Lords report on tax avoidance mostly in the right direction

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The House of Lords' Economic Affairs Select Committee published its report on tackling corporate tax avoidance today - a study we contributed some thoughts to.

The key recommendations are:

  1. Establishing a joint Commons/Lords committee to give greater oversight of HMRC and with the power to examine confidential tax information in private;
  2. HM Treasury should urgently review the UK corporate tax regime and report back on proposed actions to tackle avoidance, including those pursued internationally for example through the OECD;
  3. HM Treasury should consider internationally pursuing other approaches to taxing multinational profits such as a destination-based cash-flow tax;
  4. HM Treasury should re-examine some aspects of the UK corporate tax system e.g. differential tax rates on debt and equity;
  5. Consider regulating tax advisers, punishing users of failed avoidance schemes, and requiring large companies to publish summaries of their corporate tax returns;
  6. Better resourcing HMRC.

As is often the way with these things - there are many good ideas but some of this is clearly playing more to the popular discontent with tax avoidance than thinking carefully about the best options for policy reform.

Our submission to the Committee acknowledged the need for action on tax avoidance but stressed the importance of acting internationally through the G8, G20, and OECD. We also stressed the broader context for tax policy given where we are with the economy and in particular investment.

Business investment in 2013q1 was a full 34% below its pre-recession peak. Demand is struggling to pick up both at home and in our key European markets.

It's essential that we make the UK as attractive as possible to globally mobile investment. That doesn't mean we should accept egregious tax avoidance - and it's right we look to implement the OECD's Base Erosion and Profit Shifting plan in concert with other countries where agreement can be reached.

But we must not confuse justifiable anger on avoidance by a small minority with a general anti-business campaign that drowns out the government's broader message on creating the most competitive tax system in the G20.

Most of what the Lords have come up with here sounds sensible: Especially working internationally and equipping the HMRC to more effectively implement the current law.

Proposals to make the tax affairs of companies more transparent feature again - but this is a case of being careful what you wish for. The corporate tax system is complicated: loss carry-forwards, interest deductions, capital allowances, R&D tax credits, and investment incentives are just a few examples of the totally legitimate ways companies end up paying what might appear to be low tax relative to their turnover.

Multiply this by however many different countries - and therefore different sets of laws - a large multinational might be operating in and you have a recipe for a truly bewildering array of detail. Enough to keep tax experts busy for many weeks. Faced with that the public might be more not less suspicious that companies somehow aren't paying their 'fair' share.

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