How is it that Britain can embrace international bodies such as Nato and the World Trade Organization, but have such problems with another international body, the European Union?
It may sound like an exam question, but the answer comes down to the difference between supranationalism (when an international body overrides national governments) and intergovernmentalism (international agreement between national governments). The EU is supranational; the G7, Nato and WTO are intergovernmental – members can simply not sign up or withdraw, such as when France left Nato then re-joined. In contrast, it took the five difficult years for Britain to leave the EU, which wanted to keep us in its regulatory orbit even after Brexit.
When it comes to economic sovereignty, control of taxes is paramount – which is why the latest move from the Organisation for Economic Co-operation and Development (OECD) is so alarming. The OECD describes itself as ‘a global policy forum’ that promotes policies to improve the ‘economic and social well-being of people around the world’, but is now drifting towards something else entirely by trying to exert control over sovereign UK taxes.
Of particular concern is the OECD’s Base Erosion and Profit Shifting (BEPS) framework agreed (apparently out of the blue) at the recent G7 Finance Ministers meeting. Broadly speaking, the BEPS seeks to ensure that multinational companies pay more tax in the markets where they earn revenue. Once agreed by the wider OECD, BEPS would be set in stone by a binding international treaty, deposited at the United Nations and only subject to one vote in the Westminster Parliament. And once agreed it has to be enacted, regardless of democratic concerns – rather like the Lisbon Treaty.
A tale of two pillars
The BEPS comprises two initiatives: one good, one bad.
Pillar 1 seeks to address real issues as a result of the digitalised economy, which the UK is already doing unilaterally with the UK Digital Services Tax. This corrects a historic wrong, where tax-savvy corporations move tax offshore to lower tax areas. A common method is to charge national subsidiaries a high fee to use their intellectual property – such as use of a logo – which cuts its tax liability in the domestic state.
Pillar 1 will assist tax sovereignty, and is most welcome. Given the state of the public finances, Rishi Sunak was understandably beaming at the prospect of bringing in billions more in corporation tax. The OECD estimates that $50-80 billion more in overall tax may be raised as a result of these measures.
Pillar 2 is far more worrisome. It mandates minimum corporation tax rates and will seriously undermine our all-important tax sovereignty. For what is being agreed is an international corporation tax rate, one that cannot fall below 15% under the full force of an international treaty – i.e. by a legal agreement overriding sovereign parliaments.
There is also the risk this OECD minimum rate will rise in future: the USA was pushing for 21% as the initial minimum and the French finance minister has described the current plans as a “starting point”. Once the precedent has been set that corporation taxes can be set internationally, the UK may find it hard to resist more rises. Will it soon head for Germany’s 31% or France’s 33%? The Treasury is being unusually coy in spelling out when Westminster is involved, and if it will have any meaningful voice at all.
Particularly onerous are Pillar 2 measures where countries who implement minimum corporate tax rates can then levy additional taxes on those who don’t, through ‘jurisdictional blending’ or ‘country by country top ups’. The CBI warn that this would mean many multinationals having to run “entirely parallel accounting systems purely for this purpose”.
We Conservatives believe tax should be sovereign. Even in the EU, members are notionally in charge of their own taxation; although Brussels is adept at tax trespassing. Just look at the ‘Common Consolidated Corporate Tax Base’ (CCCTB), which would see all EU corporation tax paid directly to Brussels. Or the fact the EU Commission took Ireland and Belgium to the European Court of Justice to seek to overturn their low taxes, despite this being a ‘member competence’. They failed at first, but the EU is like The Terminator – you can blow bits off, but it keeps coming at you.
VAT is another example of Brussels overreach. Member states can only lower their rates if other members agree, which is why one of the UK’s first acts on leaving was to scrap the ‘Tampon Tax’, whereby we were forced to levy VAT on women’s sanitary products.
The Biden factor
The pattern here is one of consolidation and coordination of taxes across the EU, and a similar ratchet could now be starting with the OECD, thanks in no small part to the new man in the White House.
President Biden has been at the forefront of an internationally agreed floor for corporate taxation and we are in this position largely as a result of threats from his administration. As part of the deal, the UK Digital Services Tax will go ahead – and in other countries such as France, Italy and Canada – but then be scrapped once this new international tax comes into effect.
The US has also said it will “punish” the UK if we have the temerity to tax American conglomerates such as Apple, Google and Facebook. (Incidentally, one of the biggest American corporations, Amazon, will likely avoid paying any extra tax under the BEPs arrangement, as its profits don’t exceed the 10% threshold built into the proposals.) Bear in mind too that we have only just agreed to end tariffs on whisky, ceramics, clothes, and threatened car tariffs, over subsidies for Airbus/Boeing, but these didn’t interfere in domestic tax arrangements.
The domestic agenda
Now, some may argue that it’s quite reasonable to raise corporate tax rates. After all, Rishi Sunak is already set on raising our rate from 19% to 25%. However, we must beware the wider impact of these proposals.
The Government should be particularly wary of the potential for Pillar 2 to interfere with its own domestic policies. Will it hamstring the low tax rates promised for UK Freeports to compete with low-cost regimes? Will it restrain post-Brexit tax freedoms to encourage private sector investment? Will it harm innovation in pharma through the ‘patent box’ initiative, encouraged by lower corporation tax rates? Does it conflict with our new ‘Super Deduction’ which allows immediate deduction of 130% of expenditure on plant and machinery investments, as firms could be taxed elsewhere to meet the global minimum? Is the measure anti-competitive; effectively creating a tax cartel?
Then there’s the potential damage to low-tax jurisdictions which help finance the pharmaceuticals, financial services and extraction industries – all of which find the proposals highly complex and unintentionally damaging. AstraZeneca’s consultation found BEPS to be “extensive and complex in nature”, whilst GSK concluded: “Pillar 2 rules are currently insufficient to account for the 10-15 year investment to bring a product to market”, meaning it will discourage pharma innovation. The extractive industries share such worries. They have high levels of capital investment – often encouraged by tax credits – before returning profits years, or even decades, later. In short, Pillar 2 minimum corporate tax proposals risk increased costs for UK businesses and consumers, with no clear gain, and the CBI is right to warn disadvantages “industries with long investment cycles”.
Will this new global commitment spell the end of the Bahamas, Cayman Islands, British Virgin Islands, Gibraltar, Channel Islands and Isle of Man’s ability to offer low taxes within the British jurisdiction? Will we end up then having to subsidise, or compensate them? If the measure goes through, these low-tax jurisdictions may simply increase their local corporation tax rates to the OECD minimum, risking price rises or service reductions. Such jurisdictions are not sunspots, but often delicate ecosystems of great importance to the wider global economy. Interfering with them risks unintended consequences.
So what should the UK do next? Carve-outs or exemptions are not enough – but there is still time to overturn Pillar 2. The Treasury is consulting, and the fuller G20 will discuss BEPS later this month, followed by OECD members, who currently support the broad outline. The OECD works on the basis of compromise, so while it’s rare for a country to exercise a veto, Britain could offer its support to Pillar 1 but make clear its strong opposition to Pillar 2, for all of the reasons I’ve outlined above.
Above all, this is a question of control and sovereignty. Surely, Britain has not taken back control from the EU, only to cede it to supranational bodies elsewhere?
Click here to subscribe to our daily briefing – the best pieces from CapX and across the web.
CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.