An unlikely Anglo-German alliance on tax

In recent years the UK government has been at loggerheads with many of the EU jurisdictions when it comes to matters financial – whether it be the imposition of a financial transaction tax, giving more power to the EU or even agreeing its budget.  It was perhaps surprising, therefore, to see George Osborne, the UK’s chancellor, tightly aligned with the German finance minister, Wolfgang Schäuble, in announcing an international crackdown on tax avoidance by multinational companies at the G20 finance ministers’ summit in Mexico.

The subject of tax avoidance by corporate behemoths has been very high profile of late. Most recently, according to Reuters, Starbucks has not paid tax in the UK for three years and has paid only £8.6 million income tax since 1988, on sales of £3.1 billion – something which has caused a media storm in these straightened circumstances, despite the fact that everyone seems agreed that Starbucks has done nothing illegal.  And nor are Starbucks the only target of public and political ire – Google, Amazon and many others have all also recently been berated by politicians for using lawful techniques to move profits to low tax jurisdictions such as Netherlands and Luxembourg. 

There is a perception that these huge multi-national groupings have opportunities to structure their businesses to be tax efficient in ways that are simply not open to small independently owned businesses, giving them an unfair competitive advantage.  This has added to the sense that what they are doing may be legal, but is fundamentally unfair.

The difficulty is that large nations have enormously complex and unwieldy tax laws which have evolved over many years and were designed in days where businesses were largely static – they would have a physical presence in a location and would trade from there.  Nowadays, e commerce in particular has changed the nature of the game fundamentally – it provides companies with a huge degree of flexibility in where they trade from, and offers opportunities to separate intellectual property rights from trading entities in order to control where profits arise. The simple fact is that the ponderous nature of international corporate tax rules and the tortuous process that most of the mature jurisdictions have to go through to amend them means that governments are permanently trying to catch up with the accountants employed by big multinationals as they shift profits around the globe.  The companies always seem to be at least one step ahead of the tax man, and many of the most creative brains in the field are employed in private practice rather than in HMRC.

So whilst it is not surprising that Osborne and Schäuble have both recognised the problem, finding the solution will be a lot more taxing (forgive the pun!).  At present the detail is vague save that they have said that they will back ongoing work by the OECD to identify gaps in tax laws. But Osborne treads a fine line in as much as the UK actively encourages businesses and individuals to come to it because of its own relatively low taxation rates relative to its European competitors in key areas – Britain has the lowest rate of corporation tax in the G7, and has cut its rate by more than any other G20 country over the past two years and intends to keep doing so (from 28% in 2010 to 22% by 2014). Furthermore, it was only a few months ago that the government was encouraging the French wealthy to relocate to the UK in response to an increasing tax burden in France.  Osborne appears to want to try to keep the UK’s own tax competitiveness whilst limiting the opportunity for companies to use other lower tax areas, which raises the interesting question of at what point a tax rate is unacceptably low – traditionally it has been the offshore “tax havens” such as the Cayman Islands and the Channel Islands which have been the target of criticism, but it appears that it is countries such as Netherlands, Luxembourg and Ireland which are the key centres to which the corporate behemoths have been flocking.  These are much harder nuts to crack – their membership of the EU affords them a power and influence that the smaller offshore centres lack, and they are not naive enough to be turkeys voting for Christmas. 

So for now, despite the strong words, it is likely that the joint statement is more a case of political grand-standing than a real threat to the financial services businesses in the Netherlands, Luxembourg and Ireland.  There may be a growing and understandable feeling that "something must be done" - but identifying the solution is incredibly difficult when there are so many vested interests to balance.  The cynic in me can't help but think that in making this announcement with the Germans, the UK government is playing gesture politics so that when the forthcoming difficult EU budget negotiations begin, it can say that the UK does not always oppose the direction in which Angela Merkel wants to go.