Financial Secretary on the UK's tax regime
David Gauke at EY's 34th Annual International Tax Conference.
Good afternoon – I’m very pleased to be here with you today.
This is my second trip to the States in as many weeks – having been in Washington DC, Seattle, and San Francisco last week.
Where the UK is as a country: that’s very simple. We are recovering well from the economic crisis of 2008, with some notable successes since then; but with still more work to be done to secure economic prosperity.
And our priorities: those, too, are straightforward. To continue down the route we started in 2010, a combination of cutting back on unaffordable State spending, and unleashing growth in the private sector, to create a prosperous, business-driven economy.
Taxation is clearly at the heart of that. And I’ve been lucky enough to be the Minister with responsibility for the UK’s taxation system right from the start.
We believe that there are two things which help businesses prosper and therefore drive job creation and economic growth: the competitiveness of low taxes, and the certainty of having a properly working tax system in place.
These are the two principles of taxation in the United Kingdom – and together, I believe they help make the UK one of the best places to do business in the world.
Or, as the most recent Global Financial Centres Index survey put it a few weeks ago, “the world’s most dynamic financial centre”.
That’s not a position we can ever take for granted.
Just as water doesn’t flow uphill, wealth-creating businesses tend not to move into less competitive jurisdictions! So we have to work hard to maintain our competitiveness in every area.
That means world-class infrastructure; a skilled, flexible, ambitious workforce; deep and liquid capital markets – and a highly competitive tax regime that is fair and transparent.
That’s what we’ve worked hard to put in place.
So what does the UK’s regime look like?
Low business taxes, first of all – and, in particular, a low rate of corporation tax.
Back 2010, our rate of corporation tax was 28%; and it was a fact that one of the factors pushing businesses away from the UK was our tax regime.
Some said at the time that cutting corporation tax was not a public priority – irresponsible at a time when, in order to bring down the budget deficit, we were having to make other difficult decisions on public spending.
We looked at it another way.
The UK may be the fifth biggest economy in the world. But, in a global economy, we cannot take it for granted that businesses will choose to invest, and locate activity, in the UK. We have to persuade them too – and what better way than by our actions?
That is why we chose radical action on corporation tax – steadily reducing our rate of corporation tax to 20%, the lowest in the G7.
This year we announced that we would go further, cutting the rate to 19% in 2017 and 18% in 2020.
These new cuts will save businesses over 10 billion USD by 2021 – helping over one million businesses of all sizes.
The economic case for these cuts is very clear.
The independent Office for Budget Responsibility in the UK estimates that these cuts, plus reforms to our investment allowances, will help increase business investment – including from overseas – by over 2.4 billion USD a year by 2021.
This investment is vital to long-term growth and productivity.
Our economic modelling suggests the cuts delivered since 2010 and announced this year will increase long-run GDP by more than 1%.
The results we are seeing on the ground since we started cutting Corporation Tax have been very encouraging. We’ve seen business investment increasing – with a record number of inward investment projects last year – and some early signs of improvements in productivity…
And, interestingly, we’re also seeing Corporation Tax receipts strengthening.
Between 2010 and 2014 – that is, during the time that we cut the headline rate from 28% to 21% and cut the small companies rate – annual receipts increased by 12%.
And if you strip out the financial services sector (where receipts have been heavily affected by losses built up in the financial crisis), Corporation Tax receipts rose by 16% between 2010 and last year.
That’s a real terms increase in receipts over a period where the headline rate has been cut by a quarter,
Similarly, over the past three years, we’ve seen blue-chip companies making major new investments in the UK in some case, and indeed coming back to the UK in others. That, too, is certainly something we will want to help continue over the coming years.
But cutting the main rate of corporation tax – important though this is – is simply part of a wide suite of measures we are putting in place to boost our international competitiveness.
These include the introduction of the Patent Box and the “above the line” tax credit for research and development, and sectoral reliefs for creative industries.
We have also shifted the UK tax regime onto a territorial basis.
On top of that, we are simplifying the way tax is collected and paid – because although we probably won’t get anyone to enjoy paying tax, we can at least make it a simpler activity.
And to give businesses certainty about the UK tax environment going forwards, we will publish a business tax roadmap by April, which will set out our plans on business taxes over the next four years.
Alongside the UK’s competitiveness strategy lies the equally important principle of fairness.
Put simply, our belief is in playing by the rules.
Because we believe it is only when everybody sets rules, and sticks to them, that you can have fair and transparent competition between countries.
So we stick to the rules. For example, the UK is not a jurisdiction which offers preferential deals.
Yes, it is possible to enter into Advanced Pricing Agreements, but these are based on a fair and consistent application of the law.
And at a time when the European Commission is – rightly – ensuring that EU member states do not offer preferential tax deals which would constitute State Aid, our approach is sustainable, and offers certainty to companies who appreciate operating within a stable regime.
And as well as sticking to the rules domestically, we take a lead on international transparency issues.
When the UK hosted the G8 summit at Lough Erne in 2013, the Prime Minister made it a particular priority to stress the need for world leaders to act together in tackling corporate tax avoidance.
And in the Base Erosion and Profit Shifting project – BEPS – we took a lead role on initiating discussions and taking them forward through the G20 and the OECD.
This has been a major – even an unparalleled – effort by OECD and G20 countries working together on an equal footing with the participation of an increasing number of developing countries. More than 60 countries were directly involved in the technical working groups; and many more participated in shaping the outcomes through regional consultation.
Our aims were fourfold.
First, to restore public confidence in the fairness of the international tax system.
Second, to level the playing field among businesses.
Third, to provide tax authorities with more effective tools to tackle aggressive tax planning.
And fourth, to better align the location of taxable profits with the location of economic activities and value creation.
As you know, the OECD has reported the final BEPS outcomes to G20 Finance Ministers.
And there are some real steps forward here. You will be relieved to know I won’t run through all fifteen of the action points, but let me highlight four areas…
First, a common country-by-country reporting template for multinational companies to provide tax authorities with information on where they pay taxes and earn profits around the world for risk assessment purposes. We have just released further details on implementing this in the UK in line with the internationally agreed timetable.
Second, new rules to counter hybrid mismatch arrangements that exploit differences between countries’ tax rules to avoid paying tax in either country, or to obtain more tax relief against profits than they are entitled to. We ran a consultation on introducing these rules in the UK earlier this year.
Third, model provisions to prevent the abuse of treaties so that multinational companies will no longer be able to obtain the benefits of reduced rates of taxation in circumstances that were not intended.
Fourth, revised international standards on transfer pricing and permanent establishment to better align the taxation of profits with economic activity and to prevent the artificial avoidance of a taxable presence.
Whilst the revised OECD guidelines represent some progress, we think there is still further work needed to ensure these rules work properly and welcome the continuing international efforts in these areas. And, not least, in Europe we have just agreed a framework for tax authorities to spontaneously exchange information on the tax affairs of multinational companies, to improve transparency.
But international agreement on the BEPS reports is just the start of the process of reform.
To ensure timely, effective implementation, there’s a lot of work still to be done both internationally and domestically.
Already, we’re moving swiftly on a number of fronts.
A group of 20 countries, including the UK, has committed to move quickly towards mandatory and binding arbitration as a way to resolve tax treaty disputes.
The OECD has launched work on an innovative multilateral instrument for updating tax treaties to implement the BEPS recommendations consistently, quickly, and efficiently.
BEPS has been a major and important project – the next steps are to see the recommendations fully implemented.
Before I finish, I would like to say a few words about the Diverted Profits Tax we introduced in the UK, in order to protect ourselves against contrived arrangements to avoid UK tax.
Its objective was simple, and chimes with the BEPS objective: to ensure than when economic activities giving rise to profits take place in the UK, then that is where those profits are taxed.
There are a few things I would like to make clear about the Diverted Profits Tax.
It is a targeted measure, designed to counter the use of aggressive tax planning techniques used by some multinationals to divert profits from the UK.
These contrived 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;
And they must be designed to reduce tax and the tax benefits created must outweigh the non-tax or commercial benefits.
We specifically designed the tax explicitly to preclude double taxation, because we have no interest in taxing profits that have been taxed elsewhere – that would hardly be fair!
What is fair is taxing profits where those profits are made. Diverted Profits Tax does that – as well as sending a powerful worldwide signal that we take this seriously, helping us lead the international debate.
To conclude, we believe that the policies we have put in place since 2010 – lower taxes, simpler taxes, taxes which are paid and which combine fairness with competitiveness – have helped deliver Britain’s economic recovery.
We have more inward investment, which has created more jobs.
We have greater public confidence in our taxation system.
We have a stronger economy – which benefits businesses, and the wider public too.
Our ambition, over the next five years, is to continue down that route:
To be resolutely outward-looking; to continue making the case for free trade and for international competition;
And to welcome those who want to come to the UK, and do their business there.
So I look forward to hearing your views on how we can become even more internationally competitive.