tax revenue is not one of the grounds listed in Article 46(1) EC or a matter of overriding general interest which would justify a restriction on a freedom introduced by the Treaty.”  (From ECJ judgment in Cadbury Schweppes case, September 2006.)

ATAD shows how the mood has changed. The EU now recognises the reality: That efforts to tackle aggressive tax planning by multinationals have to be pursued at an international level, by cooperation and coordination between nation states. A unilateral approach by individual countries is doomed to failure, as tax will simply slip between the cracks of the individual national tax systems.

The UK as thought leaders

The UK itself has recognised this by taking a strong lead in international efforts at the OECD. An independent paper from the Oxford University Centre for Business Taxation described the UK as one of the “thought leaders” of the OECD’s work to address profit-shifting by multinationals.

In an EU context, the UK has not generally been at the forefront of promoting tax measures, given the strongly held view that direct tax is and should remain a Member State competence. But the UK government did support ATAD, which would not have been adopted without unanimous support within the European Council.

While ATAD is due to take effect in January 2019, just before we leave, the UK is already well on the way to adopting most of the measures within it.  And, of course, the UK was able to influence, from inside the EU tent, the way in which the proposals developed.

Looking to the future

What indications do we have of the government’s plans for the post-Brexit direction of policy on tax avoidance and international cooperation?

Over the last 18 months, there have been mixed signals.

The low point was perhaps a year ago when the Chancellor made ominous threats in an interview with a German newspaper – hinting at a possible move towards a low-tax, low-regulation economy, sometimes referred to as the “Singapore model”.

The Chancellor has since appeared to step back from this. For example, in July he told the French press that the UK’s economic model would remain recognisably “European”. More recently, there have also been some specific positive signals of the UK government’s intent.

As part of the November Budget package, HM Treasury published a paper on Corporate tax and the digital economy. It included a clear commitment from the government to the continuing importance of international, and indeed European, cooperation to find multilateral solutions:

“The government believes that the report [that is, of the OECD Task Force on the Digital Economy] needs to put forward bold multilateral solutions that build on the discussions taking place within the European Union, and help to ensure a more sustainable corporation tax framework for the future.”

Another positive sign of the future direction came in December, when the Chancellor joined with fellow European finance ministers in writing to the US Treasury Secretary, to express serious concerns about the proposed package of tax changes in the US (which have now been passed by Congress).

It was good to see the UK joining in a united European front on this issue, as this has not always been the approach in relation to recent developments in the US.

US tax changes reinforce the need for cooperation in Europe

It’s also worth pausing for a moment on the US tax changes (here are KPMG’s initial observations) as they provide a concrete example that reinforces the points I’ve been making.

The US changes are likely to pose significant challenges for European and other OECD countries. There are, firstly, issues about whether the new US tax regime is compliant with international tax treaties and with WTO (World Trade Organization) rules. These are concerns that have been widely commented on.

But there are also big questions around the likely impact on tax planning by multinationals, with potential knock-on effects for governments and tax authorities around the world.

For the last 20 years or more, global tax planning has been driven by the quirks of the US tax system. While the US system was in dire need of reform, some of the changes take it in unexpected directions, and move away from accepted international norms.

The new rules will undoubtedly trigger behavioural shifts by multinationals, some of which may be long-term and difficult to predict. I see it as a shift in the tectonic plates of global tax planning. It will be imperative for the UK to work closely with European partners, both on tax policy and tax administration, and likely over many years, in order to monitor and respond to this shift.

To sum up…

This is, of course, just one example of the challenges ahead. To address those challenges, and protect UK tax revenues, the UK must continue to play a leading role in international tax cooperation, post-Brexit.

There are some positive signs that the government wishes to maintain this role. But it’s a message that bears repeating – clearly, consistently and unequivocally.

Post-Brexit, the UK will no longer have direct influence on EU developments. That means we will have to work even harder, within forums such as the OECD and perhaps on a more ad hoc multilateral basis with our European partners, to make sure we retain our clout in global efforts against tax avoidance.

A version of this article was originally published on Judith Knott’s tax blog.

Judith Knott

Judith Knott

Judith was a civil servant for nearly 27 years, with roles including Director of Corporation Tax, International and Anti-Avoidance at HMRC and Head of Corporate Tax at the Treasury. Most recently, she was HMRC Director of Large Business before leaving in March 2016 to pursue other interests. She is now an independent commentator on taxation and writes a regular blog on her website, with recent topics including US tax reform and Making Tax Digital. She is also a member of the governing body of University of Hertfordshire.
Judith Knott

@judithmknott

Tax expert, university governor, linguist, amateur pianist. Former lives: civil servant, academic. Next ambition: learn Finnish while UK is in EU. Tricoteuse.