Let’s explore the options…
The EU referendum and corporate tax avoidance are two issues that have dominated the news over the past few months, yet they are rarely considered together.
This is not because the issue is one of trivial importance; it is reported that the United Kingdom alone loses out on approximately £69.9 billion per year because of corporate tax avoidance.
It is likely due to the lack of immediacy the UK will see in changes to such laws. Article 50 of the Treaty of Lisbon is yet to be triggered, and when it is the UK has two years to negotiate before officially leaving the EU. Therefore, changes to tax legislation will not be seen before early 2018, and even then it is unlikely that dramatic changes in this area will happen straight away.
For those unaware of how corporate tax avoidance is achieved by multi-national enterprises, the concept — on the surface — is simple.
Large multi-national companies set up holding companies in low tax jurisdictions and shift the bulk of their profits to this low tax jurisdiction so as to erode their tax base. This is more commonly known as Base Erosion and Profits Shifting (BEPS).
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Tax avoidance is completely legal and should not be confused with illegal tax evasion.
A BBC Panorama documentary exposed how GlaxoSmithKline (GSK) achieved this. It reported that the UK GSK headquarters established a subsidiary branch in Luxembourg. The subsidiary lent £6.4 billion to GSK in the UK and then the UK branch paid £124 million in interest back to Luxembourg. Therefore, £124 million was removed from their taxable profits within the UK and was taxable at a rate of 0.5% in Luxembourg instead of the UK’s 28% rate at the time.
One of the fundamental freedoms of the EU is the freedom of establishment. This legal principle grants Member State citizens’ the right to take up and pursue activities, and set up and manage undertakings in another EU country. Along with the entrenched doctrine of corporate personality, it is easy to understand why this issue is of particular importance within the EU.
While the concept is simple, the way in which it is achieved is highly complicated. Advanced legal and financial teams are employed to find and manipulate loopholes and mismatches in international tax legislation so as to erode their tax base or to be subjected to double non-taxation. Therefore, it is only reserved for the richest of businesses and makes it near impossible for wholly domestic companies and small businesses to compete.
The law has failed to keep up with globally developing business structures and internet-based companies that are able to operate and earn vast sums of money with a very limited physical presence in a particular country.
Therefore, it is clear that an international problem requires international action and reform. So, has the UK, by leaving the EU, helped or hindered its chances in the fight for fair corporate taxation?
Following the referendum, there are two main routes that we could take that may have a direct influence on corporation tax and the fight against avoidance.
The first is to leave the EU and join the European Economic Area (EEA). The approach, also known as the ‘Norway model’, would mean that the UK will remain subject to all economics-based EU legislation. This includes the draft Anti-Tax Avoidance Directive that was approved just days before we decided to leave the EU.
The second is to leave the EU without joining the EEA. Evidently this would mean a complete regain of our sovereignty — economic and otherwise.
Along with the Organisation for Economic Co-operation and Development (OECD) and Group of 20 (G20), the EU has also been a front-runner in providing anti-avoidance rules, including the proposed Common Consolidated Corporate Tax Base scheme (CCCTB).
The CCCTB was proposed in 2011 and acts as a form of harmonisation between all Member States of the EU. The operation of the CCCTB would require all companies operating in the EU to file one singular European tax return and then to be divided at the jurisdictions own rate accordingly. This was initially proposed to encourage businesses to branch out into Europe without obtaining the extra burdens involved in filing up to 27 separate tax returns. However, the EU Commission has recently seen the concept as an anti-avoidance rule providing a compulsory requirement, making tax operations more transparent between businesses and low tax jurisdictions.
It is recognised that large multi-national enterprises exploit the mismatches in secular tax systems, therefore a unified system would cause upset to the big European tax avoider.
However, the CCCTB will not come without flaws, the most explicit flaw being the loss of Member State sovereignty.
While Member States will still be able to choose their own tax rate, this will be the only right they will have if the CCCTB is implemented. One fundamental right of a sovereign nation is its right to legislate all matters involving taxation and the removal of this ability may be considered a step too far for the decreasingly autonomous nations. Tax harmonisation could be an unwelcomed step towards European federalism.
However, other European measures such as the Double Tax Treaty have provided real hope for fair tax. The UK will still benefit from such measures if it joins the EEA. However, joining the EEA will result in a lack of autonomy, a main reason why the UK has decided to leave the EU and reason why the UK alone has hit a brick wall in recent attempts to combat corporate tax avoidance.
The EU’s encroachment on our sovereignty has prevented the UK from imposing more thorough tax avoidance rules. This can be seen clearly within the newly imposed Diverted Profits Tax (more commonly known as the ‘Google Tax’).
This tax was enforced via the Finance Act 2015 on a pre-general election promise. The Google Tax is an anti-avoidance rule that acts as completely new taxation on the diverted profits of a company. The tax can be triggered where it can be seen that a particular arrangement lacks economic substance or where a foreign company avoids the permanent establishment rules of the UK. Each circumstance can be seen to shift profits away from the UK. The tax is levied at a higher rate dissuading the use of BEPS.
Prima facie the DPT is seen as a positive act for the fight against tax abuse. However, its introduction has received criticism from legal experts who claim the tax contravenes fundamental freedoms of the EU. Tax journalist Dan Neidle recognises that the DPT directly contravenes one of the fundamental community principles of freedom of establishment.
This is one example of the obstacles the EU provides when individual nations attempt implementing thorough tax avoidance laws. And adoption of the Norway model will see very limited change in this area, if any change at all.
However, if the UK was to choose a more substantial disengagement in European tax affairs, it would certainly provide the UK with a stronger armoury in this fight against corporate tax avoidance.
It is true that the UK will not benefit from certain European international measures mentioned above, however, the UK will remain a part of the OECD and G20 which provide the strongest proposals in the form of the G20 BEPs Action Plans.
When, and indeed if, the UK leaves the EU and does not become a member of the EEA, stronger tools will be given to Theresa May and subsequent governments in this fight.
However, such legislation is unlikely to be implemented until the Brexit storm hits a lull. We could be waiting until after the next general election before we see real change.
Daniel Begley recently completed his law degree at Leeds Beckett University and is now going on to study the LPC at BPP University.
Dan Neidle, ‘The Diverted Profits Tax: Flawed by Design?’  B.T.R. 147.