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UK Committee Makes International Tax Recommendations

by Robert Lee,, London

29 August 2012

The UK's international aid programme should focus on supporting tax authorities abroad, a new report has urged, with its authors also warning that the government should analyze the impact of its new tax rules on developing countries as a matter of urgency.

The recommendations are made in a report by parliament's International Development Committee.

The report notes that while the UK already works with other tax authorities as part of its aid programme, this sort of work should be given higher priority within future programmes. The report stresses that this recommendation is equally valid for all forms of taxation, including value-added tax (VAT), personal income taxation and corporate taxation. The Committee also deems it essential that taxes are paid on a fair and equal basis by local companies and individuals as well as foreign investors.

The Committee’s Chairman, Sir Malcolm Bruce explained: "The aim of development work is to enable developing countries to escape from over-reliance on aid. Supporting revenue authorities is one of the best ways of doing this: it represents excellent value for money, both for the countries concerned and for UK taxpayers. That is why we are urging the government to do more."

The report also focuses on how the government's new tax rules will affect those in developing countries. In particular, the Controlled Foreign Companies (CFC) rules are flagged as a matter of concern. Designed to discourage UK-owned corporations from using tax havens, CFC rules have traditionally applied to all UK-owned corporations. However, the new rules will apply only to corporations operating in the UK. According to the Committee, this will make it easier for those operating in developing countries to use tax havens.

It highlights claims made by organizations such as ActionAid that developing countries may lose up to GBP4bn in tax revenues as a result. The Committee has now urged the government to conduct its own analysis, for, while the government does not accept ActionAid's calculation, it does not deny that there will be some cost to developing countries. The Committee recommends that, subject to the review's outcome, the government should consider reversing the change.

Bruce said, "The government is committed to supporting economic growth in developing countries to reduce their dependency on aid. While this is clearly the right thing to do, it would be deeply unfortunate if the government’s efforts were undermined by its own tax rules.

"Some estimates claim that the revised CFC rules will cost developing countries up to GBP4bn. We do not know if this estimate is correct, but the government cannot legitimately refute the GBP4bn figure unless it is prepared to conduct its own analysis. That is what we are urging it to do."

TAGS: individuals | compliance | tax | value added tax (VAT) | tax compliance | tax avoidance | United Kingdom | tax authority | controlled foreign corporations (CFC) | tax planning | tax reform

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