Tax Treaties, the source of the problem
Mel Stride, the Financial Secretary to the Treasury, recently confirmed concerns raised in the latest TaxWatch report, that the UK’s tax treaties will render the government’s latest attempt to tax the tech giants ineffective.
In our report we analysed the government’s recent policy announcements related to their attempts to tax major technology companies. We highlighted how its most significant measure, Offshore receipts in respect of intangible property, was not only expected to recoup only a fraction of the likely lost tax from such receipts but to collapse dramatically after just a couple of years of the measure coming into effect.
The measure imposes an income tax charge on UK royalty payments paid by companies to their subsidiaries in low tax jurisdictions. Royalties are a common mechanism by which companies divert profits from countries like the UK to tax havens.
Under the government’s impact analysis, the policy will raise just £475m in total in its first year of application (2020/21) – and dwindle to only £165m a year by 2023/24. Yet TaxWatch estimated that the lost tax from UK royalties paid to tax haven subsidiaries could be as much as £8bn a year.
Although the government did not explain either why this measure would recoup only a fraction of the likely lost tax or why it would so quickly become ineffective, we suggested that this collapse in revenue was most likely due to the government choosing not to apply the measure to countries where the UK had a tax treaty.
In response to this, companies would simply restructure their tax avoidance schemes to take advantage of this loophole. Indeed, with the long lead in before the policy was implemented, and the relatively small amount of tax the government forecast the measure would raise even in its first year of operation, it is clear that the government anticipated that many companies would restructure their affairs before it came into effect and that more would follow thereafter.
Following our report, Labour Shadow Treasury Minister Anneliese Dodds MP put down a couple of questions probing the government on how their new policy would be implemented.
In a response dated, 23 April, Mel Stride confirmed TaxWatch’s concerns, stating:
The Offshore receipts in respect of intangible property measure targets multinational groups that realise intangible property income from UK sales in low or no-tax jurisdictions.
The government has been clear that this measure will be applied in compliance with the UK’s international obligations. This means that the measure will only apply to low-tax jurisdictions with which the UK does not have a full tax treaty.
In a later response dated April 29, Mr Stride provided a list of countries which have a full tax treaty with the UK, by which they mean a treaty containing “an appropriate non-discrimination article”.
The list, which can be found here: https://www.gov.uk/hmrc-internal-manuals/international-manual/intm412090 is revealing
On the list provided can be seen some classic tax haven jurisdictions including, Ireland, The Netherlands, the UAE, Luxembourg, Switzerland, Malta, Mauritius, Panama and Liechtenstein.
What’s more, the UK has recently signed new treaties with Jersey, Guernsey and the Isle of Man and it is not clear why they would not also qualify for the government’s exemption to this measure.
With the UK refusing to apply its anti-tax avoidance measures to tax havens, it is easy to see why their efforts to crack down on tax avoidance will ultimately be ineffective.
As we argued in our recent report, contrary to the position stated by Mr Stride, there is no international obligation for the UK to not apply such measures to countries where it has a treaty relationship. Tax treaties were established with the purpose of stopping companies and individuals from being taxed on the same income twice. They were never designed to allow taxable income to escape tax anywhere.
Indeed, as we noted in our report, the measure is specifically designed to apply in certain circumstances even where there is a tax treaty. The problem is that it is deliberately designed in such a way that it will hardly ever so apply. What is not clear is why. The courts have been supportive of the UK in the past when it has sought to close down tax avoidance schemes that use the UK’s tax treaty network to escape taxation. The government choosing not to apply this measure to treaty countries is a policy choice, not an obligation. Why it has made that choice, remains a mystery.
If the government wants its attempts to tax the tech giants to have real impact, it must now move to apply its income tax charge on royalties to countries which do have a tax treaty with the UK. A good start would be to apply the measure to Ireland, a country which has been actively encouraging companies to move their IP to its jurisdiction in order to help them avoid tax in countries around the world.