This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Speech by the Exchequer Secretary to the Treasury.
I would like to start by thanking the OECD secretariat for initiating and hosting this conference programme.
As it has throughout its 50 year history, the OECD is leading the debate and setting the agenda on tax policy. And the issue of competitive tax systems is no different. It’s a matter of huge importance in the current global economic climate.
How can we ensure a recovery that is led by the innovation and enterprise of a dynamic private sector released from an over-bearing tax system, but also a recovery that is fair to those on the lowest incomes, rewards hard work, and supports aspiration?
The fiscal position that we inherited when we came to Government added additional bite to this dilemma. As well as the challenge of a fair, sustainable, private sector led recovery, we also faced the challenge of eradicating the largest peace time deficit the UK has ever seen.
For us, deficit reduction was the number one priority.
We have taken many tough decisions. But we have not been persuaded by those that argue that we should raise corporate taxes.
The economics do not stack up.
We all know that higher business taxes feed through to prices, dividends, pensions, and, in particular for an open economy like the UK, wages. Higher business taxes results in lower investments. Lower investment results in lower productivity. And lower productivity will do nothing for economic recovery.
Government principles on tax
And this brings me to the UK Government’s overriding goal on tax - to establish the most competitive tax system in the G20 to support current enterprises and attract new business.
Our tax system was once viewed as an asset. And we need to make it an asset again.
In last year’s budget, the Chancellor outlined four key principles for tax reform in order to achieve this:
- Be efficient and support growth - we need a tax system that supports innovation and enterprise;
- Be certain and predictable - because businesses need more certainty on tax;
- Be simple to understand - untangling the web of reliefs and exemptions in the British tax code;
- And finally, be fair, reward work and support aspiration
But I want to give examples of what these principles mean in terms of tangible output in the UK.
In November last year we published the Government’s Corporate Tax Road Map which set out our plans for reform.
A lower rate of corporation tax is the most efficient way to help the economy and for that reason, we have already announced that we are cutting Corporation Tax by 2% this year…and 1% for each of the next 3 years, taking it down to 23%.
This will be one of the most competitive rates in the G20 and the lowest rate in the UK’s history.
But competitiveness goes beyond just headline rates of corporate tax.
We are introducing a Patent Box, which will allow companies to apply a 10% rate of corporation tax on profits attributed to patents.
We are increasing the support to business through R&D tax credits.
And in the context of addressing the taxation of income that is earned overseas…
For an open economy, like the UK, we believe we need to move towards a more territorial system of taxation.
That is why we are reforming the taxation of foreign branches by introducing an opt-in exemption from corporate tax for the profits of foreign branches of UK companies.
We are also taking action to improve the UK’s Controlled Foreign Company (CFC) anti-avoidance rules. These rules are important to protect against the artificial diversion of profits to low tax jurisdictions. But the UK’s current rules have become outdated, having been in place since 1984.
So today, we have published a consultation document on CFC reform, which outlines detailed proposals for new CFC rules to be introduced in 2012.
Reform of these rules demonstrates our commitment to openness and competition.
But this should not be seen as being at the expense of our commitment to fairness.
Britain has always been committed to the OECD’s work on tax transparency and development. The UK’s Department for International Development continues to play an active role in the OECD’s Tax and Development Task Force.
This ethic runs through our approach to CFC reform.
CFC reform will not be a vehicle to allow multinationals to avoid tax in developing countries.
We will continue to support developing countries to create robust and sustainable tax systems, and protect their own tax bases.
We are actively supporting the Ethiopian Revenue and Customs Authority modernise its tax and customs system. And the impact has been dramatic, reducing customs clearance times for low risk imports from 7 days to 10 minutes.
We are investing to help the Rwandan authorities train and develop their own tax officials, legal professionals and transfer pricing specialists.
And we are working with our international partners through the African Tax Administration Forum to promote mutual co-operation among thirty three African tax administrations, and share our expertise on transfer pricing.
The best investment we, as tax ministers, can make for developing countries is investing in lasting capacity building in developing countries to strengthen tax administration, improve the design of tax systems, and reduce the corruption that undermines efficiency and trust. And maybe in future there is a bigger role for the OECD in this area.
Policy making stability
The UK Government is committed to improving tax capacity and efficiency in developing countries. But we are also looking inwards. We know there is room for improvement in the way that we develop and implement changes to tax policy.
Tax competitiveness is about much more than rates and thresholds.
A competitive tax system needs stability, certainty and simplicity.
We have already engaged extensively with businesses on the way we make tax policy and this includes publishing the draft legislation of the annual Finance Bill.
Following publication of draft clauses for the current Bill back in December, we received over 250 substantive comments, and a number of these clauses were revised before Finance Bill 2011 was introduced.
This approach is unprecedented, and marks a step change in transparency and engagement on tax issues.
Similarly, we are capitalising on the expertise of UK business through the Office of Tax Simplification. We still have the longest tax code in the world, but the OTS is already proving influential by making practical recommendations on how we can simplify the UK tax system.
And whilst the OTS has a valuable role to play in improving the stock of UK tax law….
…we the Government have a responsibility to watch the flow of new measures.
Avoidance and relations with large business
In the UK, we are committed to strengthening strategic defences against tax avoidance, and where we see avoidance we will crack down on it - but we are also working with business to resolve complex disputes and uncertainty on tax liabilities.
The relationship our tax authority, HMRC, has with large business is vital, and I fully support HMRC’s highly successful relationship management approach. Through this service HMRC has developed strong, trusting and transparent relationships with the largest 2,000 businesses in the UK.
The money and complexity involved make this approach to working with large business the most cost-effective way to improve tax compliance.
It helps bring swift resolutions to enquiries; enables both parties to identify and address tax risks; and reduces the potential for error. It’s an approach valued by business as it brings speed, certainty and consistency, and it is valued by us as it will bring an extra £1bn in revenues by 2014/15.
We have come a long way in the United Kingdom in just a year to creating a more competitive tax environment in the UK.
Of course, we still have a long way to go, but we have provided clarity and certainty to businesses on our final destination. And we have done so by ensuring that our tax system stays true to the principles of efficiency, certainty, simplicity and fairness.
We believe that these principles can play a vital role in achieving a competitive tax system in the UK and elsewhere.
I look forward to sharing our experience, and learning from my colleagues present today, on the challenges that we all face.