Financial Secretary on the government's business taxation plans
David Gauke's speech at the 'Britain, Europe and tax competition' conference, organised by the European Tax Policy Forum and Institute for Fiscal Studies.
Good morning, and thank you for inviting me to speak at this event. It is very good indeed to be back!
During the election campaign my party asked for five more years to finish the job. We are delighted to have been granted that opportunity … and I am personally delighted to be back as the Financial Secretary to the Treasury.
We have a historic mandate from the British people to continue the progress we made over the last five years.
The UK economy is performing well. Growth is strong, and sustained. We can be proud of securing the highest employment rate on record, seeing the creation of 2 million jobs and as many apprenticeships, and growing at the fastest rate in the G7.
But we must not be complacent. There’s a long way to go before we have balanced the books and eliminated the deficit completely.
In particular, as the Chancellor made clear to the CBI last week, we need to focus on improving productivity – because without that, growth becomes an awful lot more difficult to secure.
Tax plays a primary role in both these areas.
With the fiscal position as it is, it is critical that we do everything we can to tackle tax avoidance.
Voters faced with necessary spending cuts have little tolerance for tax avoidance – whether by individuals or by companies.
At the same time, investment is crucial to growth and productivity. So our tax system needs to support our objectives of attracting investment, improving productivity and driving up living standards.
These ambitions – to support growth and to tackle avoidance – have driven our approach to tax policy over the past five years.
They will continue to do so over the next five.
So here’s our vision:
We will continue doing everything we can to help Britain compete in the world.
We will continue to provide a competitive environment for businesses carrying on activity in this country.
But if you owe tax, we will expect you to pay it.
And, more specifically, if you generate profits from activity here in the UK, then you are expected to pay your fair share.
Competitiveness is the watchword – but fairness too. So I would like to talk a little more about what those two words mean in practice.
You do not need me to tell you that internationally speaking, the world we live in is more interconnected than ever before.
Companies have choices: about where they create jobs; where they conduct their research and development; or where they base their headquarters.
What that means in practice is that to attract these companies, we have to be competitive in every area.
That means high quality infrastructure, a skilled and flexible workforce, and efficient capital markets. And it means having a competitive tax regime.
In the last five years, we have particularly focussed on making our corporation tax regime competitive. We have done this for good economic reasons.
As the IFS pointed out in one of their election briefings, ‘it has long been recognised that corporate income taxes can distort incentives in a number of harmful ways, and they are thought to have a particularly damaging effect on economic growth’.
A challenge for any government wishing to cut corporation tax is that it is rarely clear exactly who benefits from the reduction.
Indeed, as Martin Daunton’s history of UK tax policy in the 20th century - Just Taxes – points out, one of the reasons why corporation tax was first introduced after the First World War was because those paying for the new tax would not necessarily realise they were doing so.
Of course, corporation tax (as is the case with all taxes) is paid by people in the end – whether by shareholders, employees or customers.
Enthusiasts for corporation tax accept this point but argue that the burden falls on shareholders and that this is therefore a progressive tax.
Again, however, it is worth looking at the IFS’s recent analysis. They make the point that the evidence suggests that, because capital tends to be much more mobile than workers, a significant share of the burden of corporate tax tends to get shifted to labour.
So one can certainly make the arguments that it is a tax that discourages investment, reduces productivity and damages growth; it is opaque as to who pays for it in the end, thus damaging democratic accountability; and rather than the burden falling on faceless organisations or even wealthy shareholders, much of it falls on what economists call ‘labour’ and we politicians call ‘hard-working families’.
So has corporation tax had its day?
Well, despite the criticisms that can be made, there are a number of domestic and international arguments for its continued existence. It remains a key part of the international tax system And our domestic system, not least because of the interaction with income tax. The experience of the nil rate and 10 per cent rates of corporation tax was that this led to a great deal of tax motivated incorporation for little economic benefit.
Indeed, to go below a 20 per cent rate of corporation tax may require us to address some of the structural issues in our system.
And, of course, corporation tax continues to bring in around £40bn per annum.
So my argument today is not for abolishing corporation tax, although that would be a lively way to start this conference. But it is that we must maintain our international competitiveness.
And over the past five years, we have made great progress.
Before 2010 our corporation tax regime had been one of the factors pushing businesses away from the UK. Now, when I or other ministers speak to businesses about moving here, it’s a major selling point.
Our reforms included, to name just a few, cutting the main rate of corporation tax to the lowest of any major economy, introducing the Patent Box, and improving and increasing R&D tax credits.
Overall, the corporation tax cuts delivered since 2010 will save businesses £10bn a year from 2016. To give you a sense of scale, that £10bn saving is the equivalent of giving businesses enough money to hire 270,000 new employees.
According to Oxford University Centre for Business Taxation, the reduction in the corporate tax burden we have delivered will increase business investment by £11bn.
And it makes us that much more attractive to international firms. Last year UKTI reported a record number of inward investment projects. These projects led to the creation of 66,000 new jobs, and safeguarded 45,000 more.
So we have been clear that we will maintain the most competitive business tax regime in the G20.
We have heard worrying noises from across the Channel – with talk of a minimum tax rate applied on profits. So let me be crystal clear. Direct taxation is a matter for EU member states. Any EU-wide measure would require unanimity across all EU countries. Any form of EU-wide minimum tax rate would undermine our sovereignty and we therefore would block it. Put simply, it ain’t happening.
Our corporation tax regime will remain competitive - the most competitive of any major economy.
There is of course a role for international cooperation – and this brings me to my second watchword: fairness.
Fair competition between countries is imperative.
Unfair competition, on the other hand, needs to be fixed.
By unfair competition, we mean individual jurisdictions allowing certain individuals or companies not to pay tax.
That is wrong. And we have played a leading role in fixing it.
I am proud of the UK’s role. Whether it’s through the G20 or the OECD, we have consistently supported measures to strengthen the international rules to prevent corporate tax avoidance.
There can be no doubt that the tide is changing internationally. One of the by-products of the global financial crisis is that people are far less tolerant of anybody not paying their fair share. That comes across in all the conversations I have with my foreign counterparts.
Our principle is that profits should be taxed where economic activities are performed and where value is created. So we are wholeheartedly committed to effective, practical and sustainable measures to counter contrived and artificial arrangements designed to enable multinational entities to shift their profit away from where they undertake economic activities.
The G20-OECD BEPS project is well underway in reviewing the international tax rules. Many of them date back almost a century and, in today’s modern globalised economy, are no longer fit for purpose.
Over 40 countries are collaborating together to take forward the BEPS Action Plan.
The first phase was completed in September 2014, with participants reaching agreement on all of the 2014 outputs. Seven reports were produced by the OECD and endorsed by G20 Finance Ministers.
The UK has already taken action in two areas – legislating for country-by-country reporting and consulting on neutralising hybrid mismatch arrangements. The current stage is the completion of the remaining items of the BEPS action plan.
The BEPS project ends this year. We will continue to keep up the momentum and working collaboratively, so the new international tax rules are coherent and fit for purpose.
And consistent with the objective of the BEPS project is the Diverted Profits Tax (DPT).
We introduced the DPT to protect ourselves against highly contrived arrangements to avoid UK tax. Its objective is to ensure profits are taxed in the UK when the economic activities that give rise to them take place here.
A few points about DPT.
It targets contrived arrangements…
…The type of arrangements where a multinational company goes to extraordinary lengths to avoid paying tax in the UK.
…Those arrangements have to be between related parties – that is, companies within a group;
…They must create a tax mismatch whereby a group pays less than 80% of the tax that would have been due in the UK without these arrangements;
…It won’t apply to SMEs
And the tax benefits created must outweigh any other commercial purpose.
The ultimate charge levied under the DPT will normally be calculated by the application of the transfer pricing principles, and adjusted to take account of taxes paid in other jurisdictions. This ensures that there is no double taxation. The DPT is not an attempt to tax profits that have been taxed elsewhere.
This is a tax designed to ensure fairness – not to make ourselves uncompetitive.
It is based on the principle that if you generate profits from UK activity then you are expected to pay your fair share. And it sends a powerful signal: we take these matters seriously.
That gives us a strong international voice.
It puts us in a strong position for when the BEPS project has concluded.
Low taxes, competitive taxes, fair taxes, taxes which are paid. That will underpin government tax policy over the next five years.
And before I take some questions, I’d like to outline two further areas of focus for the coming Parliament.
First, we will carry out the review on business rates, making the system fit for the 21st century, and conclude it by the end of the year.
Part of this – which we announced last week as part of the Enterprise Bill – is the creation of a faster and more efficient business rates appeals system. That will be in place for the next business rates revaluation, in 2017.
Second, we will continue to make the tax system simpler.
We will be expanding the role and capacity of the Office for Tax Simplification.
And we will be reforming the way business pay their tax.
Digital tax accounts will be transformational, particularly for small business. For many, this will herald the end of the tax return.
Instead, small businesses will be able to link their business software to their digital account, so that they can see their estimated tax bill in real-time and, if they want, set up regular payments to help manage their cash-flow.
We might not be able to make people enjoy paying tax – but at least we can make it simpler!
We have five more years in which to continue the job.
The potential benefits are enormous – and they stand to benefit everybody in this country.
Tax is going to be at the heart of that. Fair tax. Competitive tax. Low tax. Tax which is paid.
I look forward to working with you as we achieve all this.