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House of Lords committee corporation tax anti-avoidance proposals "probably unworkable", says expert

A tax expert has criticised calls for a further review of the UK corporate tax regime by a House of Lords select committee.

Heather Self of Pinsent Masons, the law firm behind Out-Law.com, said that some of the recommendations made by the Economic Committee in a new report were "unworkable" and a "distraction" from current international work aimed at tackling aggressive tax avoidance by large businesses. In addition, by looking only at corporation tax, the committee had "ignored the wider picture", she said.

"The overall economic benefits of investment should be considered, not just the amount of corporation tax paid," she said.

"The Treasury has issued a clear response that it wants to have a competitive business tax system, with robust enforcement. That must be the right way to attract mobile capital to invest in the UK," she said.

The tax affairs of multinational companies including Amazon, Starbucks and Google have come under scrutiny in recent months following accusations of 'profit shifting', or deliberately transferring profits from high tax jurisdictions to those with lower rates of tax. In June, the House of Commons' Public Accounts Committee (PAC) reported on its investigation into tax avoidance and Google.

The Economic Affairs Committee began its short inquiry in response to this "public and political concern", its chair, Lord MacGregor, said. The committee concluded that the UK faces a "serious problem" of corporate avoidance, mainly because of how easy it is for multinational companies to shift profits between countries in order to reduce their global tax payments. This sort of behaviour undermined public trust in the tax system, Lord MacGregor said.

The committee welcomed the recent action plan on base erosion and profit shifting (BEPS) published by the Organisation for Economic Cooperation and Development (OECD), produced at the request of G20 finance ministers. However, it said that it was "not clear" whether the proposed reforms would be effective or whether they were achievable within the two-year timescale set out by the OECD.

For this reason, the Treasury should conduct its own review of the UK's corporate tax regime, with a focus on the differential treatment of debt and equity, it said. Under the current regime, it said that multinational companies could be encouraged to take on excessive debt in the UK in order to reduce their tax liability, including by borrowing money from an overseas subsidiary to do so.

Tax expert Heather Self said that the suggestion that the Treasury should look again at the tax treatment of debt and equity was likely to "dismay" businesses. "As the CBI said in their evidence to the committee, the deductibility of interest is an important feature of the current system, and is part of a competitive package," she said.

"Asking the Treasury to undertake a full review of the corporate tax system within the next year is likely to be a distraction from the work needed to contribute to the OECD BEPS project. It is surely more important for the UK to decide on its negotiating stance as it participates in key multilateral discussions on the international tax rules," she said.

The committee highlighted a number of areas that the Treasury should consider if it decided to conduct a review. It called for consideration of a new system of regulation for tax advisers with a view to preventing the promotion of "blatantly contrived" tax avoidance schemes, and for the creation of a requirement for firms operating in the UK to publish a summary of their corporation tax returns.

HMRC should also be better resourced in order to deal more effectively with multinationals and their tax advisors, the report said. In addition, a new joint committee of MPs and peers should be established to provide better parliamentary oversight of HMRC while protecting taxpayer confidentiality. This committee should be able to hear evidence from HMRC in private, the House of Lords committee recommended.

The report said that the Treasury should consider radical reforms of the UK corporation tax system. It suggested that the Treasury should consider a destination based tax which would tax corporate profit where goods and services were sold to a third party and not where the supplier was established.

"The committee makes some radical, but probably unworkable, proposals," Self said. "For example, moving to a destination-based cash flow tax may result in more tax on UK sales, but would be impossible to implement in the short to medium term - and very difficult even in the long term."

"Focussing on abuse, and particularly income which is not taxed anywhere, is likely to be more productive than radical overhaul of a system which works well for Government and taxpayers most of the time," she said.

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